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FINRA Reminds Members of Rules When Using Generative AI

Artificial intelligence technology has rapidly evolved in the last few years, including the development and availability of generative AI, or Gen AI – technology capable of generating significantly better text, synthetic data, images, or other media in response to prompts. Large language models 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.

As member firms incorporate the use of Gen AI or similar tools into their businesses, they should be mindful of the potential implications for their regulatory obligations, according to the Financial Regulatory Authority in a recent notice.

As FINRA noted in the January 2024 Annual Regulatory Oversight Report, Gen AI technology presents both promising opportunities for investors and member firms to enhance their products and services for investors and achieve operational and compliance efficiencies, such as the ability to analyze and synthesize vast sets of financial and market data, summarize complex documents, and serve as educational resources that may help investors at all experience levels understand and navigate markets more effectively. Gen AI tools also may allow help an individual locate and query a member firm’s policies and procedures or forms, generate summaries derived from the member firm’s research reports, or obtain issuer-specific information by drawing on SEC filings and earnings call transcripts.

They also noted concerns, such as concerns about accuracy, privacy, bias, intellectual property, and possible exploitation by threat actors. These concerns are compounded by last month’s report from the FINRA Investor Education Foundation, which found that despite the growing popularity of AI, very few consumers knowingly turn to AI for information on personal finances.

The latest notice reminded FINRA member firms that its rules – which are intended to be “technology neutral” – and the securities laws more generally, continue to apply when member 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. FINRA said a member firm must have a reasonably designed supervisory system tailored to its business. 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 did not create new legal or regulatory requirements or new interpretations of existing requirements, nor did it relieve member firms of any existing obligations under federal securities laws and regulations. According to FINRA, however, it will consider issuing further guidance on how particular rules may apply with respect to specific use cases.

As AI technology continues to evolve, FINRA encouraged member firms to engage with it for further guidance. This included seeking interpretive guidance from FINRA by following its process for interpretive requests, and submitting general feedback on how FINRA’s rules might be modernized in light of the use of Gen AI tools or other emerging technologies, consistent with investor protection and market integrity.

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