SEC chair Gary Gensler vigorously defended the commission’s proposal to regulate artificial intelligence during a conference for investment-adviser compliance officers March 8, but dodged questions about how the rule would be applied or how investment firms should plan to comply with it.
The SEC’s proposal to regulate the use of predictive analytics by investment advisers was a top priority for compliance officers attending the Investment Advisers Association Compliance Conference in Washington D.C., where Gensler participated in a fireside chat with IAA president and CEO Karen Barr.
Their conversation reflected the fund industry’s frustration with the SEC under Gensler. Barr repeatedly pressed Gensler to justify the AI rule proposal, which the IAA has asked the SEC to withdraw and revise using feedback from industry associations.
Her questions echoed the concerns of critics who have said the rule doesn’t add anything to existing regulations defining an investment adviser’s fiduciary duty to investors and is so imprecise that it simply extends existing rules to explicitly cover almost any type of traditional technology, potentially chilling innovation.
Gensler defended the AI rule as an effort to make sure investment advisers and broker-dealers “in an automated world, continue to keep investors’ interests ahead of your own.”
There are 51 million American investors who use separately managed accounts, “many of which are just automated direct robo-advisers,” Gensler said.
The SEC, he added, has an interest in making sure those automated systems — which are often run by Robinhood and other online investment platforms the SEC has sanctioned in the past — put the interests of investors ahead of those of the platform.
“If a computer scientist walks in and says there is a great algorithm that will increase the profits or revenue of an investment adviser, you might have to pause and say your fiduciary duty doesn’t square with that,” Gensler said.
The interview became tense as Gensler appearing to avoid addressing or flat-out misinterpret some of Barr’s criticisms.
At one point, Gensler asked Barr whether she would be happy going to a doctor who used predictive analytics to optimize the profits of the hospital rather than optimizing the quality of a patient’s care.
“It’s about the outcome for the client-fiduciary standard,” Barr said. “You have to put the investor in front. Whatever input or model is involved, if the outcome is that the investor benefits, that’s consistent with your fiduciary duty. You don’t need a new rule to optimize that.”
“So you’re fine with optimizing for the benefit of the hospital,” Gensler said.
“I’m concerned the AI rule is concerned only about conflicts that are covered by fiduciary duty but doesn’t address where the data is coming from and other issues the rule doesn’t get to; it’s a missed opportunity,” she said.
Gensler also pushed back against the suggestion that the pace and volume of rulemaking had imposed unreasonable workloads on compliance departments. He pointed to its efforts to stagger the compliance dates of individual requirements and provide long compliance periods.
He did not answer questions about the SEC’s further plans for regulating the data on which AI models are built, the automation of internal processes at investment firms, or what the agency plans to do with information from detailed examination surveys the agency sent asking investment firms how they use AI in almost every area of their operation.
Gensler stuck with the same theme throughout the discussion, even while responding to Barr’s closing question about what his big-picture hope was for the future of the industry.
“There are 17,000 or 18,000 investment adviser firms out there, advising investors on something around $120trn in assets; it’s a very consequential field in a financial system that is more and more important to the American public,” Gensler said. “Those people rely on advisers to plan for a better life, participate in this incredible economy as well as save for the future.
“Our role is prescribed by Congress to ensure that fiduciary duty exists to help support that.”
The Q&A offered little satisfaction to investment-adviser compliance officers looking for guidance on how to best comply with the rush of new SEC regulations.
“Not much help,” said one attendee, who asked that her name not be used. “I could have used a little more detail.”
