‘Transformative’ Artificial Intelligence May Still Present Conflicts of Interest

At a talk hosted by the National Press Club, SEC Chair Gary Gensler explained that while AI presents many economic opportunities, there is also major potential for conflicts of interest.

Gary Gensler, the chair of the Securities and Exchange Commission, described artificial intelligence and machine learning as the “most transformative technology of our time” at a speech hosted by the National Press Club in Washington on Monday.

Gensler’s focus regarding AI was, and has been for some time, on its influence on financial advice. AI has been used in sentiment analysis and predictive analytics. But Gensler said AI can create or aggravate conflicts of interest, depending on how the AI is programmed and what data it is trained on. He noted that if an adviser uses AI optimized in such a way that places an adviser’s interest ahead of the client’s, even on a highly conditional basis, then that could represent a serious conflict of interest.

Gensler went further and said that if AI software even “takes into consideration the interest of an adviser, this introduces conflict.”

The potential for conflicts stems from a number of factors. For one, AI models can be opaque and difficult for the investing public to understand, making it more difficult for investors and regulators to recognize a conflict. The outcomes of predictive analytics “might reflect old biases” if they rely on dated data or reinforce “prejudice for protected characteristics.”

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Gensler remarked, as he has previously, that he has directed the SEC staff to develop recommendations for rule proposals related to these concerns.

The chairman also touched on cryptocurrency and climate disclosure during a question-and-answer period following the speech.

In response to a question he is frequently asked—Why rely on enforcement instead of new rules for crypto?—Gensler responded that existing laws cover crypto already, and no new ones are needed. He added that the crypto industry is “rife with fraud and abuse,” and the “rules are on the books already.”

He compared his enforcement-first approach to fighting insider trading. No new rule-makings are necessary, violations should be dealt with through enforcement, and crypto is the same, he explained. He said the SEC is “speaking to the market through enforcement actions.”

On climate disclosure, Gensler was asked about opposition to Scope 3 greenhouse gas emissions disclosure that has come from Congressional Democrats in agricultural districts, such as Representative David Scott, D-Georgia. Scope 3 disclosure requires issuers with an environmental or emissions goal or mission to disclose emissions in their value chain, or a reasonable estimate thereof. Scope 3 has been sharply opposed by agricultural interests on the grounds that it would be prohibitively costly for farmers to implement.

Gensler answered that more than half of issuers already make climate risk disclosures, and a significant minority also disclose emissions. Perhaps more importantly, this proposal received high investor demand and positive feedback and is done to “bring consistency and comparability” to these disclosures.

Tags: AI, Artificial Intelligence, Climate Risk, conflict of interest, Cryptocurrency, SEC

The Pension Benefit Guaranty Corporation granted Special Financial Assistance packages to three struggling multiemployer pension plans on July 11, including more than $1 billion dollars to a single plan.

The Automotive Industries Plan, based in Dublin, California, received $1.1 billion in assistance. The plan has 23,687 participants and was expected to become insolvent in 2033. Upon insolvency, it would have had to cut benefits by about 50%.

The 5500 Form for the Automotive Industries Plan showed it had 3,024 active participants at the end of 2021. It also had 9,305 participants receiving benefits and 9,011 inactive participants entitled to benefits in the future.

The Western Pennsylvania Teamsters and Employers Pension Plan received $279.5 million in supplemental assistance on top of the $715 million it received in July 2022. The Pittsburgh-based plan has 21,110 participants and became insolvent in August 2019, when it implemented a 20% benefit cut to about 15,000 participants.

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According to the Western Pennsylvania Teamsters and Employers’ Form 5500, the plan had 3,799 active participants at the end of 2021, as well as 8,528 participants receiving benefits and 5,437 separated participants entitled to future benefits.

Lastly, the Retail Clerks Specialty Stores Pension Plan, based in Concord, California, received $60.4 million in assistance. The plan has 1,274 participants and was expected to become insolvent in 2024, when it would have had to cut benefits by 15%.

Form 5500 for this plan showed it had 32 active participants at the end of 2021, as well as 849 participants receiving benefits and 331 separated participants entitled to future benefits.

The SFA provision of the American Rescue Plan Act allows for PBGC funding for severely underfunded multiemployer pension plans. Funds that receive assistance must monitor the interest resulting from the grant money as separate from other sources of funding. The PBGC requires that at least two-thirds of the money it provides be invested in “high-quality fixed income investments.” The Final Rule on Special Financial Assistance, issued in July 2022, states that the other third can be invested in “return-seeking investments,” such as stocks and stock funds.

Tags: PBGC, SFA