SEC AI Sweep Exams

November 21, 2023

What happened? 

Artificial intelligence (“AI”) sweep exams may be on the horizon for 2024. An examination document reviewed by Ignites stated that the SEC asked at least one firm to provide information regarding its AI policies and procedures. The letter included requests for descriptions of “all algorithmic trading signals generated by AI models” that the firm uses, as well as data sources and their vendors.  

Below are additional requests from the SEC regarding artificial intelligence. 

1. List of all data providers a firm uses and any in-house alternate data sources. 
2. Client disclosures and marketing documents that reference using AI. 
3. Descriptions of AI-based models and strategies used to make investment decisions or manage client portfolios. 
4. Written guidance provided to employees on the firm’s AI-related compliance policy. 
5. List of employees or committees with AI-related focuses.  
6. A firm’s AI-related conflict-of-interest policy, contingency plans, and model validation and performance evaluation reports.  

These requests could potentially be the first of an AI-related sweep by the SEC. They are in line with the goal of the proposed rules by the SEC on July 26th, 2023, regarding the use of predictive data analytics by broker-dealers and investment advisors. The proposed rules would require a firm to eliminate or neutralize conflicts of interest associated with the firm’s use of covered technologies in investor interactions that place the firm’s interest ahead of the investor’s interest. Additionally, it would require firms to maintain written policies and procedures if covered technology is used to prevent violations of the proposed rules.  

What does this mean for me? 

AI is becoming another key focus area for the SEC. Firms should review the proposed rules by the SEC regarding predictive data analytics as well as the sample requests listed above to ensure they can comply with the proposed rules, and provide adequate documentation to the SEC if requested. Firms should also be proactive to ensure they remain up to date with regulatory expectations and best practices.

If you have questions or need assistance, contact us. Our team of regulatory experts can help answer questions or provide guidance.