Regulatory Notice 24-09: FINRA’s Guidance on Generative AI and Large Language Models

Published on June 27, 2024, FINRA Regulatory Notice 24-09 provides key reminders for member firms using Generative AI (Gen AI) and Large Language Models (LLMs) in their operations. While these technologies offer significant potential to enhance services and efficiency, firms must remain vigilant about their regulatory obligations.

The advancement of AI technologies, including Gen AI and LLMs, presents numerous opportunities for member firms to improve investor services and operational efficiencies. These tools can analyze vast amounts of financial data, summarize documents, and power educational resources. However, as firms integrate these technologies, they must continue to adhere to FINRA’s rules and federal securities laws, which are designed to be technology-neutral and remain applicable regardless of the tools used.

No New Legal Requirements

The notice does not introduce new legal or regulatory requirements. Instead, it reinforces that existing FINRA rules and securities laws apply to the use of Gen AI technologies as they do to other tools. Member firms must ensure their use of AI technologies complies with current regulations, such as those related to supervision and communications.

Regulatory Obligations

FINRA emphasizes that its rules, including those concerning supervision and communication, apply to AI technologies. For instance, if a firm uses Gen AI tools for supervisory tasks, their policies must cover aspects like technology governance, model risk management, and data integrity. The use of AI, whether developed in-house or through third-party vendors, must still comply with FINRA rules and the firm’s regulatory obligations.

Opportunities and Risks

Gen AI can significantly benefit firms by improving data analysis, document summarization, and compliance monitoring. However, concerns about accuracy, privacy, bias, and potential misuse by malicious actors persist. Firms are advised to evaluate AI tools thoroughly and ensure compliance with all applicable regulations before deployment.

Summary

FINRA’s notice reinforces that while AI technologies can enhance operational capabilities, they must be used in accordance with existing regulatory standards to ensure continued compliance and investor protection.

We encourage firms to contact Quadrant if they encounter uncertainties about applying rules to AI technologies.