SEC Commissioner Lizárraga Raises Concerns about AI and Touts Recent Cyber Proposals

SEC Commissioner Jaime Lizárraga warned of the potential risks to investors posed by artificial intelligence ("AI") and touted SEC initiatives to improve cybersecurity.

In his remarks before the Digital Directors Network 2023 Conference, Mr. Lizárraga cautioned that while AI has the potential to "increase access, efficiency, and returns" within financial markets, it also poses risks. He warned that (i) market insiders may use AI to prioritize their interests over their clients’ and (ii) criminals can use AI to manipulate stock prices or defraud investors. He emphasized the importance of the SEC and market participants staying ahead of developments in AI technologies and taking regulatory actions where necessary.

In addition, Mr. Lizárraga highlighted several SEC-proposed rules designed to protect investors from cyber risks. These include amendments to:

• Regulation S-P to require financial firms to inform consumers of data breaches of their sensitive information;
• Regulation Systems Compliance and Integrity by widening its scope to (i) cover additional entities, including security-based swap data repositories, large broker-dealers and certain exempt clearing agencies and (ii) ensure that these entity types are treated similarly to other entity types that perform the same functions for other asset classes; and
• Form 8-K and Forms 10-Q and 10-K to require disclosures regarding (i) material cybersecurity incidents, (ii) policies and procedures and (iii) management’s role in overseeing cybersecurity-related risks.