SEC Seeks Details on Investment Adviser AI Use

The Securities and Exchange Commission (SEC) is reportedly querying how investment advisers use artificial intelligence (AI).

The agency’s examination division has sent a number of investment advisers requests for information on how they employ AI, The Wall Street Journal (WSJ) reported Sunday (Dec. 10).

The report cites one of these requests, obtained by Vigilant Compliance, a regulatory compliance consulting firm, which says the SEC wants details on topics such as AI-related marketing documents, algorithmic models used to manage client portfolios, third-party providers and compliance training.

And Karen Barr, head of the trade group Investment Advisers Association, confirmed that her organization has heard about the regulator’s queries, and said the move could be “extremely helpful as the commission considers policy issues relating to these emerging technologies.”

The WSJ noted that the mere fact that the SEC is making these queries doesn’t mean the agency suspects misconduct. A spokesperson for the SEC told PYMNTS it does not comment “on the existence or nonexistence of a possible investigation.”

The report comes days after SEC Chair Gary Gensler gave a speech in which he warned businesses not to make false claims about their AI capabilities. Gensler referred to this practice as “AI washing,” comparing it to “greenwashing,” the term for when companies exaggerate their environmental records.

“Don’t do it,” said Gensler. “One shouldn’t greenwash, and one shouldn’t AI wash.”

And in October, Gensler warned it was “nearly unavoidable” that AI will trigger a financial crisis within a decade without regulatory intervention. However, he argued that such regulation could be difficult, as the risks to financial markets are rooted in technologies not governed by the SEC.

“It’s frankly a hard challenge,” Gensler told the Financial Times. 

“It’s a hard financial stability issue to address because most of our regulation is about individual institutions, individual banks, individual money market funds, individual brokers; it’s just in the nature of what we do. And this is about a horizontal [matter whereby] many institutions might be relying on the same underlying base model or underlying data aggregator.” 

The SEC had in July presented the idea of regulations to stave off potential conflicts of interest in predictive data analytics, though primarily aimed at individual models used by broker dealers and investment advisers.

Even if the present measures were altered, “it still doesn’t get to this horizontal issue … if everybody’s relying on a base model and the base model is sitting not at the broker dealer, but it’s sitting at one of the big tech companies,” Gensler said. “And how many cloud providers [which tend to offer AI as a service] do we have in this country?”