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SEC IAC Meeting Hearing summary

Securities and Exchange Commission Investor Advisory Council

Open Meeting

Thursday, March 10, 2022

Topline

  • IAC held two panel discussions on (1) ethics in AI and robo-adviser fiduciary responsibilities and (2) cybersecurity.
  • The Commissioners and AI panel focused on governance, auditing, conflict of interest in AI algorithm development, racial and gender bias, and the standard of care for tech platforms using AI.
  • The cybersecurity panel focused on corporate governance and accountability and touched on cyber incident materiality.

Opening Statements

In his opening statement, Commission Chair Gensler addressed digital engagement practices and digital finance platforms and how they raise bias and systemic risk issues. He explained how digital engagement practices are integrated into robo-advising, and folks behind those platforms have to decide the factors behind their practices and for which purpose they are optimizing, whether for investor benefit or other factors like the revenues and performance of the platform. He also said these platforms have to comply with certain standards and duties of care, but optimizing for revenues can create conflict with duties to their investors. Gensler then raised the question of when nudges by brokers require investor protections and stated that we must ensure developments in artificial intelligence (AI) do not create gender and racial inequities. He described cybersecurity as an increasing risk and stated that investors want to know more about how issuers and funds are managing cybersecurity risk, also mentioning the Commission’s cybersecurity rulemaking yesterday. He concluded by saying he has asked Commission staff for recommendations regarding broker dealers and customer notices on Regulation SP.

In her opening statement, Commissioner Hester Peirce said the provision of AI and robo-advisory services can provide affordable advice but that the implications for investor protection cannot be ignored. She also said the panel on cybersecurity is timely, given yesterday’s proposed rule.

In her opening statement, Commissioner Caroline Crenshaw said the increased role of technology provides benefits like convenient, accessible, and lower cost services and operational efficiency but that failure to comply with regulation leads to poor outcomes for investors. She then raised the question of whether technology platforms may be influencing investors in ways that may be considered recommendations or blur the line between solicited and unsolicited transactions. She added that AI is pervasive but reliance on it can present risks, like entrenching or exacerbating racial and gender bias. Crenshaw closed by mentioning Commission action in the cybersecurity space.

Panel Discussion Regarding Ethical Artificial Intelligence and “Roboadviser” Fiduciary Responsibilities

The panel focused on the ethical issues and fiduciary responsibilities related to the use of artificial intelligence in the development and application of roboadvising techniques. They provided an overview of the current state of roboadvising, focusing on algorithms, analyzed the tradeoffs between AI-powered advice vs. personal recommendations, explained the jargon, potential bias, and blind spots around robo-advice, and reviewed what is happening in the larger related space.

Moderator

  • Paul Sommerstad, Partner, Cerity Partners

Panelists

  • Tamra Moore, Partner at King & Spaulding
  • Melissa Nysewander, PhD, Workplace Investing Artificial Intelligence Center of Excellence Leader, Fidelity Investments
  • Julie Varga, VP, Investment and Product Specialist, Morningstar
  • Miriam Vogel, President, Equal AI

Panel Discussion

In her opening statement, Vogel explained that there are not yet clear guardrails and standards in place for AI needed to ensure that decades of progress toward equality are not unwritten in a few lines of code. She said financial products try to remove bias from AI but may have the opposite effect. She then described responsible AI governance by citing frameworks from the World Economic Forum, Business Roundtable, and Business Software Alliance. She also encouraged participation in National Institute of Standards and Technology’s (NIST) AI framework. Vogel went on to explain pillars of responsible AI governance, including investing in the pipeline, hiring and promoting with your values, evaluating a firm’s data, testing a firm’s AI, and redefining a firm’s team. She discussed federal government and international efforts to address AI bias, including work by the White House and the European Union. She then outlined five steps corporate leadership should take to reduce their liability and enhance the benefit of the AI systems they are using; these included establishing an AI governance framework, identifying the designated point of contact in the C-suite responsible for AI governance, communicating stages of the AI lifecycle where testing will be conducted, documenting relevant findings at the completion of each stage, and implementing routine auditing.

In her opening statement, Moore described three fundamental principles that undergird efforts by states and the federal government to govern AI and AI use, which included human rights, democracy, and the rule of law. She then discussed international efforts to govern AI use, the issue of fairness, and the need to mitigate bias. She discussed companies’ existing fiduciary duties, laws barring discrimination based on gender, race, and ethnicity, and algorithm proxies (variables, data points, etc.) that do not specifically mention race but are used to predict a person’s race. She also said historical data incorporates systemic discrimination, we do not have comprehensive federal AI legislation, and there are efforts underway to require impact assessments and algorithm explanations and efforts by agencies toward rulemaking in that area. She concluded that the need for companies to get ahead of the law is important for consumer trust and mitigating liability.

In her opening statement, Nysewander discussed how AI has evolved, emphasizing the need for ethical use and cons