The Securities and Exchange Commission last week proposed amendments to the rule permitting certain investment advisers that provide services through the internet to register with the commission. SEC chair Gary Gensler says the proposals will address potential conflicts of interest in the use of artificial intelligence on Wall Street.
The proposed amendments generally would require an investment adviser relying on the internet adviser registration rule to have at all times an operational interactive website through which the adviser provides digital investment advisory services on an ongoing basis to more than one client. The proposed amendments would also eliminate the de minimis exception from the current rule by proposing to require that an internet investment adviser provide advice to all of its clients exclusively through an operational interactive website, and make certain corresponding changes to Form ADV.
The proposal includes restrictions on brokerages as well.
“In 2002, the SEC granted what was intended to be a narrow exception allowing internet-based advisers to register with the commission instead of with the states,” Gensler said in a statement. “A lot has changed in the 21 years since, and I believe an exemption written in 2002 allows gaps in 2023. Thus, today’s proposal would modernize the internet advisers exemption to better align registration requirements with modern technology and help the commission in the efficient and effective oversight of registered investment advisers.”
The proposed reforms are partially in response to the meme stocks hype of 2021 that gained popularity among retail investors through Reddit and other social media platforms. Officials discovered brokers and robo-advisers used AI and game-like features to influence user behavior.
AI may heighten financial fragility as it could promote herding with individual actors making similar decisions because they are getting the same signal from a base model or data aggregator, Gensler said. This could encourage monocultures. It also could exacerbate the inherent network interconnectedness of the global financial system, he added.
“Since antiquity, bad actors have found new ways to deceive the public,” Gensler told the National Press Club during a speech last month. “With AI, fraudsters have a new tool to exploit. They may try to do it in a narrowcasting way, zeroing in on our personal vulnerabilities. We used to all get similar spam. Now, communications can be efficiently individualized.”
On a related note, Gensler said that public companies making statements on AI opportunities and risks need to take care to ensure that material disclosures are accurate and don’t deceive investors.