Understanding the SEC’s Focus Amid Lack of Final AI Rules

February 29, 2024

The Case

Last year, the U.S. Securities and Exchange Commission (SEC) proposed ambitious rules relating to artificial intelligence (AI) that have drawn significant commentary and criticism. While it is unlikely that any changes in the law are imminent, other initiatives by the SEC indicate that it is not willing to wait for those changes before addressing AI-related problems and risks it perceives.

The SEC’s Division of Examinations has launched a sweep focusing on the development and use of AI models by investment advisors, and the Division of Enforcement confirmed that it has AI-focused investigations underway. While the proposed rules raise the bar in the areas of conflicts of interest, disclosures, and policies and procedures, existing provisions of the federal securities laws address these areas and may apply to how firms currently develop and use AI models. Given the lengthy process of rulemaking, it is likely that the SEC has launched these initiatives with an eye on these existing provisions, which are discussed below.


Why Does This Matter?

Fintechs must navigate the complexities of AI compliance to ensure adherence to internal compliance policies and regulatory change management. Such regulations vary widely across jurisdictions, encompassing areas such as data privacy, discrimination, and liability. Compliance with these regulations is crucial for promoting trust and safeguarding against legal risks. 

The SEC’s initiatives indicate a clear focus on the development and use of AI models by investment advisors, albeit at a slow pace. While the absence of final AI rules may continue to cause gaps, fintechs should expect an expansion of existing regulatory provisions to address AI, which means readiness to address the ensuing compliance challenges will be imperative.


InnReg's Experience

As part of its compliance outsourcing services, InnReg has assisted the world's most innovative fintech companies when they receive specific inquiries and face regulatory scrutiny of their AI algorithms.


Learn More About This Topic

For additional details, read how InnReg’s primer on AI Compliance can help your fintech build best practices to meet evolving regulatory requirements. The guide covers all the key AI compliance topics, including:

  • Understanding regulatory compliance for AI-based fintech products; 

  • Implications of machine learning in compliance; 

  • Lessons learned from responding to regulatory inquiries; 

  • Legal regulations around AI, and

  • Practical application example of AI compliance by InnReg client services.

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On March 13, 2024, the European Union’s parliament formally approved the EU AI Act, making it the world’s first major set of regulatory ground rules to govern generative artificial intelligence (AI) technology.

From January 2018 to present, MMA failed to establish, maintain, and enforce a supervisory system, including written supervisory procedures (WSPs), reasonably designed to achieve compliance with rules governing outside business activities (OBAs). During this period, the firm failed to evaluate and document its evaluation of OBAs disclosed by its registered representatives as required by FINRA Rule 3270.

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© 2024 InnReg LLC

1101 Brickell Avenue
South Tower, 8th Floor
Miami, FL 33131