Regulators likely to take wait-and-see approach on AI

Regulators likely to take wait-and-see approach on AI
The SEC is working on proposed rules related to artificial intelligence and other technologies, and Senate Majority Leader Chuck Schumer has announced a framework for AI legislation.
JUL 10, 2023

Artificial intelligence has developed rapidly in recent months, but regulating how it’s used to provide financial advice and manage assets is likely to evolve more slowly.

ChatGPT and other large language models have sparked imagination and stoked fears about how AI can be applied to a variety of fields and skills — from sales and software development to writing, editing, and almost anything else. It’s not clear yet what its impact will be on making investment recommendations.

The Securities and Exchange Commission is likely to monitor how financial advisors and asset managers use AI and then determine how existing regulations can address potential investor harm before launching a rulemaking effort focused on AI, said Mike Abbriano, managing director of ACA Group, a compliance consultant.

“For the near term, they’ll take a wait-and-see approach and use the broader anti-fraud tools they have at their disposal … [rather] than handcuff themselves with more specific regulation that doesn’t keep up with the pace of innovation in this space,” Abbriano said.

The SEC has scheduled for October the release of proposed rules “related to investment adviser conflicts in the use of predictive data analytics, artificial intelligence, machine learning, and similar technologies in connection with certain investor interactions,” according to the agency’s latest regulatory agenda.

SEC Chair Gary Gensler has made a priority of addressing advisors’ so-called digital engagement practices. For instance, he has expressed concern about whether the algorithms for robo-advisors and online brokerage platforms optimize for the benefit of the investor or the financial firm.

The upcoming SEC proposals may address that issue and extend into artificial intelligence.

In a previous agenda, the SEC listed an upcoming proposal on digital engagement practices. It appears that proposal has been expanded to include AI, said Ben Marzouk, a partner at the law firm Eversheds Sutherland.

“I think they’ve been waiting to release the proposal in order to account for all the developments in AI,” he said.

Lawmakers also are trying to wrap their arms around AI. Senate Majority Leader Chuck Schumer, D-N.Y., last month announced a framework for AI legislation.

The effort will start with meetings later this year of expert panels who will try to unravel thorny issues surrounding the use of AI, such as national security, privacy, worker protection and copyright. Schumer has also asked Senate committee leaders to identify areas under their jurisdiction for potential AI work.

“We must come up with a plan that encourages — not stifles — innovation in this new world of AI,” Schumer said in a speech last month.

Marzouk hopes the SEC and the Financial Industry Regulatory Authority Inc. also take an approach that doesn’t crimp the use of AI for financial advice.

“Both regulators should be careful not to stifle innovation,” he said. “It’s important to let the technology breathe.”

Will AI remain one of the market's 'megatrends'?

Latest News

The 2025 InvestmentNews Awards Excellence Awardees revealed
The 2025 InvestmentNews Awards Excellence Awardees revealed

From outstanding individuals to innovative organizations, find out who made the final shortlist for top honors at the IN awards, now in its second year.

Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty
Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty

Cresset's Susie Cranston is expecting an economic recession, but says her $65 billion RIA sees "great opportunity" to keep investing in a down market.

Edward Jones joins the crowd to sell more alternative investments
Edward Jones joins the crowd to sell more alternative investments

“There’s a big pull to alternative investments right now because of volatility of the stock market,” Kevin Gannon, CEO of Robert A. Stanger & Co., said.

Record RIA M&A activity marks strong start to 2025
Record RIA M&A activity marks strong start to 2025

Sellers shift focus: It's not about succession anymore.

IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients
IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients

Platform being adopted by independent-minded advisors who see insurance as a core pillar of their business.

SPONSORED Compliance in real time: Technology's expanding role in RIA oversight

RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.

SPONSORED Advisory firms confront crossroads amid historic wealth transfer

As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.