SEC’s Gensler Confirms AI is Regulatory Priority

Chairman Gary Gensler  said at a conference that he has directed the SEC to explore the regulatory implications of AI in financial advising, and also reiterated the importance of advisers vetting third-party services.


Securities and Exchange Commission Chairman Gary Gensler said that he has asked the SEC staff to make recommendations to the commission on the challenges of regulating artificial intelligence.

In brief remarks made to a conference on emerging trends in asset management on Friday, Gensler discussed the importance of regulations concerning AI, especially as it relates to fiduciary duties, and made yet another public confirmation that the SEC’s staff is actively working on regulatory recommendations in this area.

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AI may prove to be “more transformative than the internet itself” Gensler said at the conference. He noted that AI can bring large benefits in terms of investment returns and access to markets, and specifically highlighted its potential role in sentiment analysis and advising.

As he has in other settings recently, Gensler also explained that the way AI software is programmed can create conflicts of interest if the AI tools are made to consider the interests of the adviser in addition to the client. To the extent that these are mutually exclusive, such programming would be a conflict and has implications for adviser fiduciary obligations. Here, on fiduciary status, is where Gensler’s focus is most concentrated, if his public remarks on AI are any indication.

Third Party Services

Gensler also briefly discussed outsourcing, custody, and cybersecurity under the umbrella of “third party services.”. He touched on the SEC’s outsourcing proposal, which would require advisers to do due diligence on their providers, identify and mitigate risks of outsourcing, and ensure an orderly termination of services at the end of their relationship, among other requirements. Gensler said that this proposal, as well as the cyber security proposals, are essential for an adviser to satisfy their fiduciary duties.

The chairman framed the new custody rule proposal, or the safeguarding rule, as belonging to this larger effort to extend adviser fiduciary duties to third parties by including their qualified custodians. This proposal, likely more than the others, have received significant pushback from industry.

Lance Dial, a partner and member of the asset management and investment funds practice at law firm K&L Gates, says that negative sentiment on this proposal is “carried by everyone in the industry.” It is unpopular for a variety of reasons, according to Dial, including its attempt to regulate custodians indirectly by requiring advisers to get assurances from their custodians. Dial explains that the contractual agreements it requires would limit the custodians that are available to advisers since they would have to negotiate with them separately, and they could lose business of clients using particular custodians.

The new custody rule would also extend these requirements to advisers engaged in discretionary trading. Though these advisers do not have custody of assets in the traditional sense, they could still unjustly take client assets through fees if they were trading excessively, a practice known as churning. Dial explains that this is more of a fiduciary problem than a custodial one, which the new proposal would not address.

Morgan Stanley CEO James Gorman To Step Down Within 12 Months

The CEO oversaw Morgan Stanley’s push into the wealth management space.

Morgan Stanley’s James Gorman plans to step down in the next 12 months, the CEO and chairman said at the investment firm’s annual shareholder conference Friday.

“The specific timing of the CEO transition has not been determined, but it is the board and my expectation that it will take place in the next 12 months,” he said. “That is the current expectation in the absence of major change in the external environment.”

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Gorman was named CEO of Morgan Stanley in 2010, replacing John Mack, who had steered the firm through the financial crisis. Gorman told shareholders that Morgan Stanley’s board had identified three potential successors, but did not name them.

Gorman, 64, oversaw a push by the New York-based investment bank into wealth management and investment advice, with the investment management division staffed with 1,300 financial professionals overseeing $1.4 trillion in assets under management as of March 31.

Gorman’s push into retail investment management included the acquisition of E*Trade Financial Corp. in February of 2020, at which time the CEO said the deal would make the firm a top player across financial advisory, self-directed investing, and workplace savings. He noted the acquisition would continue “the decade-long transition of our firm to a more balance sheet light business mix, emphasizing more durable sources of revenue,” Gorman said in a statement at the time.

In October of that same year, Morgan Stanley bought wealth manager Eaton Vance Corp., bringing on $500 billion in AUM, as well as the firm’s capabilities in individual separate accounts and customized investment solutions.

“Eaton Vance is a perfect fit for Morgan Stanley,” Gorman said in a statement at the time. “This transaction further advances our strategic transformation by continuing to add more fee-based revenues to complement our world-class investment banking and institutional securities franchise.”

Wealth-Focused Career

Gorman took the CEO role after being co-president of Morgan Stanley and overseeing the firm’s global wealth management business, investment management business and operations and technology group. Gorman joined Morgan Stanley in February 2006 as president and chief operating officer of the global wealth management group.

Prior to joining Morgan Stanley, Gorman led the global private client business for the then investment firm Merrill Lynch, which is now owned by Bank of America Corp.

Gorman is a native of Australia with an M.B.A. from Columbia University.

Retirement Footprint

Morgan Stanley’s Graystone Consulting, which provides retirement plan advisement to plan sponsors, named a new head in 2020 from the wealth management space. The workplace retirement advisory named Jeremiah France, formerly chief operating officer of U.S. Wealth at Mercer Global Investments, to be managing director and head of the division.

The firm’s workplace benefits and investing division, Morgan Stanley at Work, late last year added 401(k) retirement saver robo-adviser technology when it purchased the technology of Blooom, a Leawood, Kansas-based startup. Morgan Stanley also brought on some of Blooom’s leadership, according to statements it made at the time, without providing details of the deal.

“To help bolster our retirement offering, we can confirm we bought components of Blooom’s technology in an asset purchase, while onboarding the Blooom team,” the spokesperson said in an emailed response.

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