New regulations are coming! SEC chief warns AI poses risks to financial stability

Author: He Hao

Image source: Generated by Unbounded AI tool

** U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler warned on Monday that artificial intelligence poses risks to financial stability. The proliferation of AI means governments may have to overhaul regulations to maintain global financial stability, Gensler said. Regulators must address the challenges posed by emerging technologies. Gensler reiterated that SEC staff are weighing the need for new rules. **

Gensler calls artificial intelligence "the most transformative technology of our time." Since he took charge of the SEC in 2021, he has often discussed the impact of artificial intelligence on finance. These questions have become even more important with recent advances in the field of artificial intelligence, he said on Monday.

AI could exacerbate financial vulnerability, Gensler noted, because it could prompt individuals to make similar decisions because they get the same signals from the underlying model or data. **Current model risk management guidance was written before this new wave of data analysis, needs to be updated, and is currently insufficient. **

On a more micro level, Gensler said companies need to be aware that their use of AI may have implications for securities regulations. The SEC will pay close attention to: the use of financial fraud, improving corporate returns, and guiding investors to choose specific products. Gensler singled out public companies, saying they should be particularly wary of misleading investors in corporate statements and disclosures about the risks and opportunities that artificial intelligence may bring.

**Gensler said financial advisors and brokerages could also use artificial intelligence to guide clients into buying products, a conflict of interest that the SEC plans to crack down on, starting to consider new rules on these issues as early as this fall. ** "When communication, product availability, and pricing can be effectively targeted to each of us, it becomes easier for manufacturers to find the maximum price each individual is willing to pay for a product."

Gensler believes that investigators at the U.S. SEC could benefit from greater use of artificial intelligence, including in surveillance, analysis and law enforcement. The challenge for the SEC is to promote a competitive and efficient market for its potential dominance at the center of the capital markets. This must be carefully evaluated by the SEC so that it can continue to promote competition, transparency, and fair market entry.

Speaking publicly in May, Gensler said the next financial crisis could be in corporate use of artificial intelligence, warning of potential "systemic risks" posed by the technology's spread. Already, banks and some financial institutions are using AI in a variety of functions, including heavy compliance work that often involves evaluating new customers or checking for suspicious transactions. But despite the potential for efficiencies, these systems should come under scrutiny, Gensler said. "You don't have to understand the math, but you really have to understand how risk management works." He highlighted the potential for biased decisions.

As the fire spreads around the world, generative artificial intelligence products are increasingly becoming the focus of regulatory agencies around the world. In May, the Biden administration sought to develop a national AI strategy to guard against misinformation and other potential shortcomings of the technology. Last week, the U.S. Federal Trade Commission (FTC) formally investigated ChatGPT, the first formal investigation by a U.S. regulator. The focus of the FTC investigation includes whether ChatGPT, a chat robot owned by OpenAI, has harmed relevant individuals by publishing false information.