TheCorporateCounsel.net

Yesterday, the SEC posted a new “Office Hours” video with SEC Chair Gary Gensler, this time on the topic of systemic risk in artificial intelligence. Drawing a comparison to the disturbing 2013 romantic comedy Her, starring Scarlett Johansson and Joaquin Phoenix, Gensler discusses how AI may pose risks to financial stability in the future, given the potential dependency on a small number of AI base models. The main concern is that the base model – or data aggregator – may send a similar signal to many individual actors, leading many of them to make similar decisions. This network interconnectedness could lead a significant number of financial institutions to all head off the proverbial cliff simultaneously, leading us to the next financial crisis.

I must admit that this is an AI nightmare that I had not really considered until Chair Gensler brought it up. The fact that one or a few AI models could have such an impact on the financial markets is pretty terrifying. Thank you, Chair Gensler, for giving me another reason to not go to sleep at night.

I have always been fascinated with systemic risks in the financial system. Even before I became a lawyer, I wrote a Comment titled “Enforceability of Over-the-Counter Financial Derivatives,” which was published in the ABA Business Law Section publication, The Business Lawyer (see Vol. 50, No. 1 (November 1994)). My Comment explored concerns with enforceability in the then-nascent financial derivatives market, following a decision of the British House of Lords that derivative agreements involving certain municipalities were unenforceable. I like to think of that Comment as the starting point of my illustrious publishing career!

– Dave Lynn