The Three Things RIAs Need to Know about the SEC Predictive Analytics Rule

Alec Crawford Founder & CEO of Artificial Intelligence Risk, Inc.

AI and large language models (LLMs) like Chat GPT can save RIAs time and money. However, the SEC has requirements around using LLMs for both investing and communicating with your clients. Here’s what you need to know today!

The SEC Predictive Analytics Rule for RIAs

1 – The SEC Predictive Analytics Rule Applies to YOU!

The SEC proposed the predictive analytics rule in July 2023, and it is slated to be finalized in the second quarter of 2024. The proposed rule states that all RIAs with more than $5 million of assets under management must comply with the rule, although there will probably be a grace period for implementation. Part of the rule requires RIAs to develop policies and procedures around what they will use AI for, how to keep your confidential information safe, how to avoid conflicts of interest when using AI or other predic6ve analy6cs, and what to do if things go wrong with AI, such as a mistake with a customer communica6on or an investment, in our opinion.

2 – Treat Your AI Like an Employee

Treating an AI like an employee may sound like a sci-fi movie, but as AI’s grow more powerful, this guideline starts to sound true. What does this mean in practice? In our opinion, you will need to keep track of all chats you have with AI about investing, customers, and customer communications. But, similar to customer communications today, you need to log AI chats in a special compliance database that can be searched, but not changed going forward. Most outsourced “compliance” companies cannot handle this yet. You cannot just look at a “log” from most chatbot providers. The information, including user, chat history, model version, and data used, must go into an SEC-compliant immutable database and come with an e-discovery tool to report off that database, in our opinion. The good news is, that, so far, your AI will not ask for a bonus. Yet.

3 – Keep Your AI Data Confidential

Technology is essential for running your investment business. AI and large language models will dramatically improve your productivity. You will need to use your AI in a way that guarantees confidentiality and protects your customers’ information from a breach. Cybersecurity is critical for your IT infrastructure, and also for anything you do with AI! Many companies and parts of the US Government have banned using the public version of Chat GPT. You must be able to run AI and chatbots in a secure environment (in other words, do not use the public version of Chat GPT) to protect your data and your client's personally identifiable information. The SEC is taking cybersecurity very seriously for RIAs and will hold you to high standards, especially if your customer data leaks out. There are AI specialist software companies that can solve this problem for you inexpensively.

Conclusion AI will become foundational to the RIA business. We are all busy, and using AI will help make us more efficient, more efficient, and more successful at our jobs. However, we need to use these tools safely to gain benefits for people, companies, and society. Please see aicrisk.com to learn more about AI that is safe, secure, and future-proofed for SEC compliance.

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