AI Risks for Institutional Investors | Fred Teufel Insights
Vigilant Insights
Introduction
Artificial Intelligence (“AI”) continues to be a concern for the compliance industry.
Vigilant Director, Fred Teufel, CPA, MBA, CGMA, was quoted in a recent article by Chief Investment Officer Magazine that discussed the impact AI can have on Institutional Investors.
The article discusses vulnerabilities that AI could create for these investors, including the ability to access sensitive and proprietary information.
Fred Teufel’s Insights
Fred discusses how Investment Advisers need to be questioned by large asset owners as to their use of technology. This is even more vital when technology utilizes AI.
Any Third-Party Vendors in use by Advisers should also be vetted, as they could be using AI to construct portfolios. In situations where the AI is choosing securities, Institutional Investors should understand the source, reliability and relevance of the inputs to the information produced by AI and how the AI application synthesizes or converts the inputs into information that is fit for its intended use by investors or institutions that ultimately consume the information and use it to make decisions. Institutional investors must consider whether the inputs, the AI application and/or the AI outputs might be intentionally or unintentionally biased. There needs to be an understanding of “what goes in, what comes out and what is going on inside the proverbial black box”.
These insights are important at a time when the SEC has a Proposed Rule related to predictive analytics and AI use. Fred discusses that the proposed rule would apply to Institutional Investors, which, along with other elements of the rule, has caused the industry to mount a strong challenge to the SEC’s proposed rule. He notes that the SEC is under public and political pressure to “get out in front” of the AI phenomena.
Fred stated that the SEC may be using information collected as part of a recent SEC sweep of Investments Advisers related to AI to establish a use case to support the SEC’s position that there is a need for further rulemaking in the AI space.
Vigilant’s Conclusion
As Firms push to use any emerging technology to be competitive, it is vital that compliance programs adapt and adjust to the changing risk landscape. That adaptation should include updates to policies and procedures designed to provide proper oversight of their Advisers.
The SEC requires that policies and procedures must be reasonably designed and properly implemented. That requirement includes maintaining an understanding of how the use of AI, whether developed by third-party vendors or in-house could not only expose proprietary and sensitive information, but produce information that creates at least the appearance of a potential conflict of interest.
Reach out to Vigilant to discuss how your compliance department can successfully navigate this important topic.