The Financial Industry Regulatory Authority is reminding member firms of their regulatory obligations when using artificial intelligence, including large language models (LLMs) and other generative AI (Gen AI) tools.
In its recently issued Regulatory Notice, 24-09, FINRA noted the opportunities for firms to incorporate the use of AI into their businesses to help enhance their services for investors and make their operations more efficient. At the same time, the notice was a reminder that FINRA’s rules continue to apply when firms use Gen AI or similar technologies in the course of their businesses, just as they apply when member firms use any other technology or tool. The authority said its rules are intended to be technology neutral and to function dynamically with evolutions in technology and member firms’ processes.
FINRA cited its Rule 3110 stating that a firm must have a reasonably designed supervisory system tailored to its business.
According to the notice, “If a firm is using Gen AI tools as part of its supervisory system—for the review of electronic correspondence, for instance—its policies and procedures should address technology governance, including model risk management, data privacy and integrity, reliability and accuracy of the AI model. Moreover, FINRA rules apply whether member firms are directly developing Gen AI tools for their proprietary use or when leveraging the technology of a third party, including through embedded features in existing third-party products.”
The notice points out the rapid evolution of AI during the 2020s, including the development and availability of Gen AI technology capable of generating significantly better text, synthetic data, images, or other media in response to prompts. LLMs are a type of Gen AI that use deep learning techniques and large data sets of language to identify, summarize, predict and generate new text-based content.
In its 2024 Annual Regulatory Oversight Report, FINRA noted that Generative AI technology presents both promising opportunities for investors and member firms as well as some risks.
The latest regulatory notice states that new AI tools” have the ability to analyze and synthesize vast sets of financial and market data, summarize large and complex documents, and power educational resources that may help investors at all experience levels understand and navigate markets more effectively.”
FINRA said the tools also “may allow an associated person to, for example, easily locate and query a member firm’s policies and procedures or forms, to generate summaries derived from the member firm’s research reports, or to obtain issuer-specific information by drawing on SEC filings and earnings call transcripts.”
But despite the potential benefits, the development of Gen AI also has been marked by concerns about accuracy, privacy, bias, intellectual property, and possible exploitation by threat actors, among others, according to FINRA.
Firms were reminded to evaluate Gen AI tools prior to deploying them and ensure that the member firm can continue to comply with existing FINRA rules applicable to the business use of those tools.
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