The Securities and Exchange Commission (SEC) has adopted new rules aimed at addressing cybersecurity and artificial intelligence (AI) concerns. The SEC’s main concern is how these issues impact individual investors and other aspects of the market.
One of the new rules proposed by the SEC is to require broker-dealers to address conflicts of interest when using AI in trading. This rule was prompted by the GameStop “meme stock” event in 2021, where it was discovered that AI may have been used to amplify user behavior, leading to potentially dangerous consequences.
Another proposed rule would require companies to disclose any cyber breaches within four days, if they have resulted in serious material consequences for investors. Companies would also be required to provide regular updates on their efforts to identify and manage cyber threats.
The SEC’s AI proposal would require broker-dealers to eliminate or neutralize any conflicts of interest that arise from using predictive data analytics in trading platforms. The goal is to ensure that the broker’s own financial interest does not override that of their clients.
However, concerns have been raised about the potential risks associated with AI. The use of large language models for automating security tasks, for example, has led to instances where false positives have occurred. Additionally, the volume of data required to train AI models raises privacy concerns and could lead to the proliferation of bots scraping data from the internet.
There are also worries about the automation of tasks that could result in AI attempting to manipulate stock markets and prices. Analysts need to be vigilant in identifying vulnerabilities in software and the potential impact of data breaches.
Republican commissioners have expressed objections to some of these proposals, arguing that they are unnecessary and may stifle the use of new technologies. However, the SEC unanimously proposed a separate requirement for internet-based investment advisers to register with the agency, closing a loophole that allowed some to avoid registration.
The new rules adopted by the SEC aim to address the growing concerns around cybersecurity and AI in the financial industry. By implementing these rules, the SEC seeks to protect investors and ensure the integrity of the markets.
