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Massachusetts regulators launch probe into AI in securities industry

Massachusetts regulators launch probe into AI in securities industry

On August 3, 2023, it was reported that Massachusetts securities regulators had taken a significant step in addressing concerns about the potential unchecked use of artificial intelligence (AI) in the investment industry. Massachusetts Secretary of State Bill Galvin, the state’s top securities regulator, announced the initiation of an investigation into how investment firms are employing AI in their interactions with investors. The inquiry aims to ascertain whether these firms are adhering to the necessary guardrails and transparency measures to protect investors from potential harm.

As part of this investigation, Galvin’s office sent letters of inquiry to several firms, both those currently using AI and those involved in developing the technology for their businesses. Some notable companies that received these letters include JPMorgan Chase, Morgan Stanley, Tradier Brokerage, US Tiger Securities, E*Trade, Savvy Advisors, and Hearsay Systems. These letters seek information about the firms’ AI utilization and the measures they have in place to avoid conflicts of interest and prioritize their clients’ interests.

Galvin’s concerns about AI’s potential impact on investors were emphasized in his statement, where he expressed worries that if not implemented with proper disclosure and supervision, the technology could lead to detrimental outcomes for investors. The investigation comes on the heels of the U.S. Securities and Exchange Commission’s (SEC) recent proposal to mandate broker-dealers to address possible conflicts of interest arising from the use of AI on trading platforms.

The SEC’s proposal was partly influenced by the “meme stock” frenzy of 2021, during which predictive analytics were purportedly instrumental in driving the gamification of retail investors’ behavior. To ensure that investment firms are not prioritizing their own interests over those of their clients, Galvin’s office will closely examine the supervisory procedures in place concerning the use of AI.

Additionally, the securities division under Galvin’s purview plans to evaluate the disclosure processes employed by firms that have already deployed AI in their operations. This evaluation will shed light on how these companies inform investors about the use of AI and its potential impact on their investment decisions.

Another aspect of the investigation will involve scrutinizing marketing materials created using AI. This step is essential to understand whether firms might inadvertently or deliberately use AI-generated content to influence investor behavior or promote products and services without adequate disclosure.

The SEC’s proposal, as well as Galvin’s investigation, underscores the increasing importance of addressing the ethical and regulatory implications of AI adoption in the financial industry. As AI continues to play a more prominent role in investment decision-making and customer interactions, the need for transparency, accountability, and investor protection becomes paramount.

Overall, the investigation by Massachusetts securities regulators is a significant development in the ongoing efforts to ensure that AI is harnessed responsibly and ethically in the financial sector. As the industry navigates the challenges and opportunities posed by AI, such regulatory actions can serve as a crucial step toward maintaining investor confidence and safeguarding the integrity of the financial markets. The outcomes of these inquiries will likely be closely monitored by industry stakeholders and regulators alike, shaping the future trajectory of AI usage in investment firms.


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