SEC is looking at conflicts of interest in robo-advisers, Gary Gensler says

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"We're living in a truly transformational time," in terms of predictive analytics, which may be just as significant, if not more, than the advent of the internet, said Securities and Exchange Commission Gary Gensler Wednesday at MIT's Artificial Intelligence Policy Forum.

Deep learning and machine learning is already being adopted in the financial system, such as in claims processing, fraud detection, and robo-advising. Many more asset managers are using predictive analytics for sentiment analysis, he said. "It's being used across the land."

"I do think this is an emerging risk. It's going to be embedded somewhere in predictive analytics," Gensler said. "If someone is relying on open-AI, that's a concentrated risk and a lot of fintech companies can build on top of it. Then you have a node that's every bit as systemically relevant as maybe a stock exchange."

Specifically, the SEC is looking at conflicts of interests and sales practices. In retail investing, millions of Americans have signed up to get lower cost advice or brokerage services, Gensler said. Separately managed accounts in the U.S. have grown about 70% in five years.

When clients are getting advice no longer from humans, but from an app or robo-adviser, "behind the scenes that's a lot of predictive analytics," he said. "What the businesses are generally doing are looking for greater engagement."

Gensler has asked SEC staff to consider proposals around investment advisory space and broker space on inherent conflicts of interest. If an app's algorithm considers among its factors its profitability, there's a conflict of interest, he said.

Such conflicts could be in recommending trading options when it's not really appropriate for the client, or trading on margin, or day trading, he pointed out. The aim is to ensure that such systems are a neutral platform that does not put the company's profits ahead of the client.

In the consumer finance and investor protection, there's a concern about whether the data has biases that will come out in the decision-making. "How do we ensure that we don't embed that inequality in the models?" he asked.

In July, SEC Enforcement Director Gurbir Grewal said investment app "gamification is a huge concern."

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