SEC Scrutinizes AI Use by Financial Advisors

The SEC's 2026 Examination Priorities will focus on how firms represent their AI capabilities and whether they have policies to monitor AI use. Firms should track AI activity through a sanctioned portal and report transparently on AI use with clients. Failing to address AI regulation could lead to enforcement actions. Investment advisers should validate AI-generated information, especially when it informs investment advice. They should also conduct due diligence to assess if AI tools produce biased results that create conflicts of interest. "AI-washing," or overstating AI capabilities in marketing, should be avoided. AI can automate reporting, enhance data accuracy, and provide predictive analytics for risk management. However, firms must implement robust data protection measures, like encryption and access controls, because AI systems handle sensitive financial data. Clear guidelines are needed to ensure AI-driven processes meet required standards. Firms must archive all business-related communications, including AI interactions, to meet SEC requirements. This includes capturing original prompts, refinements, and AI responses. A strong AI risk management framework is essential, including an enterprise AI policy.