The SEC vs. the FCA: Approaching AI

Wrapped Up:

    • AI is becoming increasingly important in the private fund industry, requiring regulatory considerations to be addressed.
    • The US SEC seems to focus more on compliance risks related to AI, whereas the UK FCA tends to emphasise fair treatment of investors.
    • While steps have been taken to weather the rapid technological advances, more guidance and oversight will be necessary in the future.


AI in Investing

In the age of rapidly advancing technology, the use of artificial intelligence (AI) has become a critical tool for many industries, including the financial sector. Private funds, in particular, have turned to AI to enhance their investment strategies and improve decision-making processes. However, the use of AI in this context also raises important regulatory considerations that must be addressed to ensure compliance with existing laws and regulations.

Two key regulators, the Securities and Exchange Commission (SEC) in the United States and the Financial Conduct Authority (FCA) in the United Kingdom, have taken steps to address the regulation of AI in the private fund industry. In a recent article published by Proskauer law firm, the authors explored the approaches taken by these two regulators in regulating AI in the private fund space.


The Securities and Exchange Commission and Artificial Intelligence

The SEC, as the primary regulator of investment advisers and private fund managers in the United States, has signaled its intention to focus on the use of AI in the industry. The agency has identified several key areas where AI may present compliance risks, including data privacy and cybersecurity, bias and discrimination, transparency and explainability, and accountability. To address these concerns, the SEC has encouraged private fund managers to develop robust compliance programs that incorporate AI-specific risk assessments and controls.


The Financial Conduct Authority and Artificial Intelligence

Similarly, the FCA, which regulates the financial services industry in the UK, has also recognized the need to address the challenges posed by AI in the private fund sector. The FCA has highlighted the importance of ensuring that AI systems are designed and implemented in a manner that promotes fair treatment of investors and complies with applicable laws and regulations. The agency has emphasised the need for firms to assess the potential impact of AI on their operations and to implement appropriate safeguards to mitigate any risks.

While the SEC and FCA both acknowledge the potential benefits of AI in the private fund industry, they have also emphasised the importance of maintaining effective oversight and regulatory control. The regulators have stressed the need for private fund managers to demonstrate a clear understanding of how AI is being used in their operations and to implement appropriate governance mechanisms to ensure compliance with regulatory requirements.

In short, the regulation of AI in the private fund industry is a complex and evolving area that requires careful consideration by regulators and market participants alike. The SEC and FCA have both taken important steps to address the challenges posed by AI in this space, but it is clear that further guidance and oversight will be necessary as AI technology continues to advance. Private fund managers must remain vigilant in their efforts to comply with regulatory requirements and to address the unique risks associated with the use of AI in their operations. By proactively engaging with regulators and incorporating AI-specific compliance measures into their governance structures, private fund managers can help to ensure that their use of AI remains both effective and compliant with applicable laws and regulations.



These are the views of the Author only. It is not Investment Advice or a Recommendation from Gather International Limited or its affiliates.

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This article is for informational and educational purposes only.