On June 27, 2024, the Financial Industry Regulatory Authority, Inc. (“FINRA”) released Regulatory Notice 24-09 (the “Notice”), reminding member firms that the application of artificial intelligence (“AI”), including large language models (“LLMs”) and other generative AI (“Gen AI”) technologies, must adhere to existing FINRA rules and securities laws, similar to any other technology used by firms.
The Notice clarifies that it does not introduce new legal or regulatory requirements nor alter interpretations of existing obligations under federal securities laws.
FINRA’s heightened scrutiny of AI stems from its recognition of AI as an emerging risk, as outlined in its 2024 Annual Regulatory Oversight Report. Similarly, the U.S. Securities and Exchange Commission (“SEC”) has proposed rules on predictive data analytics, reflecting growing regulatory attention on AI use among broker-dealers and investment advisers.
In addition, there has been enforcement focus on AI technologies within broker-dealer operations, reflecting ongoing regulatory concerns and industry challenges.
As member firms integrate Gen AI or similar technologies into their operations, FINRA underscores the importance of understanding the implications and ensuring compliance with regulatory obligations.
Background
While the use of AI by member firms is not new, recent advancements, particularly in Gen AI, have expanded capabilities to generate text, synthetic data, images, and other media in response to prompts. LLMs, a type of Gen AI, utilize deep learning techniques and extensive language datasets to identify, summarize, predict, and create new textual content. Despite promising potential applications for investors and firms alike, Gen AI raises concerns about accuracy, privacy, bias, intellectual property, and vulnerabilities to malicious exploitation.
Regulatory Obligations When Using Gen AI Technology
FINRA emphasizes its rules are technologically neutral and adapt dynamically to technological advancements in member firms’ operations. These rules apply uniformly when firms use AI technologies, regardless of whether the technology is developed in-house or obtained from third-party sources, including embedded features in existing products.
For instance, FINRA Rule 3110 (Supervision) mandates member firms to maintain a supervisory system tailored to their business needs. Firms using Gen AI for supervision, such as monitoring electronic communications, must establish policies covering technology governance, including model risk management, data privacy, data integrity, and AI model reliability and accuracy.
Firms are urged to conduct thorough evaluations of Gen AI tools before deployment to ensure continued compliance with FINRA rules. Depending on the specific use case, the application of Gen AI could impact nearly all aspects of a firm’s regulatory responsibilities.
Further Considerations
FINRA encourages member firms encountering ambiguous applications of FINRA rules related to AI to seek interpretive guidance from its staff. Moreover, ongoing dialogue with Risk Monitoring Analysts is recommended to address AI-related issues or other business changes.
Looking ahead, FINRA remains open to providing additional guidance or proposing rule amendments as necessary to address the evolving landscape of AI technology in the financial industry.
Source: mayerbrown.com
