Investor Advisory Committee suggests SEC guidelines for AI disclosure

The U.S. Securities and Exchange Commission’s (SEC) Investor Advisory Committee (IAC) recently proposed guidelines for artificial intelligence (AI) disclosures, emphasizing the importance of clear and comparable information for investors. The recommendation aimed to address the lack of consistency in AI disclosures among companies, which can pose challenges for investors seeking transparency. The proposed rule would require issuers to define AI, disclose board oversight mechanisms, and report on material AI deployments internally and for consumer-facing applications.

Despite the growing prevalence of AI in businesses, the IAC found that current AI disclosures are uneven and inconsistent across the market. Only 40% of S&P 500 companies provide AI-related disclosures, with a mere 15% disclosing information about board oversight of AI. This lack of uniformity in disclosures has prompted concerns among investors, as AI-related information can be crucial for making informed investment decisions. The IAC identified various factors contributing to these inconsistencies, including the absence of a standardized definition of AI, unclear materiality standards, and the rapid evolution of the regulatory landscape.

To address these challenges, the IAC recommended a framework for standardized disclosures regarding AI. The proposed framework includes three key components:

1. Defining AI: The IAC suggested that issuers provide their own definition of AI or adopt existing definitions, such as those outlined in the National Artificial Intelligence Initiative Act of 2020. This would help establish a common understanding of what constitutes AI for disclosure purposes.

2. Board Oversight: Issuers should disclose whether their Board of Directors or a board committee is responsible for overseeing AI deployment within the firm. Clear lines of authority regarding AI deployment can provide investors with insights into how technology is integrated into business operations.

3. Reporting on Deployment: If AI deployment is material, issuers should disclose the effects of AI on both internal business operations and consumer-facing products. This includes impacts on workforce, financial reporting, governance, cybersecurity, and product integration. Integrating AI disclosures into existing Regulation S-K items would ensure a comprehensive and standardized approach to reporting AI-related information.

Despite the IAC’s recommendations, the SEC has shown reluctance to embrace the proposed guidelines. Chair Paul S. Atkins cautioned against adopting prescriptive disclosure requirements for every new business trend, while Commissioner Hester Peirce questioned the need for conformity in AI disclosures. Given the current composition of the SEC, which is majority Republican, it remains uncertain whether the Commission will act on the IAC’s recommendation.

In conclusion, while the SEC may not immediately adopt the IAC’s proposed guidelines, companies may benefit from considering these recommendations. By focusing on defining AI, board oversight, and reporting on deployment impacts, businesses can enhance transparency and provide investors with valuable insights into their AI initiatives. The IAC’s framework serves as a roadmap for best practices in AI disclosures, emphasizing the importance of standardized information for investors in an increasingly AI-driven business landscape.