RIA compliance officers are having difficulty explaining how their artificial intelligence and algorithms work, even when they use the technology to directly interface with investors, according to a top Securities and Exchange official.

Even AI engineers have had a hard time explaining the mechanics of the technology RIAs are using, the regulator said.

“I can tell you, it’s an interesting conundrum to sit down with the engineers who build AI and they say ‘Something starts here, goes in the box where the magic happens and comes out here,” William Birdthistle, director of the SEC’s Division of Investment Management told more than 600 RIA compliance executives at the 2024 Investment Adviser Association Compliance Conference in Washington, D.C., today.

“It’s not reassuring," he added.

Birdthistle's SEC unit promulgated the agency’s controversial predictive analytics proposal, which critics including the IAA say will encroach on every aspect of RIAs’ technology use, including even spreadsheets, requiring firms to identify and get rid of associated conflicts. Among other provisions, the proposal would require advisors and broker-dealers to mitigate potential conflicts of interest when they use artificial intelligence to influence client decisions on investments.

IAA General Counsel Gail Bernstein, who was on stage with Birdthistle conducting a fireside chat, noted during the discussion that the IAA is among the industry groups asking the agency to withdraw the rule.

“If it’s about technology, why just conflicts?” she asked. “Help us understand the goal.”

Birdthistle, who is departing the SEC to return to academia this week, said whether or not the rulemaking goes forward is not up to him, but it if were, he’d be glad to withdraw the proposal if Bernstein could assure him there would be no AI-based blowups or scandals.

“Do I think this project will go away? No, I don’t. ... Something will need to be done,” he said. “One thing we can take to heart of is that there are already many chefs involved. There’s a very robust comment file."

Corey Schuster, co-chief of the asset management unit of the SEC’s Division of Enforcement, said that compliance executives are telling agency examiners that their AI practices and disclosures do not align.

Schuster said that if firms are using AI for marketing, “make sure you have policies and procedures in place and describe risks. Do what you say you’re going to do."