Shearman & Sterling LLP 9 | Leveraging the Broad Potential of Artificial Intelligence While Mitigating the Risks
In his speech, Chairman Gensler discussed the
opportunities and challenges of Generative AI
and how the technology might impact securities law
and financial markets.
Congress has also indicated an interest in regulating
the use of AI. This fall, Senate Majority Leader Chuck
Schumer is launching a series of "AI Insight Forums"
featuring top AI developers, executives, scientists,
community leaders, workers, national security experts
and others.
11
His plan is to use these discussions as the
foundation for detailed policy proposals regulating AI.
12
Adjusting Public Disclosures
As the impact of artificial intelligence across industries
becomes more widespread, we recommend that public
companies carefully evaluate whether their securities
disclosures accurately reflect the potential impact of
AI on their business. The disruptive impact of AI could,
for example, cause a company to experience increased
competition, leading to the diversion or diminution
of business opportunities. In such a scenario, the
company's business prospects may well be impacted,
which could in turn cause the company to be subject to
regulatory scrutiny or securities lawsuits. To the extent
the company's risk disclosures do not adequately warn
stockholders about the possible challenges created by
the impact of AI on its business, defending against a
regulatory inquiry or litigation may be difficult.
Companies should consider revising risk factor
disclosures to account for the impact that the
development of artificial intelligence technology may
have upon the business. In the past six months, more
than 150 companies have identified a variety of AI-
related risks on their Forms 10-K.
13
The most commonly
identified risks included (i) poor implementation
or operational use of AI technologies due to bias,
hallucinations, and intellectual property infringement,
(ii) competitors gaining advantages through AI to
enhance management decision-making and optimize
corporate operations, (iii) evolving regulatory regimes
that could result in additional cost and liability, (iv)
investments in AI might be insufficient or result in
expenses that exceed revenues, and (v) reputational
harm from using AI-generated content that is factually
inaccurate, flawed, or biased.
14
Addressing Confidentiality Concerns
One of the powerful traits of an AI model is its ability
to improve the algorithm by using data, including any
data entered by a user of the AI tool. Therefore,
safeguards should be implemented to prevent
disclosure of the company's privileged, sensitive,
or material non-public information.
It was reported recently that several employees
inadvertently disclosed confidential information while
using a Generative AI tool.
15
Confidential source code
was copied and pasted into the chat in two separate
instances for checking error and code optimization.
Also, a recording of a meeting was shared with the
AI tool to be converted into notes for a presentation.
The confidential information can be used by the AI tool
to optimize its algorithm, and the information could
potentially be accessible to other users of the AI tool.
Aside from disclosing confidential information, entering
privileged information and communication can risk
waving the privilege because the information and
communication could be stored, used, and potentially
accessed by third parties.
11
See Scott Wong, "'A Moment of Revolution': Schumer Unveils
Strategy to Regulate AI Amid Dire Warnings," https://www.nbcnews.
com/politics/congress/schumer-call-hands-deckapproach-
regulating-ai-rcna90193 (June 21, 2023).
12
Id.
13
See Kate Azevedo, "Analysis: The AI Risks That Are Keeping
Companies Up at Night," https://www.bloomberglaw.
com/bloomberglawnews/bloomberg-lawanalysis/
X5EQL3JK000000?bna_news_filter=bloomberg-lawanalysis#jcite
(September 28, 2023).
14
Id.
15
See Cecily Mauran, "Whoops, Samsung Workers Accidentally
Leaked Trade Secrets Via ChatGPT," https://mashable.com/article/
samsung-chatgpt-leak-details (April 6, 2023).
