Examiners at the Securities and Exchange Commission are investigating the integration of AI advisors into their operations, including portfolio management, trading, marketing and compliance.
Under the SEC's Division of Examinations' Priorities for 2025, released Monday, examiners can examine firms' “compliance policies and procedures” related to AI-related services or procedures and their disclosures to investors.
Except one the previously reported SEC purge Looking at how firms use AI-based tools is the latest indication of an ever-increasing focus by the commission on registrants' use of AI in their day-to-day practices. It's all the more obvious, given that artificial intelligence was barely mentioned previous year exam priorities and was not cited in the 2023 release.
According to the SEC, the examination division will review registrants “with respect to their AI capabilities or use of AI for accuracy” and determine whether they have established adequate policies and procedures to oversee the use of AI, including for tasks that related to fraud prevention and detection, back-office operations, anti-money laundering processes and trading functions.
“In addition, the division will review how registrants protect against the loss or misuse of customer data and information that may occur from the use of third-party AI models and tools,” the priorities document states.
According to compliance services provider ACA Groupthe SEC's AI sweep included requests for information on how firms managed AI-related conflicts of interest, marketing materials that mention AI, continuity plans around AI system failures and other related documents.
This focus comes despite a recent ACA Group survey showing that 64% of advisory firms had no plans to build or use client-facing AI tools or predictive analytics models in the future (compared to 30% of firms who said they are not currently doing so but are “ actively explore or build” such tools).
Although AI was mentioned in the 2024 priorities, it is much more prominent this year, according to Lori Weston, director of product and strategy at STP Investment Services. Firms should be especially vigilant, given that regulators are taking enforcement action against logged for AI-related errors.
Weston also said the SEC's “increased focus” on outsourcing, particularly to advisers related to investment selection and management.
“Advisors should review their overall policies regarding the supervision and oversight of all third-party providers, with a particular focus on the use of AI by third-party providers,” she said. “In today's interconnected environment, AI risks can seep into a firm's operations through third-party vendors.”
The Commission has weighed rules related to broker/dealer conflicts and RIAs using predictive data analytics, AI and machine learning. However, according to regulatory information in the White House Office of Management and Budget, the committee is considering re-proposing those rulespushing their final stages even further.
As in previous years, examiners continue to monitor investment advisers' adherence to fiduciary duties and eb/d compliance with the Best Interest Regulation. They will focus on advisor recommendations regarding high-cost products, unconventional instruments, illiquid and hard-to-value assets and assets sensitive to higher interest rates and changing market conditions, including assets of commercial real estate.
For dual enrollees, examiners are investigating distribution and account selection practices (including the distinction between brokerage and advisory, including when rolling over to an IRA), according to exam priorities.
Like last year's priorities, examiners are investigating registrants' use of crypto assets. Climate and ESG concerns are not mentioned in the priorities for the second year as they are the focal point for several previous years.