Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: We want to welcome our Bloomberg radio and television audience
Speaker 2: right now to a special conversation with us SEC Chair
Speaker 2: Gary Glentzler and mister Gensler. The SEC clearly looking closer
Speaker 2: at the use of AI tools in finance. We know
Speaker 2: that from the agency's latest exam priorities. But in parallel
Speaker 2: a year ago, you embarked on this rule making process.
Speaker 2: And I want to start by asking what sort of
Speaker 2: additional authority or power you feel you need through a
Speaker 2: rule that you wouldn't be able to regulate through through examinations.
Speaker 3: So let me say this.
Speaker 1: I think that the use of artificial intelligence, which has
Speaker 1: been around for at least ten years, has taken on
Speaker 1: and it's an important transformative part of our economy. Every
Speaker 1: bit is transformative, is the internet more? Every bit is
Speaker 1: transformative as one hundred years ago when we electrified so
Speaker 1: many things in our markets, our factories, the automobile, the refrigerator.
Speaker 1: That transformative in finance. It's being used today by many
Speaker 1: brokerage apps and investment advisors when they're selling to the public,
Speaker 1: just as when we're looking at movie apps that have
Speaker 1: figured out long ago that I'm a rom Com type
Speaker 1: of guy, and I want to watch those movies, and
Speaker 1: so it's to ensure that in the algorithm, in the
Speaker 1: actual math of the algorithm, that they ensure that they
Speaker 1: put the public's interests, their customers interest ahead of the
Speaker 1: investment advisor and broker dealer.
Speaker 3: That's it in a nutshell.
Speaker 4: In a nutshell, do you think that there's financial systemic
Speaker 4: risk still looming large because of adoption of AI and
Speaker 4: AI models ultimately being too similar from one brokerage to
Speaker 4: the next.
Speaker 3: I do think.
Speaker 1: So I said, I like rom coms, so I'll just
Speaker 1: go with that wonderful movie her. When Scarlett Johanson, you know,
Speaker 1: played this virtual assistant when she went offline late in
Speaker 1: the movie three hundred and sixteen, folks were broken hearted.
Speaker 1: We could see that in finance there's right now two
Speaker 1: or three large cloud providers that are backing some of
Speaker 1: the biggest investments in what's called generative AI. As the
Speaker 1: financial sector more and more relies on those big base models,
Speaker 1: it is not only possible but likely that some financial
Speaker 1: crisis in the future is that everybody's relying on it.
Speaker 1: And whether it's like Scarlett Johansson going offline, or if
Speaker 1: Scarlett Johansson of the future I'm talking about the AA
Speaker 1: model is hurting and taking the capital markets off of
Speaker 1: some you know, various cliff and I think that's a
Speaker 1: hard project to solve because of the dominance of a
Speaker 1: few base models likely in the future.
Speaker 3: Do therefore more clear rules need to be envisaged.
Speaker 4: Here is examination the tool of choice.
Speaker 3: So I'm separating out there's important.
Speaker 1: Investor protection issues directly about the conflicts, and I think
Speaker 1: we can do that and proceed for I've asked staff
Speaker 1: for recommendations on a reproposal of that role. I think
Speaker 1: a secondary we didn't talk about is fraud.
Speaker 3: Fraud is fraud.
Speaker 1: If you use the algorithm and the AI model to
Speaker 1: defraud the public, it's still fraud. But I think that
Speaker 1: that's going to play out not only for US, but
Speaker 1: in other agencies around the country, the Federal Trade Commission
Speaker 1: and elsewhere.
Speaker 3: But on these systemic issues.
Speaker 1: On these systemic issues, I think it's a tough challenge
Speaker 1: that global regulators need to come together and how do
Speaker 1: we protect against what is likely to be a very concentrated,
Speaker 1: interconnected system that's relying you know, like I say, three
Speaker 1: hundred and sixteen. Relying on Scarlet Johansson for their love
Speaker 1: was one thing in a fictional movie.
Speaker 3: But what do we do here?
Speaker 2: If you're just joining us on Bloomberg Television and radio,
Speaker 2: we're speaking with the SEC chair, Gary Gensler and mister Ginsy.
Speaker 2: You're also busy in parallel with the crypto industry. I
Speaker 2: think there's consensus on the eve of an election that
Speaker 2: all of those parties involved in responsible want to hammer
Speaker 2: out some sort of new jurisdictional framework for crypto regulators
Speaker 2: to make some progress on settling oversight of that industry.
Speaker 2: Can you talk to us about the work you're doing
Speaker 2: there and if you're making any progress in that field.
Speaker 1: Look, there's nothing incompatible about the ledger technology. You know,
Speaker 1: it's just this Halloween, it will be sixteen years since
Speaker 1: Toshinakamoto wrote that white paper, So happy sweet sixteen in
Speaker 1: a week. There's nothing incompatible about a ledger technology, decentralized
Speaker 1: ledger technology, and the securities laws. And it's important that
Speaker 1: in the securities market that investors get to decide on
Speaker 1: their investments, but they get the proper disclosure that we
Speaker 1: goard against conflicts of interest and the like, and we're
Speaker 1: going to continue to do that at the Securities and
Speaker 1: Exchange Commission. If a market's ever going to have trust,
Speaker 1: it also needs to come into compliance and a lot
Speaker 1: of this field, and we've seen the challenges in this
Speaker 1: field where a lot of people have lost money. Regular
Speaker 1: investors have lost money in the field that's not providing
Speaker 1: the fundamental disclosure about their projects, about these investment contracts
Speaker 1: and these schemes, and that's a field that has a
Speaker 1: lot of conflicts in the middle of it.
Speaker 2: Something interesting has been happening over the last year where
Speaker 2: you've been focusing on policy and regulation in the Fifth
Speaker 2: Circuit Court of Appeals, there have been many suits filed
Speaker 2: in what is a kind of business friendly court. How
Speaker 2: do you have to respond to that and adjust the
Speaker 2: policy side in response to the litigation side.
Speaker 1: Mist Genza No No. I think it's a really good question.
Speaker 1: We do everything we do within the law, and how.
Speaker 3: The courts interpret the law.
Speaker 1: The courts interpret it differently, we adjust.
Speaker 3: That's what we do.
Speaker 1: It's part of our great democracy. But I do think
Speaker 1: that we're focused every day on how we drive lower
Speaker 1: cost in the system. That's why we did Equity Market reform,
Speaker 1: I would note unanimously through our five member commission. That's
Speaker 1: why we've worked so hard on the treasury markets, this
Speaker 1: twenty eight trillion market at the base of our capital
Speaker 1: markets and driving lower cost which is called efficiency, and
Speaker 1: lower risk which is called resiliency in these really consequential,
Speaker 1: significant markets.
Speaker 4: Just for a moment, reminding our TV and radio audience,
Speaker 4: we are in a conversation with SEC Chair Gary Gensler,
Speaker 4: and just to stick with the crypto aspect for a
Speaker 4: moment more. There is, though this ongoing narrative that you
Speaker 4: haven't changed that much, you haven't adjusted much in terms
Speaker 4: of it is regulation via enforcement? Will that change?
Speaker 3: Ultimately?
Speaker 4: Do you see laws coming to bear from Congress rather
Speaker 4: than you having to enforce via enforced and regulate Caroline.
Speaker 1: We have benefited for nine decades from robust laws from
Speaker 1: Congress and rules from various agencies, not just the SEC,
Speaker 1: but the Commodity Future's Trading Commission, another significant and great
Speaker 1: agency that I was honored a chair, to help promote
Speaker 1: the markets, to protect investors, to promote capital formation and
Speaker 1: the markets in the middle. And that's what will continue
Speaker 1: to do, whether it's related to the stock markets, fifty
Speaker 1: sixty trillion dollars stock markets, whether it's related to the
Speaker 1: treasury markets as I said, nearly thirty trillion dollars, whether
Speaker 1: it's related to the bonds and fixed income markets, and yes,
Speaker 1: even related to this newer market, where as I said,
Speaker 1: all too many people have been hurt. All too many
Speaker 1: people have lost money and lined up in bankruptcy court
Speaker 1: to deal with their claims. And fundamentally, what President Roosevelt
Speaker 1: laid out and has been looked at over the years,
Speaker 1: Congress could adjust, but at the fundamentally it's about disclosure
Speaker 1: to the public, so the publicing decide, and then guarding
Speaker 1: the public against the conflicts and the fraud and things
Speaker 1: that happen in the capital markets that are unregulated.
Speaker 3: We saw that happen in the nineteen twenties.
Speaker 1: None of us were alive, but you can read about it,
Speaker 1: and we don't want that to happen to the investing
Speaker 1: public and undermine the trust in the overall capital markets
Speaker 1: as we know them.
Speaker 4: Talking of disclosures, one disclosure from former President Trump is
Speaker 4: that he would fire you ultimately unsurprising to you, I'm sure.
Speaker 4: But also he's got some plans, purported plans of course
Speaker 4: to introduce his own crypto platform and has been working
Speaker 4: on it.
Speaker 3: What do you make of that.
Speaker 1: I'm not going to comment on any one project. I
Speaker 1: think your viewing audience can appreciate that.
Speaker 3: It's just not what we do.
Speaker 1: And so Caroline, I'll let you go to your next question.
Speaker 3: Well missed against the I'll jump in.
Speaker 2: You talked about the investing public that you serve, right
Speaker 2: and there is something happening where private credit firms are
Speaker 2: take private market assets where you could debate the real valuation,
Speaker 2: and they're wrapping them in products like ETFs that are
Speaker 2: somewhat sort of more retail friendly. It's a new area,
Speaker 2: it's something interesting happening, and I know it's an intense
Speaker 2: interest to our audience. How do you regulate that? And
Speaker 2: how much are you personally thinking about that?
Speaker 3: Right now? Let me put it in context.
Speaker 1: There are dollar credit markets where you can your commercial
Speaker 1: credit and you're borrowing probably worldwideer in access of thirty
Speaker 1: trillion dollars, and banks and non banks alike play important
Speaker 1: roles in that. And so what we've private credit existed
Speaker 1: when I started at Goldman Sachs forty some years ago.
Speaker 1: I mean, there were direct loans that could be made
Speaker 1: outside of the banking system, but today you've seen a
Speaker 1: growing share.
Speaker 3: Involved in that.
Speaker 1: I think that competition is good for borrowers, investors, savers
Speaker 1: and the like. That's that's competition in our capital markets.
Speaker 1: But it still has to sort of comply with the
Speaker 1: basic tenets of risk management, disclosure, transparency and the like.
Speaker 3: Our role in.
Speaker 1: It as a capital markets, you know, oversight is an
Speaker 1: important one. But I think the competition is actually benefiting
Speaker 1: a lot of borrowers. I would note this, it hasn't
Speaker 1: at this size, it hasn't lived through a downturn, so
Speaker 1: it hasn't been tested in you know, the inevitable at
Speaker 1: some point downturns that would come. There's also some intersections
Speaker 1: between this private credit merging system and the insurance sector
Speaker 1: and the banking sector. But particularly it's intersection with the
Speaker 1: insurance sector. That's you know, bears look and ratings as well,
Speaker 1: the use of private letter.
Speaker 3: Ratings on some of this.
Speaker 1: So we're looking at some of this, but I think
Speaker 1: overall it's capital markets benefiting and the public benefiting from competition.
Speaker 2: Apollo in State Street have such a private market ETF
Speaker 2: pending before the SEC. My colleagues tell me it's controversial.
Speaker 2: What can you tell me about that specific case study?
Speaker 1: I guess I could tell you the same thing I
Speaker 1: told Caroline earlier, that you know, in a role like mine.
Speaker 3: I'm a very asked to be disciplined.
Speaker 1: I try to state this with I don't comment on
Speaker 1: specific prod docs or projects that may be in front
Speaker 1: of the staff or in front of our five member commission.
Speaker 1: So I'm going to demure on that. But I hope
Speaker 1: you're listening public understands why.
Speaker 4: Do you worry about that ill liquidity mismatch though a
Speaker 4: potential one.
Speaker 1: Look, there's an ill liquidity mismatch in banks. So our
Speaker 1: twenty six trillion dollar banking system in the US has
Speaker 1: twenty trillion dollars in deposits, runnable deposits. Of course, a
Speaker 1: lot of them are insured, but a lot of them
Speaker 1: are uninsured. And so banks themselves transform liquidity, transform what's
Speaker 1: called maturity or duration, And then you think about it.
Speaker 3: In the non.
Speaker 1: Bank sector, you have, frankly, a better match of maturity
Speaker 1: of the liability side of a private fund and the
Speaker 1: assets they hold.
Speaker 3: So it may it's not without risk, but.
Speaker 1: It might be in a part of the market that
Speaker 1: they can better bear that ill liquidity risk.
Speaker 4: It's really interesting how you've got this is a line
Speaker 4: of sight. But also everything we've just articulated AI crypto
Speaker 4: private markets a lot to get on with. And your
Speaker 4: term is what until June twenty twenty six. But will
Speaker 4: it run until then? Many feel that perhaps not. What
Speaker 4: do you want to get done in the remaining months
Speaker 4: or so?
Speaker 1: Look, I think it's the greatest privilege of my life,
Speaker 1: other than having these three wonderful daughters that I have.
Speaker 1: But I'm talking about professional privilege. And so every day
Speaker 1: I come into work and think with my colleagues and
Speaker 1: fellow commissioners, how do we get things done for the
Speaker 1: investing public and the issuing public that the markets in
Speaker 1: the middle work for them, Not that the issuers and
Speaker 1: the investors are working for the intermediaries and the markets
Speaker 1: in the middle, but the markets work for them.
Speaker 3: So that's like lowering.
Speaker 1: Cost through competition, transparency and the like, and access to
Speaker 1: the markets, and then resiliency trying to use like central
Speaker 1: clearing and so forth, the backside and the plumbing. So
Speaker 1: we've gotten we laid out an agenda of fifty or
Speaker 1: fifty five projects three and a half years ago, we've
Speaker 1: actually gone.
Speaker 3: Across the line, proposed and.
Speaker 1: Adopted forty three of those. You can do the math
Speaker 1: the other projects, A number of them I've asked staff
Speaker 1: to we consider possible reproposals.
Speaker 3: But we're still working.
Speaker 1: On some rules around the market, structure of the treasury market,
Speaker 1: some rules around central clearing and segregation of funds and
Speaker 1: the like. But we're going to continue to move forward,
Speaker 1: you know, and elections have consequences.
Speaker 3: That's a great thing of our democracy. They do.
Speaker 4: SEC Chair Gary Gensler, I'll let you return to some
Speaker 4: rom coms. Thank you so much.
Speaker 3: Thanks