By now, artificial intelligence (AI) technology is virtually everywhere. With the arrival of generative AI tools like ChatGPT, every industry has devoted a considerable amount of time to projecting how these technologies will affect, reshape, or even threaten their sectors.
The financial industry is no exception; the Securities and Exchange Commission (SEC) has been working hard to establish artificial intelligence regulations and guidelines to protect investors as AI tools become more integrated into the world of financial services. Essentially, the SEC is rushing to put some safeguards in place in order to keep up with the rapidly evolving AI technology capabilities.
As a securities firm or investment advisor professional, it’s helpful to get a sense of what the SEC’s proposed AI rules may look like and how they could affect your company. While these SEC AI rules are still in the proposal phase, businesses can take steps to align their AI practices accordingly to bolster investor confidence and maintain regulatory compliance moving forward.
The dedicated SEC regulatory legal team at Jacko Law Group, PC, is ready to offer you the customized and effective guidance you and your firm need as you move forward into an increasingly complex and interdependent future. Let’s take a look at some of the measures that the SEC has proposed in terms of AI guidance, the primary motivations behind the SEC AI proposal, and some key steps you can take to maintain regulatory compliance and strengthen public trust.
What Does the SEC AI Proposal Look Like?
On July 26, 2023, the SEC released proposed rules that “would require broker-dealers and investment advisers (collectively, ‘firms’) to take certain steps to address conflicts of interest associated with their use of predictive data analytics (“PDA”) and similar technologies to interact with investors to prevent firms from placing their interests ahead of investors’ interests.” In other words, with the growing proliferation of artificial intelligence in financial services tools and technologies, the SEC wants to protect investors from firms that rely on or use these AI tools in such a way that does not protect their clients’ best interests. Although the SEC recognizes that some of these AI tools may be “beneficial to investors in providing greater market access, efficiency, and returns,” the agency cautions that “the scalability of these technologies and the potential for firms to reach a broad audience at a rapid speed” may cause damage to investors “in a more pronounced fashion and on a broader scale than previously possible.” Simply put, the SEC recognizes the importance of putting some ground rules in place to minimize any potential risk or harm to investors as AI technologies grow in power and scale.
What Are Some of the SEC AI Rules That Have Been Proposed?
The SEC’s proposed AI guidelines have yet to affect existing laws, and there is still a healthy debate about the purpose and scope of such proposed rules. Essentially, these rules aim to prevent financial and securities firms from using PDA in ways that could create a conflict of interest between those of the firm and those of its customers. At their core, the SEC appears to be concerned with so-called “black box” PDA tools (several of which include AI technologies) that do not clearly explain the basis for the conclusions they reach. AI tools are not immune to bias, inaccuracies, or errors, and the SEC wants to make sure that the conclusions, recommendations, and activities a firm or advisor reaches or takes are not based on misleading, biased, or erroneous information. The SEC guidance concerning AI technology in the financial industry can be distilled into three actions for broker-dealers and investment advisory firms: (1) Examining the PDA tools they use and eliminating any potential conflicts of interest; (2) Enacting and keeping written policies and procedures that align with any promulgated rules; and (3) Maintaining records of all evaluations performed on PDA tools, such as the date of implementation, the dates of any modifications, or any documented conflicts of interests that arose.
Public Concerns About the Proposed SEC AI Guidelines
As with any major proposal, the SEC’s proposed AI guidelines have caused a variety of reactions and concerns from a number of stakeholders, professionals, commentators, and other industry experts. In practice, the reality of documenting every potential conflict of interest would likely be an enormous task, as PDA and AI technologies rarely explain their “thinking” processes or the factors that led to their responses. In their current form, the proposed SEC AI guidelines could present a large burden on individuals and firms acting in good faith in order to remain compliant. So far, the SEC has yet to announce a specific date on which a decision could be made regarding the adoption or implementation of AI policies or guidelines.
Learn More About AI and Regulatory Compliance Requirements in EffectToday
Businesses can start to prepare for the eventual implementation of some form of AI regulatory compliance guidelines in a few simple ways. First, it’s helpful to keep an eye on the status of any proposed SEC AI guidance so that you can identify ways of aligning your firm’s AI practices to cultivate investor trust and maintain regulatory compliance. Additionally, reaching out to a trusted and experienced SEC regulatory and corporate counsel attorney is a great way to build an important relationship that can prove useful when questions about AI and regulatory compliance arise in the future. Even if your company is not facing any active issues or actions concerning AI compliance, knowing that you have a dedicated legal advocate in your corner when the time comes allows you to face the future with greater security and confidence.
At Jacko Law Group, PC, we are committed to providing high-quality and comprehensive legal guidance to companies, investment advisors, broker-dealers, hedge funds, private equity firms, and other market participants throughout the U.S. We encourage you to contact our office today at (619) 298-2880 to discuss your needs and concerns with an experienced and knowledgeable SEC regulatory attorney.
