FINRA Intensifies Scrutiny on AI and Social Media Marketing by Broker-Dealers
Washington, D.C. - September 26, 2023 - As the financial landscape increasingly integrates artificial intelligence (AI) and social media into its operations, the Financial Industry Regulatory Authority (FINRA) is ramping up its review of broker-dealers’ marketing practices. FINRA, a self-regulatory organisation, plans to scrutinise approximately 67,000 public communications by firms over the current year, significantly up from the previous year, according to Amy Sochard, Vice President of FINRA's Advertising Regulation Department. These remarks came during FINRA’s advertising regulation conference in Washington, D.C.
The surge in reviews is partly driven by the rapid adoption of AI tools, such as OpenAI’s ChatGPT, by financial advisors to draft client communications, including emails and social media posts. What heightens the regulatory focus is the potential exposure of sensitive information through these large language models (LLMs), especially if they are part of a public system. Sochard suggests that firms should consider using in-house AI tools to ensure better control and security.
In May 2023, FINRA updated its Rule 2210 guidelines to incorporate the use of chatbots and AI in communications with investors and the public. These guidelines stipulate that any use of AI must adhere to existing marketing rules, including requirements for fairness, balance, and the prohibition of misleading statements. However, regulatory directions concerning AI, particularly regarding ghostwritten content, remain unclear. Reflecting on the application of 2008 guidance on ghostwritten materials to AI-generated content, Sochard indicated a leaning towards requiring disclosure if AI content appears as though it was authored by a person themselves.
During the same conference, FINRA officials highlighted findings from recent investigations into firms using "finfluencers" - social media influencers promoting investment services or products. These investigations revealed significant non-compliance; about 70% of the reviewed communications did not meet FINRA standards for disclosures. Specifically, over 55% failed to disclose that the influencers were paid. Moreover, many communications contained misleading statements, particularly about potential investment success.
The investigations also found lapses in disclosing relationships between firms and influencers, with many firms lacking written supervisory procedures for such social media marketing. Some firms didn't retain records of the influencer communications, further violating regulatory requirements. Stephanie Gregory, Associate Director of the Complex Review Team in FINRA's Advertising Regulation Department, emphasised the necessity for thorough record-keeping and supervision of influencer-provided content. Gregory also recommended that broker-dealers should vet and educate influencers about the products or services they promote on social media.
In a further notable development, FINRA is considering guidance on using AI tools for language translation in client communications. This consideration includes consultations with foreign regulators and the U.S. Securities and Exchange Commission (SEC) to create a cohesive roadmap of existing rules and guidelines. Sochard revealed that a regulatory notice is in the works to summarise effective practices and provide resources for firms using translation AI tools. This notice aims to be released before Sochard’s retirement in November.
FINRA's proactive approach underscores the growing importance of regulatory oversight in the complex and fast-evolving domains of AI and social media within financial services. The organisation is committed to ensuring that firms adhere to strict marketing and communication standards, safeguarding the interests of investors in this digital era.
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Source: Noah Wire Services