In August, the biotechnology company Tempus earned the Food and Drug Administration’s coveted “breakthrough device” designation. The company’s new “breakthrough” test measures heterozygosity loss within tumors and uses artificial intelligence to identify cancer patients who would benefit from targeted therapies. Tempus’s innovation allows health-care professionals to make more-precise treatment recommendations and shows AI’s potential to deliver customized, efficient, and effective services across a range of industries.

Even as the notoriously risk-averse Food and Drug Administration embraces artificial intelligence, however, another federal regulatory agency—the Securities Exchange Commission—has cracked down on AI. A set of pending SEC rules proposed in July jeopardizes financial firms’ use of the technology. Like Tempus, financial firms are using “machine learning,” a process by which computers find patterns in data, make predictions, and even execute tasks without explicit programing. Just as machine learning enhances medical-services delivery, it can help financial professionals see deeper into data than any human could. This process, called predictive data analytics, enables firms not only to enhance trading strategies but also to perform tasks such as underwriting and fraud detection. Adding AI models to financial professionals’ toolkits will make the industry more competitive and improve investor outcomes.

But under the guise of minimizing conflicts of interest, the SEC now proposes requiring advisers and broker-dealers to write new internal procedures and to log all uses of technologies relating to predictive data analytics for agency review. If left unchallenged, the new rules would hamper the American financial industry’s world-beating innovation.

“Today’s predictive data analytics models provide an increasing ability to make predictions about each of us as individuals,” says SEC chairman Gary Gensler. This capability, he claims, “raises possibilities that conflicts may arise to the extent that advisers or brokers are optimizing to place their interests ahead of their investors’ interests.” While AI-assisted investing is novel, the SEC fails to explain why it runs afoul of age-old fiduciary-duty rules. Jack Inglis, chief executive of the Alternative Investment Management Association, argues that the SEC’s proposal “attempts to address a gap that does not exist.” As Tempus demonstrates in medicine, AI’s ability to enhance data analysis redounds to end users’ benefit, whether patients or investors. By demanding new forms of recordkeeping and manual oversight, the SEC guarantees that elevated compliance costs will eat into investors’ returns.

Those costs are almost certain to be substantial, given the proposal’s capacious definition of a covered technology—“an analytical, technological, or computational function, algorithm, model, correlation matrix, or similar method or process that optimizes for, predicts, guides, forecasts, or directs investment-related behaviors or outcomes in an investor interaction.” If computing power is involved, the proposal’s text suggests, the SEC would like to know about it. These overbearing rules will leave all but the most established, robustly resourced, and well-staffed advisers and broker-dealers at a clear disadvantage in competing for customers’ business, further entrenching the largest players and raising barriers to entry.

Gensler rightly fears the prospect of all advisers and dealer-brokers using the same small group of AI-driven predictive models. If all financial-market participants rely on the same AI models, those models’ flaws could cause system-wide vulnerabilities. The SEC’s desire to avoid that fate, however, does not justify its sloppy proposal. If adopted, the rules will smother what in 2020 Gensler himself described as AI’s potential “for efficiency, financial inclusion, and risk mitigation.”

AI and data analytics are force-multipliers across industries. In medicine, biotech firms like Tempus are showing the value of putting data and computing power to use. The same potential exists in finance, where creative firms can utilize data and AI to challenge industry incumbents and channel capital more efficiently than ever before. The SEC has the statutory authority to keep watch on AI risks, but if it wants to look out for investors’ interests, it should stand down from its destructive proposal.

Photo by primeimages/iStock


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