FINRA Reminds BDs of Their Duties When Using AI

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.”

LLMs, the notice states, “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.”

Generative AI technology “presents both promising opportunities for investors and member firms and some attendant risks,” FINRA’s 2024 Annual Regulatory Oversight Report pointed out.

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,” according to the notice.

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,” according to FINRA.

Broker-dealers also may be able to leverage Gen AI tools “to aid in surveillance by, for example, generating reports with summaries for the member firm’s (human) compliance personnel of potential evidence of malfeasance, such as market abuse or insider trading,” the notice states.

“While these potential uses are promising, 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,” FINRA states.