Regulators Urged to Take Risk-Based Approach Toward AI

Artificial intelligence is transforming nearly every corner of the financial industry, but regulators and industry leaders remain divided over how to define, govern and deploy the technology responsibly. 

Of the more than 500 firms polled in a Broadridge Financial Services survey earlier this month, 86% reported planning to increase AI investments over the next two years.  

Regulators have struggled to keep pace with the growing use of AI and the increasing investments in the technology made by financial firms. 

At a Securities and Exchange Commission roundtable on AI in financial services in March, panelists from major financial institutions, academia and technology firms warned that the speed of innovation is outpacing traditional regulatory frameworks. The sessions focused on both the risks and rewards of AI, as well as best practices for oversight and investor protection. 

Proposed Rule Awaits Revisions 

In July 2023, the SEC proposed a rule, commonly called the “predictive data analytics” proposal, that would require investment advisers and broker/dealers to “eliminate or neutralize” conflicts of interest arising from the use of technologies like AI in investor interactions.  

Following robust industry backlash, the agency agreed to revise the proposal, according to its July 2024 regulatory agenda, but those revisions have yet to be made. 

At the March roundtable, Commissioners Mark Uyeda and Hester Peirce, both Republicans, took aim at the original proposal during their opening remarks. 

Uyeda, who was acting SEC chair from January 20 until the April 21 confirmation of SEC Chair Paul Atkins, said he has “been concerned with some recent commission efforts that might effectively place unnecessary barriers on the use of new technology.” Peirce argued the agency fell victim to the commotion surrounding AI “when [the SEC] attempted to broadly and clumsily regulate the use of predictive data analytics by broker/ dealers and investment advisers.” 

Commissioner Caroline Crenshaw, the lone Democratic commissioner until a vacant spot is filled, did not criticize the proposal directly but acknowledged that many felt it was inappropriate.  

Several panelists questioned whether regulators should even attempt to formally define AI. Gregg Berman, managing director of market analytics and regulatory structure at Citadel Securities, compared the situation to the rise of high-frequency trading, which he said ended up working fine without a concrete definition.  

“The question in my mind is not what the definition of AI is, but does it matter?” he said. 

Others, however, including Daniel Pateiro, a managing director for strategic initiatives and artificial intelligence in the office of BlackRock’s chief operating officer, said a common taxonomy could aid transparency and regulation, if it…