The Securities and Exchange Commission (SEC) is exploring the possibility of regulating artificial intelligence (AI) based on existing securities law. Specifically, Chair Gary Gensler believes that the SEC could have a role in overseeing the use of AI-based financial tools and ensuring that brokers can effectively navigate an automated trading environment.
Gensler made these remarks during a forum at Yale, where he discussed the SEC’s potential oversight of firms that utilize retail investing technologies. He emphasized the importance of investor education and highlighted the obligation of robo-advising and brokerage platforms to provide accurate and not misleading educational material.
While Gensler clarified that the SEC may not have the authority to require financial firms to offer education, he stressed that if investment firms use AI and machine learning models to aid in decision-making, they should comply with basic disclosure requirements to ensure investor protection. Deploying AI models requires the establishment of appropriate guardrails to minimize risks and prevent illegal investment strategies.
Despite the relatively new nature of AI in certain industries, Gensler asserted that disclosure obligations regarding the use of AI systems still broadly apply. Companies should consider whether discussing AI in earnings calls or with their board is consequential or extensive enough to be considered material information that should be made public.
One potential conflict arises when predictive data analytics, created by specific algorithms, are used to optimize financial gains for either the investor or the broker. Gensler indicated that the AI system must prioritize the investor’s interest above the platform or brokerage. Any optimization function that favors the advisor or broker’s revenues, profits, or interests would raise conflicts of interest.
The SEC’s interest in regulating AI reflects the growing influence of technology in the financial industry. As AI continues to evolve and shape investment decisions, it is essential to establish guidelines and ensure transparency to protect investors. By leveraging existing securities law, the SEC aims to provide oversight and promote responsible AI usage in the financial sector.
