Gary Gensler, chairman of the Securities and Exchange Commission, warned Monday, July 17, that the widespread adoption of artificial intelligence by stock exchanges and other financial markets may create dangerous conflicts of interest and instability even as it promotes efficiency and cuts costs.
Speaking at a National Press Club Headliners luncheon, Gensler, who has pushed to extend SEC rules to the new technology, said AI may well “heighten financial fragility” by promoting herd behavior “with individual actors making similar decisions because they are getting the same signal from a base model or data aggregator.” By increasing the “interconnectedness of the global financial system,” Gensler said “AI may play a central role in … a future financial crisis.”
He said new regulations or “macro-prudential policy interventions” may be required. These are now being developed by SEC staff, Gensler said, and will be subject to public comment later this year.
Gensler was appointed SEC chairman by President Joe Biden in early 2021 after a long career as a partner in the Goldman Sachs investment banking firm and later a professor of global economics and management at the Massachusetts Institute of Technology. He has been a senior adviser in several
Democratic presidential campaigns and to the party’s candidates for governor of Maryland. On the SEC Gensler leads a three-member Democratic majority that often splits with the agency’s two Republican appointees.
In response to a question, Gensler repeated his criticism that the crypto-currency field is “rife with fraud and abuse.” He said he was “disappointed” with a federal district court ruling last week that the SEC did not have authority to regulate some crypto-currency activities. He said the agency has not yet decided whether to appeal.
Gensler said the SEC is moving ahead with developing uniform rules for companies to report on their environmental, social and governance policies (ESG) and on human capital disclosure rules to detect racial and gender bias.
He said he is fearful that artificial intelligence models “may make it more difficult to ensure for fairness” because predictive algorithms “may be based on data reflecting historical biases” and “may mask underlying systemic racism.”
Gensler declared, “The ability of these predictive models to predict doesn’t mean they are always accurate or robust. They might be … based upon some latent feature that leads to a false prediction.”
In analyzing corporate stocks, Gensler said AI may place the interests of brokers and advisers ahead of investors. He said he has asked SEC staff to recommend new rules to reduce these conflicts of interest.
“Make no mistake,” Gensler said, “AI is the most transformative technology of our time. It is just as big a deal as the internet or the automobile.” He said current regulations will have to be updated to ensure that corporate disclosures are “truthful, not misleading,” and protect the investing public.
