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SEC Chairman Gensler Highlights AI's Potential Risks to Financial Stability

In a recent discussion with The New York Times, SEC Chairman Gary Gensler highlighted the potential risks that artificial intelligence (AI) poses to the financial system. Gensler expressed concerns that the evolving AI technology could play a significant role in future financial downturns, emphasizing the issues related to economies of scale and network effects.


He speculated that upcoming business infrastructures in the U.S. might heavily rely on a handful of base models. Such a scenario could promote “herding,” where all businesses depend on identical information, thus amplifying the chances of a financial collapse.


The SEC introduced a potential regulation last month that would necessitate investment consultants to eliminate technology-induced conflicts of interest. This initiative stems from concerns that AI might prioritize the interests of brokers or advisers over those of investors. Gensler, in a prior press statement, stressed that advisers should always prioritize the investor's interests.


In further comments to The New York Times, Gensler mentioned, "The emphasis should always be on the investor, not the adviser or broker." He expanded on the recent proposal, detailing the need to address conflicts potentially inherent in AI models.


Furthermore, Gensler emphasized that even if AI provides erroneous financial guidance, the onus remains on the investment consultants. He stated, "Under existing laws, investment advisers owe their clients a fiduciary duty, including a duty of care and loyalty. This obligation persists, irrespective of whether an algorithm is in use."

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