Investment Advisers, Research Analysts should disclose AI tool usage to clients: SEBI

SEBI has proposed that registered Investment Advisers and Research Analysts who employ artificial intelligence (AI) tools in their services must disclose the extent of usage to clients. File
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Securities and Exchange Board of India (SEBI) has proposed that registered Investment Advisers and Research Analysts who employ artificial intelligence (AI) tools in their services must disclose the extent of usage to clients, emphasizing the importance of strong security measures to avoid unintended data exposure.

This transparency is crucial for clients to understand how AI tools contribute to their investment decisions and to make informed choices about their advisory services.

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“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”, Trivesh D, COO at Tradejini, a stock trading platform, said.

SEBI in its consultation paper earlier this month, highlighted the growing usage of AI tools in Investment Adviser (IA) and Research Analyst (RA) services.

With technological innovations and advancements, many AI tools are currently available in chatbot form such as OpenAI’s ChatGPT, Google’s Gemini, etc.

AI-based tools allow one to have human-like conversations and receive human-like responses with the chatbot. These tools assist various tasks such as summarising and analysing data and may help in improving efficiency and productivity.

“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,” SEBI said in its consultation paper issued last week.

Feroze Azeez, Deputy CEO, Anand Rathi Wealth Ltd said “While embracing this innovation, we must be mindful of its implications and responsibilities”.

IAs provide personalised services according to client-specific requirements based on risk profiling and suitability. Similarly, RAs provide recommendations based on certain parameters and methodology adopted and are required to keep records of the research report, research recommendations, and rationale for arriving at research recommendations.

“While AI tools can provide significant assistance in the work of IAs and RAs, they may not always give meaningful outputs that are expected to be based on the understanding of complex security-specific or client-specific scenarios/ requirements such as personal/ financial conditions or goals,” SEBI stated.

Further, such tools may not always provide all the information based on which output/ recommendation has been generated. For example, AI tools may not bring out whether the requirements of risk profiling and suitability have been complied with by IA, it added.

“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 suggested in the consultation paper.

Considering that the investment advice/ research services provided by IA/RA based on AI tools would affect the investment decision of clients, Sebi said, the responsibility of data security, compliance with the regulatory provisions governing investment advisory services/research services lies solely with the IA/ RA, irrespective of the scale and scenario of IA/ RA using AI tools.

Mr. Trivesh believes that technology can significantly enhance the efficiency and reach of investment advisory services but it should be used as a complementary tool rather than a complete replacement for human judgment and expertise.

“The dynamic and culturally diverse nature of India’s financial landscape demands personalized investment advice that AI alone cannot provide. Since AI will undoubtedly continue to change the financial services sector, efforts to integrate it into IA and RA services should be pursued with a balanced approach, leveraging its strengths while addressing its limitations,” he added.

Additionally, SEBI is also looking to create a closed ecosystem for fee collection by registered investment advisers and research analysts through a separate mechanism in order to help investors ensure that their payments are reaching only registered IAs and RAs and help them identify, isolate and avoid unregistered entities, who would be unable to access this closed ecosystem.