The Securities and Exchange Commission looks to have opened at least two fronts in the adoption of artificial intelligence in financial services. The Division of Examinations has apparently started a sweep, sending out information requests on AI-related topics. SEC Chair Gary Gensler has expressed skepticism about the technology.
The first issue is a marketing-related issue for firms. Chair Gensler was reported to have made speech last week that warned against “AI Washing.” As there have been cases against firms purporting to based investment decisions using ESG factor, but not actually doing so (greenwashing). Chair Gensler warned about firms marketing themselves as AI enable, but not actually using AI.
You can’t oversell your AI capabilities.
The other issue is watching the risks with actually using AI for investment decision. As an example, there is concern that there is only a few underlying AI platforms, a whole lot of investment decisions could go rampaging in the wrong direction together, off a cliff. We’ve seen isolated cases of this at firms with trading algorithms that stop working. They unplug. If you’ve got a robot, you’ve got to make sure you can shut down the robot if (when?) the robot goes bad.
Earlier this year, the SEC released a proposed rule on Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers that calls for investment advisers and broker dealers to:
“Eliminate, or neutralize the effect of, certain conflicts of interest associated with broker-dealers’ or investment advisers’ interactions with investors through these firms’ use of technologies that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes.” – Release Nos. 34-97990 / IA-6353
It reads like a rule that is very skeptical of AI. It’s so broad and meandering that I’m not sure where it will end up. The intent is clear. Don’t let your AI do bad things.
Sources:
- SEC Chair Warns Against “AI Washing” By Kevin LaCroix in The D&O Diary
- SEC Chief Gensler Warns of AI ‘Herding Effect’ Leading to a Market Crash
- Proposed Rule: Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers
- Fact Sheet
- SEC Proposal on Predictive Data Analytics Lacks Statutory Authorization by Andrew Vollmer
- SEC Probes Investment Advisers’ Use of AI by Richard Vanderford
- Artificial Intelligence: The next frontier in investment management by Deloitte
- AI Is Coming for Wealth Management. Here’s What That Means by Blake Schmidt and Amanda Albright