In a move signaling a deep dive into the evolving landscape of financial technology, the Securities and Exchange Commission (SEC) has initiated inquiries into the utilization of artificial intelligence (AI) by investment advisers. The agency’s examination division, according to reports from The Wall Street Journal (WSJ), has dispatched requests for information to multiple investment advisers, seeking insights into various aspects of their AI integration. The SEC’s interest encompasses AI-related marketing documents, algorithmic models governing client portfolios, third-party providers, and compliance training.
SEC’s inquisitive stance on AI integration and industry response
The SEC’s examination division is actively engaged in understanding how investment advisers leverage artificial intelligence in their operations. Reports from The Wall Street Journal reveal that the agency has reached out to several advisers, soliciting details on AI-related marketing documents, algorithmic models used for client portfolio management, third-party providers, and the training protocols for ensuring compliance. Vigilant Compliance, a regulatory compliance consulting firm, obtained one of these requests, shedding light on the SEC’s focus on the multifaceted use of AI within the financial industry.
Karen Barr, the head of the Investment Advisers Association, has acknowledged the SEC’s inquiries, expressing optimism about their potential role in shaping policies concerning emerging technologies. While the SEC’s queries do not necessarily imply suspicion of misconduct, the proactive approach indicates a keen interest in understanding the implications of AI integration in the financial sector. Barr sees the regulator’s move as potentially “extremely helpful” as the commission grapples with policy issues related to the rapid advancements in AI technologies.
SEC chair Gensler’s warning and future challenges of AI use
The recent inquiries come in the wake of a stern warning from SEC Chair Gary Gensler, who cautioned businesses against making false claims about their AI capabilities, coining the term “AI washing” to describe such practices. Gensler drew parallels between AI washing and “greenwashing,” where companies exaggerate their environmental records. In a speech, he emphasized the importance of transparency and accurate representation in the use of AI within financial services.
Gensler’s cautionary stance on AI extends beyond mere warnings. In October, he highlighted the looming risk of an AI-triggered financial crisis within a decade, emphasizing the need for regulatory intervention. Yet, he acknowledged the complexity of regulating technologies not currently under the SEC’s purview. Gensler highlighted the challenge posed by horizontal issues, where multiple institutions might rely on the same underlying AI model or data aggregator, a situation not effectively addressed by existing regulatory frameworks.
As the SEC delves into the intricate realm of AI integration among investment advisers, the financial industry stands at the crossroads of innovation and regulatory scrutiny. The proactive inquiries signal a recognition of the transformative potential of AI and the need to navigate its risks responsibly. The challenge now lies in striking a delicate balance between fostering technological advancements and safeguarding the financial stability that underpins the market. How will the industry respond to these inquiries, and what role will AI play in shaping the future landscape of financial services? The answers may shape the trajectory of AI adoption in the financial sector and influence regulatory approaches in the years to come.
