Technology-neutral recommendations to ensure that markets and investors are protected while encouraging innovation and competition
Washington, D.C. – MFA, in a comment letter submitted today to the U.S. Treasury Department, provided four recommendations for regulators to consider as they establish rules regarding the use of artificial intelligence (AI) in financial services. The letter is in response to a Treasury request for information on the uses, opportunities, and risks of AI in the financial services sector.
MFA recommends that before taking any action on the use of AI in financial services regulators consider how:
- Alternative asset managers use AI to enhance existing processes and procedures
- Fiduciary duty and other existing regulations already sufficiently address potential concerns posed by the use of AI tools
- Past attempts to regulate specific technologies confirm that regulators should remain technology neutral and prioritize regulating activities
- Potential use cases for AI are still developing and could unlock important benefits
MFA’s recommendations aim to protect both markets and investors while encouraging innovation, competition, and the ability of alternative asset managers to generate returns for their investors, including pensions, foundations, and endowments.
MFA’s letter also supports regulatory approaches that utilize the existing, technology-neutral frameworks to address activities rather than a specific technology. This will avoid unintentionally hindering the development of new uses for technology that could augment human capabilities and benefit investors.
AI has demonstrated the potential to enhance efficiencies and produce benefits for markets, managers, and investors. Currently, alternative asset managers use AI tools to enhance research and analysis, risk management, portfolio optimization, fraud detection, and compliance, always with human involvement.
“MFA appreciates Treasury soliciting public feedback about how it should address the use of AI in financial services before drafting any regulation. AI technology shows incredible promise as alternative asset managers deploy this transformative technology to the benefit of their investors, which include pensions, foundations, and endowments,” said Bryan Corbett, MFA President and CEO. “Leveraging existing regulatory frameworks to address specific activities of concern will protect investors, markets, and managers without stifling innovation or competition. Like many technological innovations before, AI has the potential to reduce costs and improve markets, and any concerns should be addressed with a technology- neutral approach.”
MFA’s comment letter highlights how regulators’ past attempts to regulate technology rather than activities were unsuccessful:
When the CFTC attempted to regulate a specific technology (i.e., automated trading), it encountered tremendous challenges drafting proposed rules “just right” and ended up withdrawing its initiative in its entirety and solely deferring to existing rules and regulations. Through this rulemaking initiative and process, the CFTC ultimately realized that the markets it regulates and the technological tools used by its market participants are constantly changing. Similarly, the CFTC changed the definition of storage media recordkeepers could employ under CFTC Rule 1.31 from “optical disk” to “electronic storage media” and then again to “electronic regulatory records” in order to “modernize and make technology neutral the form and manner in which regulatory records must be kept.” In light of experiences such as this, we encourage regulators to maintain a commitment to remain technology neutral and avoid putting in place regulations tied to technological terms and concepts that will quickly become outdated and out of step with the marketplace.
Attempting to regulate any one specific technology over another could unintentionally stifle innovation, reduce returns to investors, and potentially circumscribe the ability of smaller and emerging managers to remain nimble and agile in an ever-competitive market.
Read the comment letter here.
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About the global alternative asset management industry
The global alternative asset management industry, including hedge funds, credit funds, and crossover funds, has assets under management of $5.5 trillion (Q3 2023). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.
About MFA
Managed Funds Association (MFA), based in Washington, DC, New York, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 180 member fund managers, including traditional hedge funds, credit funds, and crossover funds, that collectively manage over $3.2 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.
