SEBI asks Investment Advisers, Analysts to disclose AI tool usage to clients

In order to prevent unintentional data exposure, Sebi has advised that registered investment advisers and research analysts who use artificial intelligence (AI) tools in their services notify customers about the level of utilization. 

For customers to make educated decisions regarding their advisory services and to comprehend how AI technologies impact their investing decisions, there must be openness. 

Trivesh D, COO at Tradejini, a stock trading platform, told PTI, “”The possibility of unintended data exposure highlights the need for strong security measures and clear disclosure to clients about the extent of AI tool usage.”

In its consultation paper earlier in August, the Securities and Exchange Board of India (Sebi) emphasized the increasing use of AI techniques in Research Analyst (RA) and Investment Adviser (IA) services.

Many AI technologies, including Google’s Gemini and OpenAI’s ChatGPT, are now accessible as chatbots thanks to technology developments and improvements.

With AI-powered solutions, a chatbot may converse with a human and respond to it in a human-like manner. These tools support a number of tasks, including data analysis and summarization, and they may enhance productivity and efficiency.

In a consultation document published last week, Sebi stated, “These AI tools, however, may not adequately safeguard sensitive data shared during conversations, potentially leading to unintended data exposure and concerns related to data security.” 

IAs offer customized services based on risk assessment and suitability in accordance with client-specific needs. Similar to this, research assistants (RAs) offer suggestions based on predetermined guidelines and techniques used. They also have to maintain documentation of the research report, recommendations, and justification for those recommendations.

Although AI tools can greatly aid in the work of IAs and RAs, Sebi noted that they might not always produce meaningful results that are expected to be predicated on an understanding of intricate security-specific or client-specific scenarios/requirements, such as goals or personal/financial conditions. 

Furthermore, not all the information needed to develop an output or recommendation may always be available through such technologies. It further stated that AI technologies might not reveal, for instance, whether risk profiling and appropriateness requirements have been met by IA.

“An IA/RA who uses AI tools for servicing its clients must provide complete disclosure of the extent of use of such tools to its prospective clients, to enable them to take informed decisions of continuance or otherwise with the IA/RA,” Sebi wrote in the consultation paper. 

Given that the investment advice and research services rendered by IA/RA using AI tools would influence the clients’ investment decisions, Sebi stated that regardless of the scope and circumstances surrounding IA/RA’s use of AI tools, the IA/RA is solely responsible for data security and compliance with the regulatory provisions governing investment advisory services and research services.

In order to help investors ensure that their payments are reaching only registered investment advisers and research analysts, as well as to help them identify, isolate, and avoid unregistered entities, who would not be able to access this closed ecosystem, Sebi is also looking to create a closed ecosystem for fee collection by registered IAs and RAs through a separate mechanism.