The US Securities and Exchange Commission’s Division of Examinations has begun requesting information from financial firms about their use of artificial intelligence, according to an analysis from Red Oak.
The requests are focused on three areas: AI-driven portfolio management, algorithmic trading models and marketing claims. The SEC is particularly examining whether firms can substantiate public statements about their AI capabilities, an issue commonly referred to as “AI washing”.
Red Oak’s analysis found that the examination activity appears to follow a familiar regulatory pattern, with a group of firms receiving requests first before awareness spreads across the wider market. While most compliance professionals surveyed had not received an AI-related request, many were using the time to prepare for potential scrutiny.
One of the main challenges for firms is creating a complete inventory of their AI use. The SEC is requesting written, audio and video materials where firms mention AI, including ADV Part 2 filings, websites, pitch materials and video content.
Firms are being asked to ensure AI-related claims are accurate and consistent across their communications. However, identifying all AI usage can require coordination between IT, cybersecurity, legal and marketing teams, with some firms finding that internal teams are using AI tools without compliance teams being aware.
Third-party vendors are also creating additional complexity, as products that incorporate AI require firms to document and monitor their use. According to Red Oak, some firms are rebuilding due diligence questionnaires to include AI-specific risks.
Several areas remain unclear for firms. There is currently no dedicated field for AI use within ADV filings, while guidance around retaining AI prompts and responses, as well as disclosures for AI-generated marketing content, continues to develop.
In response to this uncertainty, many firms are choosing to document and retain more information rather than less.
AI governance also remains inconsistent across organisations. Around two-thirds of compliance and legal professionals surveyed by Red Oak reported having some form of AI governance committee. However, day-to-day oversight of AI systems has often been managed by IT teams.
Compliance, legal and audit teams are now working to verify that AI systems operate as described by IT teams and to document oversight through training records, committee structures and meeting records, which examiners are specifically requesting.
Red Oak recommends firms take three immediate steps, beginning with reviewing all public AI claims for accuracy, cataloguing AI tools currently in operational use against existing policies, and assigning clear ownership of AI governance.
Read the full RedOak analysis.
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