SEBI seeks transparency in AI tool usage by investment advisors, research analysts; what this means

The Securities and Exchange Board of India (SEBI), in a recent consultation paper, sought transparency over the usage of artificial intelligence (AI) tools by investment advisors (IAs) and research analysts (RAs).

According to the apex market regulator, the IAs and RAs should disclose to their clients about the extent of the usage of AI tools to provide their services. The paper also emphasised on the importance of strong security measures to avoid unintended data exposure.

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

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.

What SEBI said

These AI tools “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.

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, the regulator 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.

Notably, AIs 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.

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.