SEC looking at AI in investment advice

The Securities and Exchange Commission (SEC) in the US is seeking input on how retail brokers, wealth managers and robo-advisers are designing digital customer engagement tools. The aim of the consultation, which comprises almost 400 questions, is to assess if the digital tools used by financial advice firms should be governed by existing rules or require new ones.

The Chairman of the SEC, Gary Gensler said that “its rules may need updating to account for an artificial intelligence-led revolution in predictive analytics, differential marketing and behavioural prompts designed to optimise customer engagement.”

The SEC is therefore requesting information and public comment on the design and strategies behind digital interactions with investors.

“While new technologies can bring us greater access and product choice, they also raise questions as to whether we as investors are appropriately protected when we trade and get financial advice,” the SEC chairman said.

The review of rules by the SEC was prompted by January’s GameStop saga. Shares of GameStop soared in January after retail investors congregating on Reddit and trading on low-cost brokerage platforms bought shares in the video game retailer, causing big losses for hedge funds that had shorted the stock. As volatility soared, retail broker Robinhood curbed buying in GameStop and other stocks because it could not provide the cash its clearinghouse required to guarantee those trades during the two days it takes them to settle.

Part of the focus of the consultation is on optimised platforms that could be making what qualifies as recommendations or provision of financial advice to investors. The SEC is seeking input into how trading apps entice retail customers using game-like features such as points, rewards, bonuses, and competitions, with Robinhood one platform that has been under scrutiny over its gamification of buying and selling stocks.

But the SEC is also seeking to understand the tools and technology investment advisers use to develop and provide investment advice to their clients. The SEC is interested in advisers’ growing use of AI for robo-advice to create investment strategies, develop advice and increase revenue and consultation questions include: who oversees those platforms, how advisers and clients might be affected by them, and potential risks to advisers, clients, and markets.

Another focus of the consultation is the potential for systemic risk attached to market concentration with the securities industry’s outsourcing to just a few cloud-computing providers that rely on AI to process massive data volumes. Financial market participants most commonly outsource data storage and computer processing to cloud services including Amazon Web Services, Microsoft Azure and Alphabet’s Google Cloud.

Questions the SEC is asking include: what terms of service do investment advisers put in place with cloud service providers in connection with the potential for loss of service or loss of data?; how do investment advisers interact with clients when the platform is unavailable – for example, when the adviser has lost internet service or when the platform is undergoing maintenance?.

The request for input is intended to provide a forum for market participants, investors and other interested participants to share their perspectives. The consultation closes on 1 October. All comments will be posted on the SEC’s website.

This article is general information only.