SEC’s Gary Gensler Calls for AI Integration in Regulatory Oversight

SEC's Gary Gensler Calls for AI Integration in Regulatory Oversight

At the National Press Club on July 17, Gensler acknowledged AI as a technology as transformative as the internet and mass automobile production but raised important questions about its potential impact on societal structures and global financial stability.

The SEC Chair emphasizesd the potential of artificial intelligence in enhancing market surveillance and regulatory efforts, highlighting its benefits for disclosure review, exams, enforcement, and economic analysis. Additionally, Gensler has voiced serious concerns over its potential risks to global markets. He said:

“We at the SEC also could benefit from staff making greater use of AI in their market surveillance, disclosure review, exams, enforcement, and economic analysis.”

Gensler’s take on AI: A potent tool or a pandora’s box?

While acknowledging the generally optimistic outlook, Gensler emphasized that many AI systems are riddled with prejudice and dishonesty, infringe upon individual privacy protections, and pose numerous potential conflicts of interest.

Gensler, who earned a reputation as a stringent regulator during the “crypto crackdown,” does not view AI’s evolution as an unambiguous boon. Instead, he perceives it as a Pandora’s box of “macro challenges for society.” He fears that the integration of AI could usher in dramatic alterations to the labor market and exacerbate international rivalry, particularly between the U.S. and China, as they strive to be at the forefront of AI innovation.

While AI’s potential impact on employment has been a considerable debate, Gensler focuses on technology’s possible effects on the financial markets. He fears AI could intensify the “inherent network interconnectedness of the global financial system,” potentially leading to increased financial fragility.

A herd mentality and market monocultures

With a small number of tech giants potentially dominating AI, Gensler expressed concerns about “herding” behavior in the markets. This occurs when investors receive identical signals from AI systems about buying or selling, leading to uniform decisions that can result in financial monocultures and volatility.

Supporting this notion, research by Markus Konrad Brunnermeier from Princeton University and a study by Asad Ayoub and Ayman Balawi from the University of Pécs found that such herding behaviors often contribute to stock market crashes and influence prices during bear and bull markets.

Data privacy, intellectual property, and conflicts of interest

Beyond financial stability, Gensler pointed out other significant challenges brought forward by AI. He expressed concerns about data privacy and intellectual property issues, referring to current disputes such as the Hollywood writers’ and actors’ doubles strike, where creatives are protesting against the use of AI in entertainment and the potential loss of their livelihoods.

The increasing use of AI in the financial sector also worries Gensler due to the potential conflicts of interest. Brokers and financial advisers might use AI systems to prioritize their interests over those of their customers, a trend he hints at cracking down on in the near future.

Future of AI regulation

In Gensler’s view, current regulations are inadequate to tackle the problems posed by AI. This has necessitated a revision of the rulebooks for a more robust macro-prudential policy framework. Ironically, the SEC could leverage AI to enhance market surveillance, disclosure review, and economic analysis, among other aspects. Gensler believes that the use of AI by the SEC could potentially contribute to more effective regulation of this game-changing technology.

While there’s no denying the revolutionary potential of AI, its integration into markets requires careful regulation to prevent undesirable consequences. As governments worldwide grapple with this challenge, the insight from experienced regulators like Gensler could be crucial in ensuring that this transformative technology develops in a way that benefits society.

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