SEC to Increase Scrutiny of AI Tools Used by Brokers, Investment Advisers

By Nicola M. White
Bloomberg News
(TNS)

The U.S. Securities and Exchange Commission’s examiners will step up scrutiny of financial firms’ use of artificial intelligence next year, the latest sign of regulators’ growing concerns about the emerging technologies.

Investment advisers, brokers, clearing agencies and others can expect the SEC to focus on their statements about AI tools to ensure they comply with agency rules, according to a Division of Examinations report published Monday. The regulator will also look into how firms supervise the use of the technologies for tasks tied to trading, fraud prevention and anti-money-laundering policies.

Although the agency put AI risks on its examination watch list last year, it went into further detail in the latest report. The sharper focus follows warnings from a number of financial regulators, including the Federal Reserve and Consumer Financial Protection Bureau, that the new tools present serious risks as well as opportunities. They have sounded alarms about everything from discrimination to potential systemic risk.

The SEC has clamped down on so-called AI washing, or misrepresenting how companies use machine learning and other tools. Chair Gary Gensler has repeatedly warned against overblown claims about AI.

In March, the regulator fined two money managers for making allegedly bogus claims about their use of artificial intelligence. Last week, the agency sued a robotics company and its founder for allegedly making fake statements about an AI-powered humanoid robot.

The SEC watch list reflects rapid developments in AI’s underlying technologies, said Peter Dugas, executive director of Capco, a financial services consulting firm.

Investors and corporate board members want firms to push out automation tools to speed up processes, but the firms need to ensure they’re complying with agency rules and disclosing risks to customers, he said.

“It’s a broad industry challenge everyone is facing,” Dugas said. “The SEC is very much watching.”

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