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SEC Enforcement Director Outlines Compliance Measures for AI Use in Financial Markets

Updated: Apr 18

The Securities and Exchange Commission's (SEC) Director of Enforcement, Gurbir Grewal, emphasized the imperative for firms to exercise caution in their use of artificial intelligence (AI) and to avoid making false or misleading claims about AI products and services. Speaking at a compliance conference, Grewal highlighted the increasing risks associated with AI adoption, driven by heightened interest from investors and the market. He warned that this heightened interest could potentially elevate investor risk as firms rush to introduce new AI-driven offerings aimed at improving financial decision-making, market predictions, productivity, and investor attraction.


SEC Enforcement Director Outlines Compliance Measures for AI Use in Financial Markets

Grewal cautioned that amidst this pressure, some firms might be tempted to overstate the capabilities of their AI products and services. He stressed the importance of accuracy in representations regarding AI usage, urging firms to carefully evaluate whether their claims genuinely reflect their practices or are merely aspirational in nature.


The speech referenced recent SEC fines imposed on two investment advisers, Delphia USA and Global Predictions, for allegedly misleading clients about their utilization of AI technology. Grewal underscored the necessity for firms to ensure that their representations about AI usage are not materially false or misleading to avoid potential enforcement actions for what is termed "AI washing."


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To mitigate the risks associated with AI washing, Grewal outlined three general compliance principles. Firstly, he recommended that firms educate themselves about emerging AI risk areas by reviewing past enforcement actions and closely monitoring future disciplinary actions in the field. Secondly, firms should actively engage with personnel across various business units to gain a comprehensive understanding of how AI intersects with their activities and strategies. Thirdly, firms should update their policies, procedures, and internal controls to address the risks of AI washing based on their understanding of AI use within the organization.


Moreover, Grewal discussed the individual liability of chief compliance officers concerning disclosures about their company's AI products and services. He emphasized the SEC's approach to evaluating cybersecurity disclosure failures, stating that individuals acting in good faith and taking reasonable steps are less likely to face enforcement action.

By fLEXI tEAM


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