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Sebi has proposed that registered investment advisers and research analysts who use artificial intelligence (AI) tools in their services must disclose the extent of their use to clients. File | Photo credit: Reuters
The Securities and Exchange Board of India (SEBI) has proposed that registered investment advisers and research analysts who use artificial intelligence (AI) tools in their services should disclose the extent of their use to clients. It has also stressed the importance of strong security measures to avoid unintended data exposure.
This transparency is important for clients so they can understand how AI tools contribute to their investment decisions, and make informed choices about their advisory services.
Also read:How will the next wave of mass-AI tools transform learning?
“The potential for unintended data exposure highlights the need for robust security measures and clear disclosures to clients about the extent of use of AI tools,” said Trivesh D, COO of stock trading platform TradeJini.
Sebi, in its consultation paper earlier this month, had highlighted the increasing use of AI tools in investment advisory (IA) and research analyst (RA) services.
With technological innovations and advancements, many AI tools are currently available in the form of chatbots such as OpenAI’s ChatGPT, Google’s Gemini, etc.
AI-based tools allow humans to interact with chatbots and receive human responses. These tools assist in various tasks such as summarizing and analyzing data and can help improve efficiency and productivity.
“However, these AI tools may not adequately secure sensitive data shared during interactions, potentially leading to unintended data exposure and data security-related concerns,” Sebi said in its consultation paper issued last week.
Firoz Aziz, Deputy CEO, Anand Rathi Wealth Ltd, said, “While adopting this innovation, we must be conscious of its impacts and responsibilities”.
IAs provide personalized services as per client-specific requirements based on risk profiling and suitability. Similarly, RAs provide recommendations based on certain parameters and methodology adopted and are required to maintain a record of the research report, research recommendations, and the rationale for arriving at the research recommendations.
“While AI tools can provide significant assistance in the work of IAs and RAs, they may not always deliver meaningful outputs that are expected to be based on an understanding of complex security-specific or client-specific scenarios/requirements such as personal/financial situations or goals,” Sebi said.
Moreover, such tools may not always provide all the information on the basis of which the output/recommendation has been generated. For example, AI tools cannot tell whether the requirements of risk profiling and suitability have been complied with by the IA, it also said.
“IAs/RAs who use AI tools to serve their clients should provide their prospective clients with full information about the extent of use of such tools, so that they can make an informed decision on whether or not to engage with the IA/RA,” SEBI has suggested in the consultation paper.
Given that the investment advisory/research services provided by IA/RA based on AI tools would influence the investment decision of clients, the responsibility for data security, compliance with regulatory provisions governing investment advisory services/research services rests entirely with the IA/RA, irrespective of the scale and scenario of the IA/RA using AI tools, Sebi said.
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.
He added, “The dynamic and culturally diverse nature of India’s financial landscape demands personalised investment advice, which AI alone cannot provide. As AI will undoubtedly continue to transform the financial services sector, efforts to integrate it into IA and RA services must be pursued with a balanced approach, leveraging its strengths while addressing its limitations.”
Additionally, SEBI is also considering creating a closed ecosystem for fee collection by registered investment advisers and research analysts through a separate mechanism, to help investors ensure that their payments are reaching only registered IAs and RAs and help them identify, isolate and avoid unregistered entities that would be unable to access this closed ecosystem.
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