SEC Increases Focus on AI

October 29, 2024

What happened?

The SEC’s Division of Examinations (“EXAMS”) will intensify its focus on artificial intelligence (AI) usage, according to its 2025 Examination Priorities, released last week. In addition to utilizing third-party AI tools, EXAMS stated that many firms are developing their own generated AI tools and employing complex algorithms to inform investment strategies—presenting new and different kinds of risks.

The SEC is expected to rewrite its Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers Proposal, according to the agency’s regulatory agenda.

2025 Examination Priorities

In its 2025 priorities, EXAMS cited AI as an example of an additional focus area, stating that if advisers integrate (AI) into advisory operations, including portfolio management, trading, marketing, and compliance, an examination may look in-depth at compliance policies and procedures as well as disclosures to investors related to these areas.

AI on SEC Exams

Already, we’ve seen several AI-related requests on SEC Exams. Examples are included below:

• AI Disclosures and Marketing: All disclosure and marketing documents to clients where the use of AI by the Adviser is stated or referred to specifically in the disclosure. Include all audio and video marketing in which the Adviser’s use of AI is mentioned.
• AI Description of AI Models and Techniques: A written description of all distinct artificial intelligence based artificial intelligence models and artificial intelligence techniques developed and implemented by the Registrant to manage client portfolios or make investment decisions and transactions since inception.
• AI Compliance Policies and Procedures: All written compliance and operational policies and procedures concerning the supervision of all artificial intelligence systems utilized by the Registrant. If any material amendment was made to these policies and procedures during the Examination Period, please describe the amendment and when it became effective.

AI Washing

The priorities were released just a couple weeks after the SEC announced charges against Rimar Capital USA, Inc. (Rimar USA), Rimar Capital, LLC (Rimar LLC), Itai Liptz, and Clifford Boro for making false and misleading statements about Rimar LLC’s purported use of artificial intelligence (AI).

In March, the SEC settled charges against two investment advisers for making false and misleading statements about their purported use of AI.

What does this mean for me?

The SEC will continue to intensify its focus on AI, and advisers should make sure they are prepared to comply with increasing expectations. If you have not updated your policies and procedures to address AI, you should start there. It can also be helpful to establish an acceptable use policy and provide thorough employee training to understand what is approved, and what is not. To help, you may want to reference our AI Do’s and Don’ts guide.

Fairview can help develop AI policies and procedures, help establish acceptable use policies, develop a training program, and more. If you have questions or need help, let us know.