SEC Investigates AI Investment Advisers: Key Updates Revealed
Published on: March 10, 2024
The SEC is intensifying scrutiny on how investment advisers deploy artificial intelligence, reflecting agency head Gary Gensler's cautious stance on the technology. The agency's examination division is conducting a 'sweep' by sending information requests to several advisers, focusing on AI-related marketing, algorithmic models for client portfolio management, third-party providers, and compliance training.
This SEC initiative has been confirmed by the head of the Investment Advisers Association, who views it as a valuable exercise for the commission to consider policy issues related to these advanced technologies.
The SEC's investigation is part of its regular oversight and doesn't necessarily imply misconduct. It aims to understand better the governance and application of AI in financial advising, amid a broader trend of AI adoption among top investment firms.
Leading investment firms are increasingly contemplating AI tools. Prominent firms have established AI research groups and teams, exploring the potential of AI in wealth management and financial trend analysis. However, specifics on the SEC's targets or the firms' responses to information requests remain undisclosed.
The SEC's broader rule-making agenda includes a focus on the use of AI by regulated firms. Proposed rules aim to address conflicts of interest and ensure client prioritization in AI deployment. SEC examinations often inform rule-making and risk alerts, and can sometimes lead to charges against firms.
Gensler has publicly expressed concerns about AI in finance, ranging from bias and conflicts of interest to potential financial crises due to overreliance on leading AI providers and 'AI washing' practices.
The SEC's AI-focused sweep is more targeted than its usual broad examinations, seeking detailed information on firms' AI usage. Many firms are reassessing their AI policies, but the widespread adoption of AI technologies presents challenges to potential regulatory interventions.
The SEC's information requests cover 26 topics, including management of AI-linked conflicts of interest, contingency plans for system failure, and the impact of AI systems on regulatory or legal issues. The letters also inquire about recent AI-related advertising.
The pace of SEC rule-making and the complexity of the proposals have been challenging for firms to navigate. Industry representatives suggest a more collaborative approach between the SEC and the investment industry to address these complexities effectively.