Regulatory News Update: SEC Sweep Initiative Targeting AI-Driven Investment Advisers

December 13, 2023

What: The SEC’s Division of Examinations has initiated a sweep of investment advisers on how AI-based tools are being deployed by the firms across the industry.

Who: Investment advisers in receipt of examination notifications should expect requests related to AI practices, governance, and oversight.

When: Several investment advisers have reported AI-focused request lists in conjunction with recent examinations. CRC expects this trend to continue into 2024.

Why: In light of the SEC’s recent focus on AI-driven investment management services, as well as the proposed rule related to conflicts associated with such activity, a sweep initiative is a commonly-practiced next step for the regulator, and serves primarily as a data collection exercise. In light of findings, advisers should expect modifications to proposed rulemaking, risk alerts, and guidance in this area.

How: Advisers can prepare for AI-focused examinations and request list items by conducting a brief mock-audit of its AI-related policies, procedures, and practices. Firms should be prepared to produce the documents relating to AI use in the event of an SEC request, including (but not limited to):

• Itemization of areas and instances where AI-based tools are deployed across the firm, particularly with respect to investment recommendations;
• Data security measures relative to AI use;
• Policies and procedures related to the use of AI within the firm, particularly with respect to investment recommendations;
• An itemization of inputs that drive AI-based recommendations and other activity, including how such information is collected and updated;
• Advertising materials and disclosures, including Form ADV, that reference the use of AI, particularly with respect to investment recommendations;
• Information related to the development, testing, and ongoing management and oversight of AI tools; and
• Plans in place to identify, resolve, and disclose AI system failures, AI-driven errors, and other issues related to AI use.

CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information about the SEC’s AI-driven conflicts proposed rule and new sweep exam initiative, including updated proposals, rule finalization details, and CRC’s thoughts on how to ensure successful integration of new or updated rules within your firm’s existing regulatory compliance program.

Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com