FINRA’s Guidelines on Artificial Intelligence (AI)

FINRA’s Guidelines on AI, FINRA Updates Guidance on ChatBots, Communications  

Artificial intelligence (AI) technology is revolutionizing the way financial firms communicate with clients and investors. From chatbots to automated reports, AI is increasingly being used to generate communications that are efficient, personalized, and tailored to individual needs. However, with this innovation comes the responsibility of ensuring compliance with regulatory standards. 

AI Applications in the Securities Industry 

According to the Financial Industry Regulatory Authority (FINRA), the proliferation of AI-based applications in the securities industry is evident across three broad areas: 

1. Communications with Customers: Firms are using AI to enhance customer experience and outreach targeting through virtual assistants and email screening applications. These AI-driven tools enable firms to provide personalized responses to customer inquiries and deliver curated content based on individual preferences. 

1. Investment Processes: AI is being utilized in brokerage account management and portfolio management to provide real-time insights into customer needs and trading behaviors. AI tools analyze vast amounts of data to tailor investment suggestions and provide customized research to customers. 

1. Operational Functions: Firms are using AI to enhance compliance, risk management, and administrative tasks. AI-powered surveillance and monitoring tools enable firms to identify patterns and anomalies more efficiently, while automation of administrative functions streamlines processes and increases productivity. 

Compliance with Regulatory Standards 

Despite the potential benefits of AI applications, firms must ensure compliance with applicable federal securities laws, FINRA rules, and regulatory standards. FINRA emphasizes that firms are responsible for the content of communications generated by AI technology, necessitating adherence to supervision requirements and content standards outlined in FINRA Rules 2210 and 2220. 

FINRA Updates Guidance on Chatbot Messaging and AI Generated content 

 The Financial Industry Regulatory Authority (FINRA) has updated its guidance this week on firms and their use of chatbot messaging and AI generated content. The updates to FINRA Rule 2210 can be found in Frequently Asked Questions about Advertising Regulation. 

Understanding Firms’ Responsibilities 

One question that arises regarding AI-generated communications is whether firms are responsible for their content. According to FINRA’s guidelines, the answer is yes. Firms bear full responsibility for the communications they distribute or make available, regardless of whether they are generated by humans or AI technology. 

Compliance Obligations 

Firms must ensure that AI-generated communications comply with applicable federal securities laws and regulations, as well as FINRA rules. This includes adherence to supervision requirements, recordkeeping obligations, and content standards outlined in FINRA Rules 2210 and 2220. 

Supervision and Oversight 

Supervision of AI-generated communications is necessary to ensure compliance with regulatory standards. Firms must establish and maintain procedures for reviewing and approving AI-generated content before distribution. This includes assessing the accuracy of the communications to prevent false, misleading, or exaggerated statements. 

In addition to supervision, firms must adhere to recordkeeping requirements mandated by FINRA and the SEC. This includes maintaining records of AI-generated communications and documenting the review and approval process. 

FINRA’s content standards require that communications be fair, balanced, and free from false or misleading statements. Firms must ensure that AI-generated communications adhere to these standards to avoid scrutiny. 

Regulatory Sanctions in 2024 – AI Washing

Despite the potential benefits of AI applications, firms must ensure compliance with the regulatory guidelines regarding artificial intelligence. 

Recent enforcement actions by the Securities and Exchange Commission (SEC) against firms engaged in AI washing underscore the importance of transparency and accuracy in representing AI capabilities.  

AI washing refers to the practice of making unfounded or exaggerated claims regarding artificial intelligence capabilities, which can mislead investors. 

For instance, the SEC recently settled charges with investment advisers Delphia (USA) Inc. and Global Predictions Inc for allegations that the firms made false and misleading statements about their use of AI.  

Securities Fraud Attorneys       

This information is publicly available and provided to you by The White Law Group. 

If you are concerned about your investments, please call the securities attorneys at The White Law Group at 1-888-637-5510.       

The White Law Group, LLC is a national securities fraud, securities arbitration, investor protection, and securities regulation/compliance law firm dedicated to helping investors in claims in all 50 states against their financial professional or brokerage firm. Since the firm launched in 2010, it has handled over 700 FINRA arbitration cases. 

Our firm represents investors in all types of securities related claims, including claims involving stock fraud, broker misrepresentation, churning, unsuitable investments, selling away, and unauthorized trading, among many others.            

With over 30 years of securities law experience, The White Law Group has the expertise to help investors defrauded in securities, investment, and financial business transactions attempt to recover their investment losses.