ANALYSIS: Why Vendor AI Use Is the Investment Adviser’s Problem

The SEC has made it clear, through recent proposed rulemaking, internal committee recommendations, and compliance exams, that it expects some initial due diligence and ongoing compliance by investment advisers using artificial intelligence (AI) for internal and client-facing functions. But what oversight obligations, if any, does an investment adviser have when a vendor utilizes AI?

The SEC actually began to address this question last fall, in a rule proposal targeting more accountability for investment advisers that outsource certain functions to a vendor.

In the proposal, the SEC queried whether or not investment advisers should be required to consult ...