The integration of artificial intelligence (AI) into business models and investment strategies has accelerated in recent years. This acceleration has generated practical and legal issues as well as an increased interest from the federal government. As AI is transforming various aspects of business operations from customer service automation to advanced risk management models, the Securities and Exchange Commission (the SEC) has been closely following these developments and emphasizing the need for clear, accurate and comprehensive AI-related disclosures. As calendar year end public companies prepare for the upcoming annual reporting season, they should consider the SEC's stance and areas of disclosure.

The SEC's Stance

Following making AI an examination priority in 2024, the SEC recently announced in October 2024 that AI will continue to be one of its examination priorities for 2025. In 2024, SEC Chair Gary Gensler has stated that companies must ensure that their statements about AI capabilities and risks have a reasonable basis and are specific to the company, rather than relying on vague or boilerplate language. Gensler's comments shed some light on the SEC's expectations for public companies and investment firms. He emphasized that companies discussing AI in earnings calls or with their boards of directors should consider whether the information is material to their business and, if so, disclose it appropriately. Gensler also highlighted the need for companies to define AI clearly in their disclosures, specifying how and where it is being used, and the particular risks they face about their AI use. In another instance, Gensler discussed other risks associated with AI such as inaccurate AI predictions, difficulty avoiding conflicts of interest when using AI models and using AI for fraudulent schemes.