SEC Chair Gensler Identifies New Challenges and Risks Raised by AI

SEC Chair Gary Gensler identified new challenges and risks posed by artificial intelligence to market participants and the greater financial system.

In remarks before the National Press Club, Mr. Gensler focused on addressing AI-related risks at both the micro and macro levels. He asserted that the SEC remains "technology neutral," and raised the following concerns:

Narrowcasting

Mr. Gensler reiterated that advisers and broker-dealers who choose to incorporate AI-technologies when making recommendations to their clients must ensure that the recommendations are in the best interest of the client. He explained that AI-based models provide an increasing ability to predict how individuals may respond to messaging, individualized offerings or individualized pricing in order to create tailored communications ("narrowcasting"). He highlighted concern over potential biases associated with predictive algorithms in AI-based models, which can use data that reflect historical biases or mask underlying systemic racism. He emphasized that this can make it more difficult to ensure fairness and explain algorithmic outcomes when, for example, one person is determined to be qualified for a loan over another.

Mr. Gensler said that he asked SEC staff for recommendations on rule proposals to address potential conflicts by advisers and broker-dealers who use narrowcasting communications to determine a client’s "maximum willingness to pay a price or purchase a product."

System-wide Risk

Mr. Gensler warned of a scenario in which a few AI platforms could dominate the market and threaten financial stability. He said that AI could "promote herding with individual actors making similar decisions because they are getting the same signal from a base model or data aggregator." These "monocultures," Mr. Gensler continued, could "exacerbate the inherent network interconnectedness of the global financial system." Based on the challenges that AI poses to financial stability, he argued that current risk management guidance will be "insufficient" and will require "new thinking on system-wide or macro-prudential policy interventions."