Monday, December 11, 2023
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SEC Questions RIAs About Artificial Intelligence

Investment advisors have begun receiving examination surveys from the Securities and Exchange Commission, asking if and how the firms are using artificial intelligence, according to various news reports.

At least a handful of investment advisors have received questionnaires from the SEC’s Division of Examinations asking how they’re using the technology, according to a report in The Wall Street Journal Sunday.

Vigilant Compliance, a national regulatory compliance consulting firm that obtained an SEC survey, said in a recent blog that the agency is collecting information on AI models used to manage client portfolios, AI-related marketing practices and disclosures, third-party providers and compliance training.

“Any technology used for portfolio management or investor decision-making will be assessed to determine if any inherent bias in the programming creates conflicts of interest for the firm,” Vigiliant’s director Fred Teufel said in a Dec. 4 company blog.

SEC Chairman Gary Gensler has said in the past  that AI can create or aggravate conflicts of interest for investors—for instance, if an advisor optimizes or programs AI to choose outcomes such as the advisor’s services or products over less-expensive options such as an investor’s 401(k) plan.

If AI even “takes into consideration the interest of an advisor, this introduces conflict,” Gensler said in a July speech at the National Press Club in Washington, D.C.

According to Teufel, while most RIAs are not currently using AI “per se for portfolio management,” most firms do use devices that would be considered a covered technology and could produce data or directives that might create the appearance of a conflict of interest from the SEC’s perspective.

In future SEC exams, Teufel said that advisors “will need to demonstrate an understanding of what goes on ‘behind the scenes’” with this technology and be able to demonstrate before using it that they’ve kicked the tires and “evaluated the inputs and IT processes to ensure that they do not create an intentional or unintentional conflict of interest.”

Don’t Overpromise

Karen Barr, president of the Investment Adviser Association, a trade group for advisors, told the Wall Street Journal that her group’s member firms have indeed gotten SEC questionnaires.

According to Barr, quoted in the Journal, the insights and real-world information that come out of the SEC’s queries could prove to be “extremely helpful as the commission considers policy issues relating to these emerging technologies.”



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