SEC Chair Advocates Increased AI Use for Market Surveillance and Enforcement

U.S. Securities and Exchange Commission Chairman Gary Gensler says the SEC could benefit from making greater use of artificial intelligence (AI) in several areas, including enforcement and market surveillance. However, he also raised a number of concerns associated with AI, emphasizing that the regulator is currently developing rules to address AI-related challenges.

Gary Gensler on AI Benefits and Challenges

U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler discussed AI and the challenges surrounding it, including the impact on financial stability, in his remarks before the National Press Club on Monday.

“Today’s AI-based models provide an increasing ability to make predictions about each of us as individuals,” he described. “Models have been developed to assist in making decisions about who gets jobs, loans, credit, entry to schools, and healthcare, to name a few. This raises a host of issues that are not necessarily new to AI but are accentuated by it.”

Noting that “AI models’ decisions and outcomes often are unexplainable” and “the insights that come out of such models by design are inherently challenging to interpret in terms of accessibility to humans,” Gensler detailed:

AI also may make it more difficult to ensure for fairness. The outcomes of its predictive algorithms may be based on data reflecting historical biases as well as latent features that may inadvertently be proxies for protected characteristics.

Moreover, the SEC chair stressed: “If the optimization function in the AI system is taking the interest of the platform into consideration as well as the interest of the customer, this can lead to conflicts of interest. In finance, conflicts may arise to the extent that advisers or brokers are optimizing to place their interests ahead of their investors’ interests.” He revealed:

That’s why I’ve asked SEC staff to make recommendations for rule proposals for the Commission’s consideration regarding how best to address such potential conflicts across the range of investor interactions.

AI and Financial Stability Risks

Gensler also discussed the risks AI poses to financial stability. “The possibility of one or even a small number of AI platforms dominating raises issues with regard to financial stability,” he said.

“AI may heighten financial fragility as it could promote herding with individual actors making similar decisions because they are getting the same signal from a base model or data aggregator,” the SEC chairman cautioned. “This could encourage monocultures. It also could exacerbate the inherent network interconnectedness of the global financial system.”

However, Gensler noted that the current model risk management guidance “will not be sufficient” and “will need to be updated.” He explained that while model risk management tools can help to reduce overall risk, they primarily address firm-level, or micro-prudential, risks. The SEC chair added that many of the challenges to financial stability that AI may pose in the future will require new thinking about system-wide, or macro-prudential, policy interventions.

In conclusion, Gensler emphasized:

While recognizing the challenges, we at the SEC also could benefit from staff making greater use of AI in their market surveillance, disclosure review, exams, enforcement, and economic analysis.

“I think AI is going to continue significantly transforming science, technology, and commerce … Given that we’re dealing with automation of human intelligence, the gravity of these challenges is real,” he opined.

What do you think about SEC Chairman Gary Gensler’s statements on AI? Let us know in the comments section below.

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