Galvin launches investigation into brokers’ use of AI

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 Stanley 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 or Hearsay. A spokesperson for Savvy said the firm could not comment because it has not yet received the letter.

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.”

[More: Gensler says AI holds promise, peril for financial advice]

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