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July 17, 2024 at 01:18 PM
What You Need to Know
- A new FINRA notice reminds broker-dealers that its rules — on supervision, for example — are technology neutral.
- Firms using AI models must have policies and procedures on issues like like data privacy and reliability of the models.
- The rules apply whether firms use third-party tools or build them in house.
The Financial Industry Regulatory Authority is reminding broker-dealers that FINRA rules apply when using generative artificial intelligence, including rules that apply to supervision of electronic correspondence.
In recently released Regulatory Notice 24-09, FINRA sets out BDs’ duties when using generative AI and large language models.
The notice reminds firms that FINRA’s rules, which are intended to be technology-neutral, and securities laws “generally continue to apply when firms use gen AI or similar technologies in the course of their business, just as they apply when firms use any other technology or tool,” attorneys at Stradley Ronon write in a recent brief on the notice.
The notice points to Rule 3110 (Supervision), which requires that a member firm must have a reasonably designed supervisory system tailored to its business.
If a firm uses generative AI as part of its supervision system to review electronic correspondence, “its policies and procedures should address technology governance, including model risk management, data privacy and integrity, reliability and accuracy of the AI model.”
In addition, the attorneys point out that the notice “cautions that regulatory obligations apply regardless of whether a firm uses its own proprietary gen AI tools or leverages the technology of a third party.”
Gen AI and LLMs
As the FINRA notice states, AI technology “has rapidly evolved in 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.”
