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Cyber Law Expert Anticipates Regulatory Response to AI, Big Data

Over-reaction could stifle innovation, says founder of new George Mason University institute

Friday, March 29, 2019

By Ted Knutson

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Regulation has barely begun to have an impact in areas of big data and artificial intelligence, but veteran financial industry lawyer and technology expert Thomas Vartanian said it is only matter of time.

There will be a “first disaster,” Vartanian said during a panel discussion at the recent Investment Adviser Association Compliance Conference. “Regulators are going to come in with big force.”

Vartanian, who retired from Dechert LLP to become founder and executive director of the Financial Regulation & Technology Institute, which launched early this year at George Mason University's Antonin Scalia Law School, said there is potential for regulatory over-reaction, which could stifle innovation or lead to an economic crisis.

He said the lessons are in financial crises dating back 200 years - the subject of a book he is working on.

As noted in his faculty biography (he is also a professor of law at the Scalia school), Vartanian from 1983 through 2018 chaired the financial institutions practices of the Dechert and Fried Frank firms “through four financial crises and was consistently recognized by clients as 'one of the best financial services lawyers in America.'”

Regulatory Positions

His own regulatory background includes serving as general counsel of the Federal Home Loan Bank Board and Federal Savings & Loan Insurance Corp. during the Reagan administration. Before that, he was special assistant to the chief counsel and senior antitrust litigation attorney in the Office of the Comptroller of the Currency.

Thomas Vartanian Headshot
Thomas Vartanian

He is also a past chairman of the American Bar Association's Cyberspace Law Committee.

Addressing a current innovation - blockchain - Vartanian said it is likely to change the role of financial intermediaries, but admitted, “I am not smart enough to know how it is going to change, and a lot of financial institutions feel the same way.”

On the emerging big data and AI front, he said that regulators will have to act quickly to avoid being left behind or losing control. Anticipating how those processes play out will be a determinant of future financial institution success.

He predicted a reallocation of wealth to those who can afford big data and its advantages at the expense of those who can't.

In a commentary on prospects for AI regulation, at Fortune.com, Principal Financial Group chief data scientist Joseph Byrum attributed the regulatory lag in asset management to the speed of AI adoption. Byrum noted that a 2017 Financial Stability Board report laid out potential risks and benefits of AI and machine learning in financial services, and he suggested “get[ting] ahead of policymakers by crafting sensible and fair industry-specific rules for the use of AI in asset management,” modeled in part on standards and ethics guidelines of the IEEE.

Reassurance for CCOs

Also at the IIA Compliance Conference, Stephanie Avakian, co-director of the Securities and Exchange Commission's Division of Enforcement, said chief compliance officers don't have to worry about being personally sanctioned if they are operating in good faith.

“We're not second-guessing professional judgment,” she said.

Avakian said the SEC is dealing with after-effects of the federal government shutdown, which forced some meetings to be delayed and lengthened time to schedule others.

The shutdown pushed back the SEC agenda “somewhat,” stated Commissioner Robert Jackson. He also put in a word for companies to be fully forthcoming when they suffer cyber breaches. “Hacks aren't secret,” and word spreads among investors, he said.




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