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William Galvin
William Galvin

Massachusetts Regulator Launches Probe into Brokerages’ Use of AI

Massachusetts Secretary of the Commonwealth William Galvin sent inquiry letters to Morgan Stanley, JP Morgan Chase and E*Trade, among others, asking about their supervisory policies and procedures for artificial intelligence.

Morgan Stanley, JP Morgan Chase and E*Trade were among the firms that received inquiry letters from Massachusetts Secretary of the Commonwealth William Galvin about the use of artificial intelligence in their securities businesses. 

Tradier Brokerage, US Tiger Securities and Savvy Wealth also received letters of inquiry about their use of AI, according to Galvin’s office. 

“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 announcing the inquiry.

According to Galvin’s office, the content of the letters vary from firm to firm but cover an array of AI-related questions, including compliance and supervisory policies and procedures, as well as details about marketing materials that have been created using AI. All were chosen because the firms had already indicated they are using (or developing the use of) AI technology for working with investors.

Galvin’s office is also looking into what disclosures firms are mandating for customers, as well as information on resources and staff responsible for creating and maintaining AI tools. The Secretary’s main focus is how firms’ use of AI may intentionally or unintentionally put firm needs ahead of the customer’s.

Marketing tech company Hearsay Systems also received a letter because the firm provides AI-related support or software to its customers, including Charles Schwab, Morgan Stanley and UBS, among others, according to its website. Earlier this year, Hearsay launched Content+, which uses AI to power content recommendations.

Galvin is not the only regulator investigating AI’s impact on the financial services space; a new rule from the Securities and Exchange Commission concerning AI-related conflicts of interest in brokerages was included in the agency’s most recent regulatory agenda and could be introduced as soon as this fall. 

Additionally, a FINRA executive also warned advisors at the agency’s annual conference this year that AI-generated recommendations would still fall under the requirements in the SEC’s Regulation Best Interest rule. Regulators and industry experts also expect AI usage to increase cybersecurity risks to RIAs as the technology’s accessibility boosts the range of possibilities for cybercriminals and hostile nation-states when targeting advisors and firms.

Galvin has long been one of the most notable actors in investigating and charging firms for investor-related violations. (Earlier this month, Massachusetts was one of several states ordering Raymond James to pay a total of $12.5 million after the firm agreed it charged “unreasonable commissions” on hundreds of thousands of retail clients’ transactions.) 

Galvin’s office also instituted a first-in-the-nation fiduciary rule that went beyond protections offered by the federal Reg BI standard. The online brokerage Robinhood successfully challenged the legality of the rule in court last year, though that decision is currently being appealed, according to Reuters.

The firms have been asked to respond to the state’s inquiries by Aug. 16.

TAGS: Technology
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