SEC Initiates Sweep of AI Use Among Advisors

The U.S. Securities and Exchange Commission (SEC) has initiated an investigation into investment advisors’ use of artificial intelligence (AI) to acquire data that some industry observers believe may influence the regulator’s approach to AI-related policies.

According to The Wall Street Journal, the SEC’s examinations division has sent out letters requesting information on AI marketing, compliance training, and algorithms used to manage portfolios for clients and third-party providers, citing a letter obtained by Vigilant Compliance, a regulatory compliance consulting firm.

SEC sweeps, according to Chuck Martin, Vigilant’s COO, can help push rulemaking, while the material acquired in the exams can be utilized to bring charges against firms.

The letters seek information on 26 areas, including some of the SEC’s previously voiced concerns, such as potential conflicts of interest stemming from the use of AI.

Earlier this year, the commission proposed a rule that would require broker-dealers and investment advisors to identify any conflicts of interest emerging from the use of predictive data analysis technology.

The rule has been criticized by several industry trade associations and legal consultants, as well as financial advisory firms such as Morgan Stanley and Fidelity Investments, for the cost of compliance, among other things.

Meanwhile, SEC Chair Gary Gensler has repeatedly warned about the financial services industry’s overreliance on AI, particularly the risk of a flash crisis caused by too many financial services businesses depending on too few language models for generative AI.