Artificial intelligence (AI) is expected to revolutionize many areas of modern life, including the investment management industry. AI applications currently are being used to develop management programs for investment funds, for example. One area where AI is not yet widely used, but where WSGR expects to see new AI applications in the future, is to support and implement more complex, individually tailored, and responsive asset allocation services based on a wide range of new and more quickly updated data sources.
For example, AI could be used to provide ongoing recommendations to individuals based on a combination of information provided to the adviser by the investor and data collected from an investor's online activities. In this context, AI could, among other things:
The development of AI-based individually managed accounts will raise significant regulatory issues, including, among others, regulation under the Investment Advisers Act of 1940 (Advisers Act) and similar state laws. Below, we address several significant issues under the Advisers Act for advisers that use AI in two scenarios: (1) to make recommendations that investors then must approve or reject; or (2) to invest client assets at the adviser's discretion based on the investor's predefined preferences. WSGR will address issues related to broker-dealers who run these programs in a future alert. Advisers providing these programs should also consider issues related to intellectual property, technology licensing, and others.
Most advisers that sponsor AI-based separately managed accounts will need to register as investment advisers under the Advisers Act or similar state law, and as a result will need to comply with regulations in the areas listed below, plus others:
For more information about AI-based investment management programs or any related matter, please contact any member of the fintech regulatory practice at Wilson Sonsini.
This Wilson Sonsini Alert was prepared by Amy Caiazza.