Since taking the helm at the Securities and Exchange Commission in April 2021, Gary Gensler has initiated a wide-ranging set of rules, according to ISDA IQ.
“We’ve already proposed and adopted more than 40 items during my time here. More than three quarters of those are well into the implementation phase and have not been challenged in court,” Gensler told ISDA IQ in an interview.
“We recently halved the US settlement cycle for equities and corporate and municipal bonds, along with Canada and Mexico. We’ve adopted and implemented some really critical items related to corporate governance. We’ve taken some very important steps in cyber, both for companies and issuers that have material cyber events and, more recently, for individuals,” he said.
“We’ve adopted and are working with clearing houses and market participants on implementation of some key reforms in the Treasury market related to central clearing,” he said.
“We’ve addressed some of the repeated instabilities in money market funds and adopted rules last year that are still being implemented. We adopted rules on truth in advertising for registered investment companies and we have updated a 24-year old rule in that area,” he added.
ISDA IQ said that there has been an active debate about the regulation of crypto assets, and whether they should be considered as securities. When asked what is the appropriate model of regulation for this market, Chair Gensler said: “Without prejudging any one asset, it’s pretty straightforward: most crypto assets are likely to be securities and should be regulated as such.”
Gensler said there are 15,000-20,000 tokens and there’s nothing incompatible about the accounting ledger they’re stored on with the securities laws.
“The principle is consistent – it’s about making proper disclosure to investors so they can decide whether they want to buy or sell a particular crypto asset,” he said.
In July 2023, the SEC proposed rules to require broker-dealers and investment advisers to take steps to address conflicts of interest associated with the use of predictive data analytics and similar technologies. When ISDA IQ asked how the SEC is approaching the rapid development of artificial intelligence (AI), Chair Gensler replied that AI is among the most transformative technologies of our time.
“It’s already being used in finance to protect customers from fraud, to survey markets and for compliance with anti-money laundering and sanctions regimes,” he said.
“It’s used by traders to assess the markets, by investment advisers to set up robo-advising applications and by insurance companies for claims processing,” he said.
“It’s used by all sorts of financial institutions for opening accounts, and I think it will lead to significant changes in corporate issuance and risks and opportunities in different parts of the economy,” he added.
“Our role here at the SEC remains consistent – it’s all about making sure firms disclose the material information that is needed and that those disclosures are not misleading,” he said.
“Just as in other areas of transition, sometimes folks will exaggerate what they’re doing with this new technology, whether it’s an investment adviser bragging about the use of AI when they’re not really using it or a company that says it’s doing something but it’s not true.”
We need to beware of misleading the public in any material way – so-called AI washing. Fraud is fraud and bad actors will try to use new technologies to do bad things. That’s been true since antiquity. If firms are using an AI model, they shouldn’t think they can now do a bad thing and blame it on the model. If you deploy the model, you have a certain responsibility and obligation, particularly if you’re a fiduciary or advising people.
“If you’re using a model to front run or manipulate a market or perpetrate a fraud, there’s still a human somewhere who is responsible. Finally, we have a proposal outstanding about potential conflicts,” Gensler said.
“If you’re using an algorithm that’s putting the investment adviser or the broker-dealer into the mix of your engagement with customers, the basic concept in the US is that you’ve got to put the investor first. You must make sure the algorithm hasn’t got it the other way around by putting the investment adviser or broker-dealer first,” he said.
The three areas of focus for the SEC are AI washing, fraud and deception, and conflicts, according to Chair Gensler.
“But I also think there’s a risk that goes well beyond the US, which is that the use of AI will lead to certain fragilities in capital markets. That is why both the models and the data are likely to end up being quite centralised,” he noted.
“We already have a system in the US where there are three large cloud providers, two of which are used by around 75% of the financial sector. There are natural economics of networks that are at play, and that is likely to also happen with AI. If everyone relies on the same model or the same data set, this could drive the market to a bad place, but that’s a challenge we all share,” he said.
The interview also discussed the Treasury market reforms, the climate-related disclosures, cross-margining arrangements, as well as the SEC’s proposal on safeguarding advisory client assets.
Read the full interview here
