SEC Chair Gary Gensler raised regulatory concerns about "the uses of digital analytics in finance."
In remarks at Practising Law Institute's 2021 SEC Speaks program, Mr. Gensler highlighted the following:
- Conflicts of Interest. Mr. Gensler pointed out that platforms may employ algorithms that steer customers toward purchases or decisions that are not in their best interest in order to optimize revenue. With respect to digital engagement practices ("DEPs"), he noted a response to a recent request for public comment that reported a spike in losses for clients with accounts in platforms using DEPs. In addition to feedback on DEPs, Mr. Gensler stated that staff is evaluating the motives for employing such practices, including payment for order flow.
- Bias. Mr. Gensler emphasized that the underlying data relied on by analytical models might be reflective of demographic biases (e.g., credit rating disparities among users who have different phone software systems could reflect that certain demographics tend to use a particular phone software). Mr. Gensler advocated for establishing safeguards specific to algorithmic biases.
- Systemic Risk. Mr. Gensler highlighted the growth of "deep learning," a type of artificial intelligence, as a novel form of digital analytics that might lead to increased "herding, interconnectedness, and concentration." Mr. Gensler compared the potential for deep learning to cause a system-wide crisis to "subprime mortgages before the 2008 financial crisis" and "certain stocks during the dot-com bubble."
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