The Financial Industry Regulatory Authority (Finra), the regulatory body overseeing Wall Street, recently designated artificial intelligence (AI) as an “emerging risk.” In its recently published annual compliance report, Finra cautioned that broker-dealers adopting AI on a broad scale have the potential to revolutionize various aspects of their operations, ranging from trade processing to client relations.
While acknowledging the promising opportunities presented by these AI tools, the report highlighted concerns about accuracy, privacy, bias, and intellectual property. The report urged member firms to carefully consider the implications of new technologies, including generative AI tools, on their regulatory obligations.
Adjunct Associate Professor R.A. Farrokhnia, the executive director of the Columbia Business School’s Office of Advanced Projects and Applied Research in Fintech, emphasized the need for caution. He remarked, “It’s one thing for ChatGPT to write you a poem, It’s another thing for it to manage your money.” Farrokhnia called for increased regulation in the AI industry, recognizing the complexity of the task at hand. “It’s a complex, multilevel problem to solve,” he added.
Finra’s warning aligns with growing concerns in the financial sector. SEC Chair Gary Gensler recently expressed worries that widespread use of AI tools by investors could lead to a market crash, creating a “herding effect.” The SEC has initiated inquiries into the use of AI by investment advisors, and Gensler highlighted the potential risks associated with relying on similar tools.
The SEC is currently reviewing public comments on a proposed rule regarding conflicts of interest in the use of predictive data analytics by broker-dealers and investment advisers. Finra advised firms interested in adopting AI to focus on key areas such as anti-money laundering, cybersecurity, communication with the public, and research.
As the financial industry grapples with the transformative potential of AI, the call for increased regulation and careful consideration of its implications continues to gain momentum. The intersection of technology and finance poses intricate challenges, prompting regulatory bodies and industry experts to navigate this evolving landscape with vigilance.
By: Montana Newsroom staff
