The broad application of AI in the financial ecosystem comes with notable concerns, according to Gary Gensler, chairman of the Securities and Exchange Commission (SEC).
In July 2023, the SEC had already proposed a rule to responsibly manage the integration of AI. In an interview, Gensler outlined his concerns that AI could be at the heart of financial crises.
Gensler, who is also a professor of global economics and management at the MIT Sloan School of Management, suggested that the systemic risk of AI will be magnified if it is widely adopted across different sectors of the economy.
“This technology will be the center of future crises, future financial crises,” Gensler said. “It has to do with this powerful set of economics around scale and networks.”
To mitigate these risks, the SEC has proposed a rule to prevent conflicts of interest arising from predictive data analytics and AI used by broker-dealers and investment advisers. The proposal requires firms to identify and address potential conflicts, and also insists that firms ensure that these technologies do not prioritize their business over the interests of investors and follow strict record-keeping practices.
Gensler also highlights the complexities created by the dominance of a few AI companies. He warned of potential “herding” behavior, with the economic system relying on identical basic models, increasing interconnectedness, and the risk of a financial crash.
The SEC chairman also raised the issue of accountability, saying that even in an era of AI-driven financial advice, investment advisors should uphold their fiduciary duty of care and loyalty. Algorithm developers have “the same duty of care” as investment advisors, in addition to a “duty of loyalty to their clients,” Gensler said.