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### Leveraging AI Technology for SEC Investment Adviser Insights

The SEC is querying how investment advisers use AI. The agency has sent a number of investment advi…

According to reports, the Securities and Exchange Commission (SEC) is investigating the utilization of artificial intelligence (AI) by investment advisers. The Wall Street Journal (WSJ) disclosed on Sunday, December 10, that the SEC’s examination division has initiated inquiries with several investment experts regarding their use of AI.

One of these requests, issued by the regulatory compliance consulting firm Vigilant Compliance, was highlighted in the report. The SEC’s request delves into various aspects such as AI-centric marketing materials, computational models for managing client portfolios, third-party vendors, and compliance training.

Karen Barr, the head of the Investment Advisers Association, acknowledged the significance of this move, stating that it is crucial as the committee deliberates on issues related to emerging technologies. She also confirmed that her organization was aware of the regulator’s investigations.

While the SEC’s inquiries do not necessarily imply a probe into misconduct, PyMNTS reached out to the organization for a response, which has not been received thus far.

The release of this report follows SEC Chair Gary Gensler’s warning to companies against making unsubstantiated claims about their AI capabilities. Gensler likened this behavior to “greenwashing,” a term used when companies embellish their environmental credentials, and labeled it as “Artificial washing.”

Gensler cautioned against such practices, emphasizing that both greenwashing and AI washing should be avoided.

In October, Gensler expressed concerns that without regulatory intervention, AI could potentially trigger a financial crisis within the next decade. He highlighted the risks posed to financial markets by unregulated technologies, making it challenging to establish appropriate rules.

Addressing the issue of economic stability, Gensler noted the complexities involved as existing regulations primarily focus on specific institutions like banks, money market funds, and brokers. However, the emergence of horizontal issues, where multiple institutions rely on the same core data aggregator or fundamental model, presents a unique challenge.

While the SEC has primarily concentrated on individual models used by broker-dealers and investment advisers, the agency introduced the concept of regulations in July to mitigate potential conflicts of interest in predictive data analytics.

Gensler underscored that even with regulatory adjustments, addressing the horizontal issue remains a challenge, especially if multiple entities rely on a foundational model controlled by major tech companies rather than broker-dealers. This raises questions about the limited number of cloud service providers in the country offering AI services.

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Last modified: February 7, 2024
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