Regulators likely to take wait-and-see approach on AI

investmentnews.com:

Artificial intelligence has developed rapidly in recent months, but regulating how it’s used to provide financial advice and manage assets is likely to evolve more slowly.

ChatGPT and other large language models have sparked imagination and stoked fears about how AI can be applied to a variety of fields and skills — from sales and software development to writing, editing, and almost anything else. It’s not clear yet what its impact will be on making investment recommendations.

The Securities and Exchange Commission is likely to monitor how financial advisors and asset managers use AI and then determine how existing regulations can address potential investor harm before launching a rulemaking effort focused on AI, said Mike Abbriano, managing director of ACA Group, a compliance consultant.

“For the near term, they’ll take a wait-and-see approach and use the broader anti-fraud tools they have at their disposal … [rather] than handcuff themselves with more specific regulation that doesn’t keep up with the pace of innovation in this space,” Abbriano said.

The SEC has scheduled for October the release of proposed rules “related to investment adviser conflicts in the use of predictive data analytics, artificial intelligence, machine learning, and similar technologies in connection with certain investor interactions,” according to the agency’s latest regulatory agenda.

SEC Chair Gary Gensler has made a priority of addressing advisors’ so-called digital engagement practices. For instance, he has expressed concern about whether the algorithms for robo-advisors and online brokerage platforms optimize for the benefit of the investor or the financial firm.

The upcoming SEC proposals may address that issue and extend into artificial