What’s the latest news in the world of regulatory compliance? Welcome to our biweekly recap, where we are giving you our report highlighting the top compliance news articles from various industry news publications. We have selected the most relevant and important news articles related to registered investment adviser (RIA) compliance and regulatory issues. This recap focuses on two new SEC proposed rules, an explanation of the SEC’s RIA Code of Ethics rule, how advisers are utilizing AI and the impact of social media on investing.
Here are our top investment adviser compliance articles as of Jul. 28, 2023:
SEC wants planners to be responsible for AI, robo advisor recommendations (Author – Dan Shaw, Financial Planning)
The SEC is concerned about potential conflicts of interest regarding investment advice provided by artificial intelligence and robo-advisors. The commission voted 3-2 to propose a rule requiring financial planners to monitor these systems for conflicts and eliminate them as much as possible to protect clients’ interests.
“We are concerned that given the complex nature of many of these technologies, a firm’s data or software might intentionally or unintentionally cause the firm to place its own interests ahead of investors’ interests,” said William Birdthistle, director of the SEC’s division of investment management, in Wednesday’s online meeting.”
The proposed rule would make brokers and advisers go through a three-step procedure to identify and mitigate conflicts arising from their technology use. Some industry representatives are concerned about the potential burdens and costs associated with compliance. The proposal is now open for public comment for 60 days.
Additionally, the commissioners unanimously voted to propose a change allowing advisers offering recommendations exclusively through websites to register with the SEC, even if they have fewer than 15 non-internet clients.
SEC Floats New Rules on Digital Nudges, Robos (Author – Melanie Waddell, Think Advisor)
The SEC has approved proposed rules to regulate the use of artificial intelligence (AI) by investment advisers and broker-dealers. The rules target conflicts of interest arising from the firms’ use of predictive data analytics during investor interactions. SEC Chairman Gary Gensler raised concerns about the potential for such technologies to prioritize firms’ interests over investors’. The proposed rules would require firms to eliminate or neutralize conflicts of interest related to their use of AI in investor interactions, implement written policies and procedures to prevent violations and maintain recordkeeping. Critics, including the Investment Adviser Association, expressed concerns about the need for new regulations and existing regulatory obligations in the investment adviser space.
The SEC’s RIA code of ethics rule, explained (Author – Chris Stanley, Financial Planning)
This article dives deep into the obligations and requirements set forth by the SEC’s code of ethics rule. In response to SEC enforcement actions involving fiduciary duty violations by investment advisory personnel, the SEC introduced the Investment Adviser Codes of Ethics Rule in 2004. The rule requires all SEC-registered investment advisors to establish, maintain and enforce a written code of ethics that reflects fiduciary obligations, compliance with federal securities laws and reporting of personal securities transactions and holdings by access persons. The rule also mandates access persons to report any violations promptly to the chief compliance officer.
Advisory firms should carefully review the rule and its components to ensure compliance and prevent conflicts of interest.
How advisors are taking advantage of wealthtech’s AI enthusiasm (Author – Justin L. Mack, Financial Planning)
AI-powered tools are transforming wealth management, as discussed in a webinar organized by the strategy consulting firm Ezra Group. The leaders from wealthtech firms explored how AI and machine learning are reshaping the industry and provided tips on leveraging these technologies to enhance investment decision-making, optimize portfolios and deliver personalized services to clients. Examples include some firm’s using an AI chatbot, while other firms are using AI for fraud protection and cybersecurity.
However, firms are cautious about AI’s decision-making abilities and focus on using AI for operational efficiencies and delivering information to their teams more quickly and efficiently.
Social media’s impact on investing (Author – Kelvin Cheng, Investment News)
The accessibility of investment information on the internet and social media has led to a surge in DIY investing, particularly among young adults who are less trusting of traditional investment professionals. Influencers on platforms like YouTube, TikTok and Instagram are often promoting products and services, sometimes without adequate regulatory constraints. ChatGPT, despite its limitations in real-time data access, is being used by some for financial advice. However, the wealth industry needs to consider to what extent the investing public will rely on institutions versus digital solutions. There are signs of a resurgence in active investments, and wealth managers’ expertise and risk management become crucial in turbulent markets.
Check out our previous round up, which focused on an SEC cryptocurrency update, implications of AI, how advisers can take advantage of social media and the potential compliance concerns when it comes to Threads.