INTERVIEW On Regulating Increasingly AI-driven markets
As AI reshapes financial services, regulators are grappling with how to oversee the transformative technology. The U.S. Securities and Exchange Commission is tasked with balancing innovation and investor protection in an increasingly AI-driven market.
To understand the SEC's approach, I spoke with Dan Michael, a partner at Skadden in New York City and former head of the complex financial instruments group in the SEC's enforcement division.
While the agency has initially focused on clear-cut cases of misrepresentation, more sophisticated enforcement actions are likely on the horizon. Michael draws parallels between the SEC's AI approach to its stance on cryptocurrency.
The discussion delves into:
The current status of proposed rules, like predictive analytics
The challenges of using AI while complying with existing regulations like Regulation Best Interest
The complexities of proving intent in AI-driven trading
The regulatory implications of AI's ability to process vast amounts of unstructured data
We also have some fun imagining the SEC of the future — where an enforcement attorney is tasked with interrogating an algorithm.
At Skadden, Michael is co-head of the law firm’s Web3 and Digital Assets Group, where he represents companies, executives and directors in connection with SEC and FINRA probes and examinations.
Hope you enjoy our chat!
This interview has been edited for clarity and length.
How is the SEC responding to AI’s growing role in financial advice?
The SEC’s initial approach focuses on “low-hanging fruit,” targeting clear cases of misstatements or fraud, where companies claim their AI can perform functions that it can’t. These types of cases resemble traditional fraud cases but involve a new technology.
As AI’s use in finance evolves, the SEC is likely to pursue more sophisticated cases directly related to the technology’s impact and whether it complies with the federal securities laws. For example, if AI is used to offer financial advice, this raises significant concerns under Regulation Best Interest (Reg BI) and duty of care standards.
