SEC Boosts Oversight on Dual Registrants and AI in 2025

Published Date : 22/10/2024 

The Securities and Exchange Commission (SEC) has announced in its annual examination report that it will intensify its focus on dual registrants and the use of artificial intelligence (AI) in the financial industry. The Commission aims to ensure that firms are complying with Regulation Best Interest and other regulatory requirements. 

The Securities and Exchange Commission (SEC) is ramping up its scrutiny of financial firms, particularly those that are dual registrants and those leveraging artificial intelligence (AI) in their operations. In its latest annual examination report, the SEC has outlined its priorities for the year 2025, emphasizing the need for robust compliance with Regulation Best Interest (Reg BI) and other regulatory standards.

on the SEC

The SEC is an independent agency of the United States government, created in 1934 to protect investors, maintain fair and efficient capital markets, and facilitate capital formation. The Commission has five Commissioners appointed by the President, with the advice and consent of the Senate. The SEC's primary mission is to enforce federal securities laws and regulate the securities industry, the nation's stock and options exchanges, and other electronic securities markets.

Focus on Dual Registrants

Dual registrants are firms that are registered as both investment advisers and broker-dealers. The SEC has identified these firms as a high-priority area for examination due to the potential for conflicts of interest and the complexity of their business models. The agency will be closely monitoring how these firms manage conflicts of interest, ensure fair treatment of clients, and comply with Reg BI.

Artificial Intelligence in the Financial Sector

The use of AI in the financial sector is growing rapidly, and the SEC is keen to ensure that firms are using these technologies responsibly and in compliance with regulatory standards. The Commission will be examining how firms are implementing AI in areas such as trading, risk management, and customer service. Particular attention will be paid to ensuring that AI systems are transparent, fair, and do not perpetuate or exacerbate existing biases.

Regulation Best Interest (Reg BI)

Reg BI, which went into effect in June 2020, requires broker-dealers to act in the best interest of their retail customers and to place the interests of their customers ahead of their own. The SEC will be conducting rigorous examinations to ensure that firms are meeting the fiduciary standards set forth in Reg BI. This includes assessing whether firms are providing clear and accurate information to clients, avoiding conflicts of interest, and charging reasonable fees.

Key Areas of Examination

1. Compliance with Reg BI The SEC will focus on whether firms are adhering to the four key obligations under Reg BI disclosure, care, conflict of interest, and compliance.

2. Conflict Management Dual registrants will be scrutinized for how they manage conflicts of interest, particularly in situations where they offer both advisory and brokerage services.

3. AI Transparency Firms using AI will be expected to provide detailed documentation on how their systems operate, including the data used, the algorithms employed, and the decision-making processes.

4. Cybersecurity The SEC will continue to prioritize cybersecurity, ensuring that firms have robust systems in place to protect sensitive data and prevent cyber attacks.

5. Customer Protection The Commission will assess whether firms are adequately protecting customer assets and providing fair and transparent services.

Conclusion

The SEC's heightened focus on dual registrants and AI in 2025 underscores the Commission's commitment to maintaining the integrity and fairness of the financial markets. Firms are advised to review their compliance programs and ensure they are aligned with the latest regulatory requirements. By doing so, they can avoid potential penalties and build trust with their clients.

For more information on the SEC's examination priorities, financial firms can refer to the SEC's official website and the full annual examination report. 

Frequently Asked Questions (FAQS):

Q: What is the SEC's primary mission?

A: The primary mission of the SEC is to protect investors, maintain fair and efficient capital markets, and facilitate capital formation.

Q: What are dual registrants?

A: Dual registrants are firms that are registered as both investment advisers and broker-dealers, which can create potential conflicts of interest and complex business models.

Q: What is Regulation Best Interest (Reg BI)?

A: Reg BI requires broker-dealers to act in the best interest of their retail customers and to place the interests of their customers ahead of their own.

Q: Why is the SEC focusing on artificial intelligence (AI) in the financial sector?

A: The SEC is focusing on AI to ensure that firms are using these technologies responsibly, transparently, and in compliance with regulatory standards.

Q: What are the key areas of examination for the SEC in 2025?

A: The key areas include compliance with Reg BI, conflict management, AI transparency, cybersecurity, and customer protection. 

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