Washington, D.C. (August 8, 2023) - On July 26, 2023, the U.S. Securities and Exchange Commission (SEC) announced new proposed rules for regulating brokerages and money managers using artificial intelligence (AI) to serve their clients. The SEC's plan aims to address concerns about potential conflicts of interest that arise when financial services firms use the burgeoning technology. Companies and individuals in the financial industry should take note.
The SEC's proposed new rules would require companies to evaluate their use of AI and predictive data analytics for whether they create conflicts of interest. Money managers have fiduciary duties to their clients. If an adviser's AI tool provides a client with bad advice, recommending a risky asset that would not fit the client's risk appetite and causes financial loss, the AI may end up compromising the client's best interests. If an AI tool gives rise to such conflicts, companies would be required to eliminate the conflicts and reinforce their written policies to ensure compliance in the future.
The move comes amid a shift in focus by the Wall Street regulator. In comments to Bloomberg Businessweek, SEC head Gary Gensler signaled a new direction for the agency after two years of focus on the cryptocurrency space. Gensler's remarks drew a qualitative difference between AI and crypto, as he noted that with AI "[t]here's a 'there' there," and that it's "the most transformative technology of this generation."
The SEC is not the only regulator to turn its attention toward AI. Lenders are likely to see more regulatory developments. For example, the head of the Consumer Financial Protection Bureau warned that new restrictions on AI in lending are looming, and the Federal Reserve's vice chair for supervision cautioned about the risk of bias and discrimination to creep in through facially-neutral technology. The Federal Trade Commission, meanwhile, has already begun a probe into OpenAI, the company behind the popular ChatGPT tool, to investigate its risk for consumer data. The Biden Administrationhas similarly signaled new executive actions on the horizon, setting up guardrails with an eye to "responsible innovation."
The indefiniteness of the SEC's new rules poses regulatory risks for affected financial services providers. While leaps in AI development have brought the field to the public's attention in the past year, AI has long facilitated operations for advisors, brokers, and traders, for instance to detect fraud or unusual market activity. Even within the SEC, not all commissioners are on board with Gensler's proposed rule. Commissioner Mark Uyeda questioned whether even rudimentary applications like electronic calculators or automated recommendations on a client's portfolio composition could begin to entail onerous regulatory burdens and discourage future innovation.
As such, while companies can profit from opportunities associated with operating on the technological frontier of AI, companies face legal risks associated with the evolving legal framework governing AI. Lewis Brisbois' attorneys are available to assist clients with any questions regarding the SEC's new rules. For more information on this development, contact the authors of this alert. Visit ourSEC Enforcement & Litigation Practice pageto learn more about our capabilities in this area.
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