AI and the Future of Regulatory Compliance

The Potential Benefits of AI in the Financial Sector

The genie is out of the bottle.  AI is a reality that simply cannot be ignored. AI’s potential to enable enhanced financial solutions and greater returns for investors has led brokers and advisors to quickly embrace the technology. Firms are utilizing AI “to forecast fluctuations in investment value, answer client inquiries, and even program robotic advisors for automated planning and investment services, thereby increasing market access, streamlining efficiency, and increasing potential returns for investors.”

The rapid-paced world of financial compliance is also taking notice. Ever-expanding regulatory requirements create a complicated ecosystem that intensify pressures on compliance professionals. Burnout and high attrition rates in the arena of financial compliance only compound these challenges. Many compliance professionals are looking to AI solutions to alleviate these pressures.

“By incorporating AI into their compliance operations, financial services organizations can uncover opportunities to automate the more routine aspects of regulatory compliance, analyze and process massive amounts of data from multiple sources, and reduce the burden on their employees.”

Although the potential benefits of AI appear very promising, regulators also have deep concerns.  For example, the SEC has begun to focus on AI technologies, particularly the potential for firms to overstate their AI capabilities similar to greenwashing.

AI Washing and Regulator’s Concerns

Like other significant trends impacting the financial sector, regulators such as the SEC are visibly concerned about the potential negative impacts of AI, particularly a concept called AI Washing- making false artificial intelligence-related claims.  Stemming from a similar concept called greenwashing- making overstated, misleading, or false claims related to a company’s environmental efforts- the SEC is concerned that AI Washing “may run afoul of securities laws.”

Just as the SEC has continuously cracked down on greenwashing, it is actively watching for instances of companies engaged in AI Washing by providing false or misleading claims to investors about its genuine AI capabilities.

A prime example is Rockwell Capital Management LLC.  In February 2023, Rockwell and its founder agreed to settle SEC fraud charges for allegedly misrepresenting AI and machine learning models for predicting price behavior.

Importantly, Rockwell’s experience with the SEC is not an isolated anomaly. “Firms should anticipate an increase in SEC enforcement actions pertaining to alleged AI Washing. Additionally, they should prepare for increased SEC oversight concerning their use of AI and the statements made to investors about AI’s capabilities.”

What’s the best way for companies to remain compliant and out of the SEC’s crosshairs?  
 

The Solution: Orion Compliance and AI Integration

Choosing a compliance platform that anticipates and integrates AI technologies is logically the best solution for financial entities to remain compliant. Orion Compliance is a perfect example.

Orion has been working on integrating AI into their technology offerings. By embedding AI into their tools, implementation is simple. Orion believes this integration cultivates richer and more meaningful conversations by providing customized AI assisted explanations relating to the impact of proposed changes to a client’s portfolio.

Compliance solutions that anticipate AI technology should also guide companies to adopt best practices to avoid AI Washing.  A compliance program that anticipates AI should result in companies to consider the capabilities of the technology they employ to ensure whether it can truly be characterized as AI. Such solutions should also closely scrutinize any statements to customers regarding a company’s AI capabilities.

Now is the time for Orion Compliance. Although the SEC also focuses on other technology, it is clear that AI is the target of the Commission’s attention.