Technology – the new risk frontier for asset managers

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With AI washing, crypto volatility, and digital engagement practices under scrutiny, asset managers must adapt to evolving SEC regulations while securing adequate insurance against legal and financial risks

IN THE fall of 2024, the Securities and Exchange Commission (SEC) released a bulletin highlighting specific areas of concern for asset managers and their proprietary funds. These areas include cyber exposure, cryptocurrency investing, artificial intelligence (particularly “AI washing”), and digital engagement practices. According to Kevin Koehler, financial institutions leader at Westfield Specialty, the bulletin is a clear indicator of regulators’ revised focus and the associated potential risks that asset managers must navigate in this new regulatory environment. “These are evolving, technology-related issues, and investment advisors are held to a high fiduciary standard,” says Koehler. “We are now at an inflection point in understanding the role of emerging technologies and cryptocurrency investments. The SEC is also focusing on complex investments, including those that are difficult to value, involve leverage, and require sophisticated investors.”

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“We are now at an inflection point in understanding the role of emerging technologies and cryptocurrency investments”

Kevin Koehler, Westfield Specialty

The SEC has been vigilant in monitoring the custody and management of digital assets, emphasizing the need for investment advisors to adhere to stringent standards. However, cryptocurrency remains volatile and opaque in terms of SEC regulation, according to Koehler. “With the new Trump administration, there has been an accelerated mainstreaming of cryptocurrency,” he tells Insurance Business. “However, it remains unclear how the SEC will approach it.” The Trump administration has announced plans to eliminate regional SEC office heads, which could slow enforcement actions in the short term. The administration’s stance on the Foreign Corrupt Practices Act and its embrace of cryptocurrencies may also influence SEC priorities. But Koehler stresses that, over time, enforcement is likely to ramp up, with a continued focus on technology issues.

Accelerating technology usage increases potential exposures for asset managers

Published Apr 21, 2025

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“[Brokers must] ensure the policy has been created or substantially revised in recent years to explicitly address these issues, rather than relying on older forms that may be imprecise or ambiguous”

Kevin Koehler, Westfield Specialty

One emerging area of concern is AI washing, which refers to companies overstating or misrepresenting their use of AI technologies to appeal to investors and consumers. Similar to “greenwashing” in environmental sustainability, AI washing can mislead investors, customers, and stakeholders by overstating the role or capabilities of AI in a company’s suite of products or services and can lead to inflated valuations and misguided investments. “I don’t think we’ve reached a point where it’s an extreme concern, but that’s part of the reason why the SEC wants to

be ahead of it,” Koehler says. “The average person doesn’t necessarily understand the degrees of sophistication associated with AI and how it’s being represented.” For example, a financial firm might claim its investment algorithms are “AI-powered” when, in reality, they rely on basic statistical models rather than true machine-learning or deep-learning techniques. The SEC’s bulletin cautions asset managers against such misrepresentations, emphasizing the importance of transparency and accuracy in AI-related disclosures. “[Asset managers’] clients need to fully understand the depth of AI usage, and if it’s not clearly disclosed, any resulting losses could trigger potential claims,” Koehler says. At the same time, digital engagement practices, including the use of social media and other online platforms, have transformed how asset managers interact with clients and market their services. While these tools offer vast opportunities for outreach and engagement, they also pose regulatory risks. The SEC has expressed concerns over misleading advertisements and the potential for investor misinformation. Koehler stresses that asset managers must ensure their digital communications comply with regulatory standards to help avoid enforcement actions.

Insurance coverage for emerging risks in the asset management space

Insurance claims often correlate directly with financial losses. In other words, when customers or investors lose money, they are more likely to bring lawsuits. In the case of AI washing or misleading digital engagement practices, asset managers should be concerned not just about the risk of SEC investigations but also about potential civil litigation. Misrepresentation could have a contagion effect, Koehler says, impacting multiple investors and creating systemic issues, which increases the likelihood of regulatory scrutiny and investor lawsuits. Despite these risks increasing with greater use of technology, some insurance carriers have been slow to adapt to the needs of asset managers. Koehler points out that some carriers continue to rely on policies drafted years ago, failing to address the unique challenges posed by recent technological advancements. The nascent nature of

cryptocurrency and other digital assets, coupled with regulatory uncertainty, has made some insurers hesitant to offer appropriate coverages tailored to the new risk environment. This lag in policy evolution may leave asset managers vulnerable, as traditional professional liability coverage often does not encompass nuanced risks associated with cyber threats, digital assets, and AI implementations. “Every broker and their insured should be focused on ensuring that their policy provides the coverages they need,” Koehler says.

Getting adequate liability coverage for asset managers

Brokers have a few key areas to consider. First, Koehler says, they need to focus on the definition of professional services to ensure that coverage is provided for cryptocurrency use and digital investments. Second, they must carefully review the exclusionary language and embedded definitions to avoid losing necessary coverage or having cryptocurrency-related losses specifically excluded. “Most underwriters will make an effort to underwrite it, though cryptocurrency remains highly volatile,” Koehler says. As the market evolves, underwriters are becoming

SEC areas of concern

Key areas of regulatory focus for asset managers include:

digital engagement practices

“AI washing”

cryptocurrency investing

cyber exposure

What is AI washing?

Comparison to greenwashing:

Definition:

AI washing refers to companies overstating or misrepresenting their AI capabilities to attract investors and customers

Like companies exaggerating sustainability claims, firms may be misleading about their AI sophistication

increasingly sensitive to the risks involved in the custody and management of cryptocurrency and other digital assets. Financial firms seeking to insure themselves against such risks must also ensure they have robust security measures to help satisfy underwriters’ concerns. “With more mature cryptocurrencies like Bitcoin and Ethereum, there is at least some structure, such as more mature markets and semi-established trading patterns, which makes potential risks associated with them more easily addressed,” says Koehler. “However, meme coins or other unconventional digital assets may face stricter underwriting, with exclusions or adjustments in policy retention and pricing structures.” Beyond cryptocurrency investments, AI washing and digital engagement practices should receive the same scrutiny. “Regulatory coverage is a key concern (around these risks),” Koehler continues. “Insureds should look for policies that provide coverage early on during the investigative process, particularly for informal investigations. Policies should be structured to provide coverage for early defense costs associated with targeted regulatory inquiries.” Westfield Specialty strives to address the liability needs of the industry under one policy. “We recently launched a completely revamped FI Asset Management package policy that is designed to provide a comprehensive corporate solution for the potential risks the asset management community faces,” Koehler says. The new package policy is designed not only to offer traditional core professional liability and management liability coverages, but it also has options to add coverage for (first- and third-party) cyber liability, employment practices liability, and fiduciary liability. The form also has a broad definition of professional services and typically provides coverage for informal investigations and pre-claim inquiries. It also includes exclusions that address each coverage elected and, unlike many other carriers’ policies, it does not have expansive “digital assets”-related exclusions. Koehler is confident that brokers will address each of these risks as they seek the best policies for their clients. His biggest piece of advice? “Ensure the policy has been created or substantially revised in recent years to explicitly address these issues, rather than relying on older forms that may be imprecise or ambiguous,” he says.

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