The integration of artificial intelligence (AI) into investment and wealth management is transforming the industry, driving efficiencies, and introducing new complexities. As AI applications proliferate, regulatory bodies like the Securities and Exchange Commission (SEC) are increasingly focused on ensuring that these technologies are used responsibly and ethically. According to the Financial Industry Regulatory Authority (FINRA), AI-based applications are significantly impacting broker-dealers by enhancing operational capabilities.

In 2025, the SEC has made it a priority to scrutinize how investment advisors and wealth management firms integrate AI into their operations. The examination focuses on compliance policies related to AI's use in portfolio management, trading, marketing, and compliance functions. Particular attention is given to the accuracy of AI-driven capabilities and the supervision of tasks such as fraud prevention and anti-money laundering (Wealth Management, Oct 21, 2024).

The SEC's scrutiny extends to the protection of client records and information when using third-party AI models. Firms are expected to implement robust policies to manage conflicts of interest and ensure continuity plans are in place for AI system failures.

Potential Impact of Recent Trump Administration on AI Regulations

However, the Trump administration's approach to artificial intelligence (AI) is characterized by a strong emphasis on deregulation and promoting innovation. This policy direction is expected to create a more favorable environment for AI companies by reducing regulatory barriers, aligning with President Trump's broader economic objectives of fostering growth through technological advancement.

Key aspects of the administration's AI strategy include:

• Deregulation: Streamlining existing regulations and minimizing new ones to reduce operational costs for AI firms.
• Investment Encouragement: Creating an environment that stimulates increased investment in AI technologies and startups.
• Innovation Focus: Prioritizing technological advancement as a driver of economic growth.
• State-Level Governance: Potentially leading to a more fragmented regulatory landscape as individual states take a more active role in AI governance.

While this approach may accelerate AI development and deployment, it also raises important considerations:

• Ethical Concerns: Reduced federal oversight may lead to challenges in addressing AI ethics and bias issues.
• Safety and Security: A less regulated environment could potentially compromise AI system safety and security standards.
• Global Competitiveness: The policy aims to maintain U.S. leadership in AI, but may face challenges from other countries with more coordinated national AI strategies.

As the AI landscape continues to evolve rapidly, the long-term implications of this approach remain to be seen. It will be crucial to monitor how this policy balances innovation with necessary safeguards and how it positions the United States in the global AI race.Recap of Regulatory Developments Prior to the Recent Trump Administration

1. SEC's Proposed Rules on Predictive Data Analytics: The SEC has proposed new rules aimed at enhancing transparency and oversight of predictive data analytics used by investment advisers and broker-dealers. These rules seek to ensure that firms using AI and machine learning algorithms for investment decisions and recommendations provide clear disclosures to clients and have appropriate risk management practices in place.
2. AI sweep focusing on private fund advisers use of AI and conflict of interest: The SEC has initiated a sweep examination focusing on private fund advisers' use of AI and potential conflicts of interest. This examination aims to assess how these advisers are leveraging AI in their investment strategies, risk management, and client interactions, while ensuring that any conflicts of interest arising from AI usage are properly addressed and disclosed.
3. AI Washing: Regulators are increasingly cautious about the practice of "AI washing," where firms exaggerate or misrepresent their AI capabilities to attract clients or investors. The SEC is closely monitoring marketing materials and disclosures related to AI to prevent misleading claims and ensure that firms are transparent about the extent and limitations of their AI-driven services.
4. SEC Guidance on AI-Driven Robo-Advisors: The SEC has issued guidance for robo-advisors that use AI algorithms to provide investment advice and portfolio management services. The guidance emphasizes the importance of clear disclosures, robust compliance programs, and regular testing of AI models to ensure their accuracy and reliability.
5. RFI by US Department of Treasury: The U.S. Department of the Treasury has issued a Request for Information (RFI) seeking public input on the use of AI in financial services. The RFI aims to gather insights on the benefits, risks, and regulatory implications of AI adoption in various financial sectors, including investment and wealth management, to inform future policy-making efforts.
6. Executive Order on Safe, Secure, and Trustworthy AI: The White House has issued an executive order under Biden's administration promoting the development and use of safe, secure, and trustworthy AI across various industries, including financial services. The order emphasizes the importance of responsible AI development, transparency, and accountability, and encourages collaboration between government agencies, industry stakeholders, and academia. This order was revoked recently by the Trump administration.
7. NYDFS Guidance on AI and Cybersecurity Risks: The New York State Department of Financial Services (NYDFS) has released guidance on managing cybersecurity risks associated with AI adoption in financial services. The guidance highlights the need for robust governance, risk assessment, and ongoing monitoring of AI systems to mitigate potential vulnerabilities and protect sensitive data.
8. Bipartisan House Task Force on AI Report: A bipartisan task force in the U.S. House of Representatives has released a comprehensive report on AI, including its impact on financial services. The report provides recommendations for fostering responsible AI innovation, addressing ethical concerns, and ensuring appropriate regulatory oversight to protect consumers and maintain market integrity.
9. Colorado AI Act: Colorado has enacted the Colorado AI Act, which establishes a framework for the responsible development and deployment of AI systems in the state. The act includes provisions related to transparency, accountability, and non-discrimination in AI usage, setting an example for other states and jurisdictions considering AI-specific legislation.

These regulatory developments reflect the growing recognition of AI's transformative potential in investment and wealth management, as well as the need for proactive measures to address the associated risks and challenges. By staying informed about these evolving regulations and guidance, firms can better navigate the AI landscape, harness its benefits, and maintain the trust and confidence of their clients in this exciting new era of financial services innovation.