Massachusetts securities regulators have opened an investigation into the ways in which investment firms use artificial intelligence in their interactions with investors, citing concerns about the technology’s potential unchecked use.
Massachusetts Secretary of State Bill Galvin, the state’s top securities regulator, on Thursday announced that his office had sent letters of inquiry to a number of firms using or developing AI for their businesses, including JPMorgan Chase and Morgan Stanley.
Others who received letters included Tradier Brokerage, US Tiger Securities, E*Trade, Savvy Advisors and Hearsay Systems, according to a spokesperson for Galvin, a long-serving Democrat and prominent state securities regulator.
“If deployed without the guardrails necessary to ensure proper disclosure and consideration of conflicts, I am concerned that this technology could result in harm to investors,” Galvin said in a statement.
Representatives for the companies did not immediately respond to requests for comment.
The investigation came a week after the U.S. Securities and Exchange Commission proposed requiring broker-dealers to eliminate possible conflicts of interest from the use of artificial intelligence on trading platforms.
The SEC’s proposal, which now faces a period of public comment prior to any decision on whether to adopt it, was in part inspired by 2021’s “meme stock” frenzy, in which SEC officials say predictive analytics helped drive the “gamification” of retail investors’ behavior.
Galvin’s office said he was particularly focused on what supervisory procedures the firms have in place regarding AI to ensure it will not put the companies’ interests ahead of their investor clients.
Galvin’s securities division plans to also evaluate what disclosure process firms that have already deployed AI have in place and is also examining some firms’ marketing materials that may have been created using the technology.
https://www.investmentnews.com/galvin-launches-investigation-into-brokers-use-of-ai-240703
The state of Massachusetts is concerned about what it calls a growing and potentially unchecked use of artificial intelligence in the securities industry.
On Wednesday, Secretary of the Commonwealth William Galvin announced that his securities division would launch an investigation into how firms are using AI to engage with Massachusetts investors. The office has sent letters to six companies — JPMorgan Chase, Morgan Stanley, Tradier Brokerage, US Tiger Securities (the U.S. broker-dealer division of Tiger Brokers), Savvy Advisors and Hearsay Systems — seeking information on how they are using AI in their business activities. ETrade, which is owned by Morgan Stanley, also received a letter.
Of particular concern is the supervision firms have in place over AI engines to ensure the technology is not putting the firm’s interests ahead of clients’ interests, Galvin said in a statement.
“If deployed without the guardrails necessary to ensure proper disclosure and consideration of conflicts, I am concerned that this technology could result in harm to investors,” he said.
Galvin is correct to be investigating firms’ use of AI, as the technology remains largely untested and unproven, said Ric Edelman, founder of the Digital Assets Council of Financial Professionals. There are many instances of AI generating false, yet convincing, information, and tools like ChatGPT make it too easy for advisors to create client-facing content that hasn’t been approved by compliance.
“State and federal securities regulators need to insure that advisors and their firms are using the technology appropriately and responsibly, and maintain complete records of their usage,” Edelman said in an email. “Done correctly, generative AI can and will be a tremendous productivity tool that improves client service. But without necessary guardrails, investor safety is at risk.”
Some firms have been cautious in their deployment of AI to avoid these concerns. For example, Morgan Stanley, while ahead of many firms in its development of AI, has only made the technology available to Morgan Stanely employees to find information from the firm’s own content library, as InvestmentNews previously reported. The company has not introduced a product for retail investors or clients of financial advisors.
“We recognize the transformative potential of AI in finance and are committed to ensuring its responsible use in alignment with our core values, and we will continue to conduct regular audits to ensure that our AI systems are transparent, explainable and auditable to facilitate accountability,” Sal Cucchiara, chief information officer for wealth management and investment management at Morgan Stanley, told InvestmentNews in July.
The company declined to comment on the letter it received from Galvin.
However, other firms have made plans to use AI to power recommendations for retail investors. In May, JPMorgan applied for a trademark for a product called Index GPT, which employs “cloud computing software using artificial intelligence” for “analyzing and selecting securities tailored to customer needs.”
JP Morgan did not respond to a request for comment, nor did Tradier, Savvy or Hearsay.
Galvin’s investigation comes a week after the Securities and Exchange Commission proposed new rules requiring broker-dealers to eliminate possible conflicts of interest from AI technology.
While intelligent regulation of AI would benefit the wealth management industry, the state of Massachusetts’s investigation in addition to the SEC’s highlights an overly complex and fragmented regulatory landscape, said Brad Genser, co-founder and chief technology officer of Farther, a digital registered investment advisor.
“A hodgepodge of investigations and regulations could inadvertently hinder the delivery of AI benefits to clients and pose challenges for businesses to adapt swiftly to evolving market needs,” Genser said in a statement. “I believe collaboration between our industry and regulatory authorities is critical to effectively strike the right balance between investor protection and innovation.”
TLDRS:
- The state of Massachusetts is concerned about what it calls a growing and potentially unchecked use of artificial intelligence in the securities industry.
- The investigation came a week after the U.S. Securities and Exchange Commission proposed requiring broker-dealers to eliminate possible conflicts of interest from the use of artificial intelligence on trading platforms.
- The SEC’s proposal, which now faces a period of public comment prior to any decision on whether to adopt it, was in part inspired by 2021’s “meme stock” frenzy, in which SEC officials say predictive analytics helped drive the “gamification” of retail investors’ behavior.
- On Wednesday, Secretary of the Commonwealth William Galvin announced that his securities division would launch an investigation into how firms are using AI to engage with Massachusetts investors. The office has sent letters to six companies — JPMorgan Chase, Morgan Stanley, Tradier Brokerage, US Tiger Securities (the U.S. broker-dealer division of Tiger Brokers), Savvy Advisors and Hearsay Systems — seeking information on how they are using AI in their business activities. ETrade, which is owned by Morgan Stanley, also received a letter.
- Of particular concern is the supervision firms have in place over AI engines to ensure the technology is not putting the firm’s interests ahead of clients’ interests, Galvin said in a statement.