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Last week, the SEC convened a Roundtable on Artificial Intelligence in the Financial Industry and all of the sitting Commissioners had something to say on the topic. Acting Chairman Mark Uyeda noted in his opening remarks:

Financial regulators should take a technology-neutral approach to regulation. I have been concerned with some recent Commission efforts that might effectively place unnecessary barriers on the use of new technology. We should avoid an overly prescriptive approach that can lead to quickly outdated, duplicative rules, a “check the box” approach to compliance, and impediments to innovation. To the extent that advances in technology, such as AI, create potential gaps in our regulatory structure or point to the need for additional guidance, it is the Commission’s responsibility to address those gaps or provide guidance in ways that encourage innovation while protecting investors. The Commission must be mindful of its statutory authority and prioritize effective and cost-efficient regulations in this space.

As with other financial innovations, the use of AI also may bring risks and challenges. AI is a broad term, but risks from the use of AI technologies may largely depend on the specifics of the technology, use case, and deployment at issue. As we evaluate potential risks and challenges arising from the use of AI, we should focus on obtaining relevant data and evidence. To foster a commonsense and reasoned approach to AI and its use in financial markets and services, regulators should be engaging with innovators, technology providers, market participants, and others.

Commissioner Hester Peirce’s remarks posed some questions for consideration during the Roundtable:

Today’s roundtable is a great step toward a better understanding of artificial intelligence, its role in the financial industry, and how to think about regulating it. A better understanding can dispel unfounded fears and enable us to focus on real problems and to identify tailored solutions. To that end, I have several questions that the panelists may wish to consider:

– What areas of the securities industry are likely to be most transformed by AI in the next five years? Should we do anything as a regulator to prepare for these changes?
– Do firms need guidance from the Commission about their usage of artificial intelligence technology, and how should the Commission deliver such guidance?
– Given the rapid pace of technological evolution in this space, how do we ensure that any potential Commission guidance or regulations related to the use of artificial intelligence do not quickly become outdated?
– Relatedly, how do we ensure that our actions do not stifle innovation and remain technologically agnostic?
– Finally, how do we avoid overreacting to the most egregious cases of artificial intelligence misuse and letting it define our rules and guidance?

In her remarks, Commissioner Crenshaw took credit for the idea of this Roundtable, and also highlighted specific areas that needed to be addressed in the course of the discussion:

Now, whenever I speak with members of financial services community about AI, I ask them – how do you define AI and how are you using it? There is one constant. No one is on the same page. In many ways, when we speak about these technologies, I think we have a tendency to talk past each other.

So, let’s reset. And let’s answer some very basic but important questions.

– What is artificial intelligence? How do we achieve greater precision in our terminology and definitions?
– How is AI being deployed in the financial services industry today? And how will it be used in the future?
– I ask this with respect to all industry participants – how is it used by broker dealers, investment advisers, issuers, intermediaries, markets, investors and other stakeholders?
– Are the most common uses investor-facing, related to investing or the deployment of capital, or are they in pursuit of back-office efficiencies? Is AI being deployed by companies or by their service providers?
– What governance mechanisms are in place to oversee AI systems – especially those systems that may employ “black box” algorithms, where it’s not clear how inputs are weighed or outputs derived? What do those governance mechanisms look like? And is AI being used at board or governance levels?
– And what oversight is applied to ensure that legal and regulatory responsibilities are met – both fiduciary and professional obligations, as well as the relevant rules governing trading mechanics or back-office functions?
– What disclosures are being made around AI uses and risk, and are they consistent and sufficient?
– Are there areas where investors are left vulnerable by the use of AI – either susceptible to fraud or systematic disadvantage?
– Are there systemic market or volatility risks associated with the use of AI that we need to be focused on?

AI appears to represent a sea-change in technology. It is powerful and persistent. It will drive change. The question is – are we prepared for it? I hope that today’s session is an important step for preparedness at the SEC.

– Dave Lynn