SEC Chair Gary Gensler cautioned on Monday that artificial intelligence (AI) poses a risk to financial stability. He suggested that the proliferation of AI could necessitate governments worldwide to substantially revise regulations to maintain global financial stability. Regulatory bodies must address the challenges emerging technologies bring. Gensler affirmed that the SEC staff is weighing the need for new rules.
Gensler referred to AI as the "most transformative technology of our time." Since assuming leadership of the SEC in 2021, he often discussed the impact of AI on finance. With the latest advancements in the AI field, these issues have become even more significant, he mentioned on Monday.
Gensler pointed out that AI could exacerbate financial vulnerabilities as it may prompt individuals to make similar decisions based on the same signals from foundational models or data. Current model risk management guidelines were written before this new wave of data analytics and require updating, as they are currently inadequate.
On a more granular level, Gensler stated that businesses need to be aware that their use of AI could implicate securities laws. The SEC will closely monitor uses involving financial fraud, inflating corporate returns, and guiding investors to select specific products. Gensler especially cautioned publicly traded companies to be vigilant about company statements and disclosures regarding the risks and opportunities AI may bring, to avoid misleading investors.
Gensler indicated that financial advisors and brokers may also use AI to guide clients to purchase products, which could create conflicts of interest. The SEC plans to address this, possibly considering new rules related to these issues as early as this fall. "When communication, product offerings, and pricing can be effectively personalized for each individual, it becomes easier for producers to identify the maximum price each person is willing to pay for a product."
Gensler believes that SEC investigators could benefit from using more AI, including in surveillance, analysis, and enforcement. The challenge for the SEC is promoting competitive and efficient markets while considering its potentially dominant role in the heart of the capital markets. The SEC must carefully evaluate this to continue fostering competition, transparency, and fair market access.
In a public speech in May of this year, Gensler stated that the next financial crisis might arise from corporate use of AI, warning of the potential "systemic risk" its propagation could pose. Currently, banks and some financial institutions are using AI in various functions, including tedious compliance tasks typically involving assessing new clients or inspecting suspicious transactions. However, Gensler said that while these systems could potentially enhance efficiency, they should undergo rigorous review. "You don't have to understand the math, but you really have to understand how risk management is managed," he emphasized, noting the potential for biased decisions.
As generative AI products become increasingly popular worldwide, they are drawing the attention of regulatory agencies everywhere. In May of this year, the Biden administration sought to establish a national AI strategy to counter misinformation and other potential shortcomings of this technology. Last week, the Federal Trade Commission (FTC) officially investigated ChatGPT, marking the first formal inquiry by a US regulatory body. The FTC's focus includes whether ChatGPT, a chatbot under OpenAI, has harmed individuals by disseminating false information.
