Regulatory Spotlight on AI in Financial Advising: Risks, Opportunities, and Compliance Needs
From the desk of Jim Eccleston at Eccleston Law
Artificial intelligence (AI) tools, including large language models (LLMs), present both promising opportunities and notable risks for financial advisors. According to Financial Planning, as the popularity of AI grows in the financial advisory sector, regulators like FINRA and the SEC are examining potential issues closely.
Recently, regulatory bodies raised concerns about practices such as “AI washing,” where firms exaggerate their AI capabilities, and the potential risks of “hallucinations” in generative AI, where models like ChatGPT produce incorrect or misleading responses. At FINRA’s recent advertising regulation conference, FINRA Senior VP Brad Ahrens highlighted the importance of understanding both AI’s potential and its risks, especially with the widespread adoption of generative AI.
SEC Chair Gary Gensler also weighed in, warning firms against overreliance on AI and underscoring the need for a measured approach. Gensler suggested that financial institutions should critically assess how they might depend on AI-driven models to avoid issues that could harm capital markets.
FINRA noted the increase in LLM use cases within firms, particularly in providing automated answers to client questions or accessing specific content in manuals. While FINRA did not take a stance on this usage, it emphasized the importance of monitoring AI outputs. Philip Shaikun, Vice President and Associate General Counsel at FINRA, urged firms to ensure compliance by implementing human oversight and spot-checking procedures.
FINRA and the SEC have also emphasized monitoring tech vendors, given that some may have incorporated AI into their services since initial contracts were signed. Firms should remain vigilant, particularly with vendor agreements where AI capabilities have changed over time. Amy Sochard, FINRA’s VP of Advertising Regulation, suggested that firms regularly reassess vendor technology to ensure they remain compliant.
According to Financial Planning, hyper-personalization in marketing is another area where AI poses ethical risks. AI enables firms to track digital footprints, leading to highly personalized ads that could exploit user data. Rachael Chudoba from McCann Worldgroup advised firms to educate their teams on the ethical and regulatory implications of AI-driven personalization to prevent exploitative advertising tactics.
Eccleston Law LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
Tags: eccleston, eccleston law
