Conflicts of Interest in Artificial Intelligence | Office Hours with Gary Gensler

This video can be viewed at the below link.[1]

Chances are you may be watching this video because an AI-powered search algorithm suggested it to you.

How might similar algorithms affect your investment choices?

Artificial intelligence is about using math, using data, using computational power to recognize patterns and make predictions.

Companies now can use it to narrow-cast in other words, to individually target or personalize a message, pricing, or products to each of us individually. In finance, robo-advisors and brokerage applications are using such algorithms.

Already we receive messages from AI-recommender systems, whether in finance or elsewhere, that are considering how we might as individuals respond to their prompts, respond to their products, respond to their pricing.

We all know some forms of these predictive data analytics well, it's all around us. The flashing buttons on our screen, the push notifications, the colors, the sounds, the well engineered subtleties of our modern digital life. If finance platforms figured out something else subtle about us, let's say maybe our color preferences.

Little story from my youth: my mom used to dress my identical twin brother Rob in red and me, Gary in green. Yeah, it's it's real. It's true. Today, I might not react as favorably to green prompts.

Artificial intelligence systems can pick up on these subtle preferences. If their optimization function takes the interest of the platform, the robo-advisor, the brokerage app, into consideration as well as the interest of a customer this can lead to conflicts of interest.

Well, in finance, when brokers or advisers act on those conflicts, and if they optimize to place their interest ahead of their investor’s interest, investors may suffer financial harm.

Are investment firms sending me alerts that aren't green because somehow they’ve figured out, that I might react in a different way, or because it might benefit the firm's revenues, profits or other interest at my expense?

Those who provide financial advice and recommendations, whether or not based on artificial intelligence, are still required to serve the best interest of the clients and retail customers.

We at the Securities and Exchange Commission are focused on how evolving artificial intelligence affects investors, affects issuers and the markets connecting them. That's why we proposed a rule last year regarding how best to address potential conflicts across a range of investor interactions, from robo-advisors to brokers.