AI Regulation in Finance and Securities


Artificial Intelligence (AI) is currently in the spotlight, mainly for its impact on industries and its potential to alter professions from education to law raising questions on how best to adopt it and how best to adapt to it? AI has been a big part of our day-to-day lives for several years now as each household’s resident ‘Alexa’ can attest to, but it is only recently that an understandable panic has set in as the technology behind the capabilities of the learning machine becomes more evident.

As the time for speculative analyses comes to an end, governments and regulators are aware of the urgency in mapping out guidelines. This is even more apparent in the Finance and Securities sectors as many tools currently used are AI driven, and concern over compliance and ethics continues to rise.

How is AI currently utilized in the Finance and Securities industry?

The finance and securities sectors are heavily regulated as the SEC and other agencies continue to promote transparency and ethics in the U.S. market. As they consider compliance and regulatory proposals already on the table, many AI-driven tools are already in use in the industry.

  • Risk Assessment and Management: With the use of AI algorithms, firms and advisors can analyze large sets of data, trends and other information to make informed decisions in managing portfolios.
  • Trading Systems: High frequency trading systems can be automated to make trading decisions based on data analysis and pre-defined rules. This reduces human error and allows for fast and efficient trading.
  • Trading Strategies and Market Predictions: With its ability to decipher massive sets of data quickly, recognize patterns and opportunities, and make decisions based on historical data, AI is able to develop highly complex trading strategies. This ability also lends itself to Market Prediction by analyzing market data and sentiments, and other factors that may contribute to market trends.

These are just some of the ways that AI is already being used or tested. Tapping into the capabilities of machine-driven decision making and action offers an exponential list of possibilities, but it also comes with many concerns.

Potential Issues of AI in Finance and Securities

Chief Executive of the popular OpenAI, Sam Altman, has been a vocal advocate for the regulation of Artificial Intelligence. The New York Times reported on Mr. Altman’s speech to lawmakers urging them to regulate AI as soon as possible.

“I think if this technology goes wrong, it can go quite wrong. And we want to be vocal about that,” he said. “We want to work with the government to prevent that from happening.” He said.

He emphasized the importance of establishing safe protocols, “we believe that the benefits of the tools we have deployed so far vastly outweigh the risks, but ensuring their safety is vital to our work.”

Concerns Surrounding Use of Artificial Intelligence in Finance and Securities

The adoption of AI in the finance and securities industries poses serious ethical concerns. AI can process and translate vast amounts of data faster than human personnel can follow, and this raises serious questions about accountability and quality control.

Human Oversight and Quality Control: In an industry such as finance that requires critical judgement in decision making especially when it comes to risk management, it is important to maintain human oversight and supervise AI processes to maintain quality control and ethical standards, manage risks and ensure compliance.

  • Accountability and Liability: In the event of financial losses, misconduct, or costly errors, who is to be held responsible? As AI systems evolve to become more self-directed, the opportunity for error increases. It is critical for active human oversight to maintain transparency, and accountability.

Bias in Data: By the very nature of its design, AI is driven by data that, compiled over decades, may include bias towards certain groups. Regulations set for the use of AI in the finance and securities industries must consider the potential for prejudice in AI algorithms that could lead to discriminatory and unfair practices towards certain groups based on socio-economic, racial, gender-based and other characteristics.

Privacy and Data Protection: The usefulness of Artificial Intelligence in finance and securities is based on analyzing substantial sets of sensitive data to make informed decisions. However, this opens up Pandora’s box for data privacy and piracy issues. Firms and individuals in the finance sector must take protective measures on data used to prevent breaches, identity theft and more.

This, of course, assumes that the data was acquired with consent. As the capabilities of AI continue to evolve, it is important to ensure that all data obtained and stored, must have the individual’s informed consent.

Risk Management: As AI is adopted across the industry, interconnectivity among AI systems increases. As human reliance on AI analyses increases, the risk of widespread misinformation or faulty projections could potentially lead to systemic risk that can affect the entire US finance and securities industries.

Regulatory Lag: One of the biggest concerns with the adoption of AI in the finance and securities sectors is the characteristic regulatory lag that comes with advances in technology leading to gaps in supervision and lack of enforcement.

Existing Regulations That Can Be Applied to AI

Fortunately, there are regulations already in place that can act as guidelines or even be extended to address compliance in the use of Artificial Intelligence in these industries.

In terms of data privacy and protection, the California Consumer Privacy Act (CCPA) allows California residents control over their personal data, including the right to know what information is collected, how it will be used, and, in most situations, the ability to erase data obtained.

This makes it mandatory for any party trying to collect data, to get expressed consent before doing so. The CCPA can become an important tool for regulators in the finance and securities industries to ensure that advisors and firms comply with the proper procedures for the collection, protection, and use of data. Unfortunately, the CCPA only applies to California consumers and is one of only five comprehensive privacy acts in the US. Other states with data protection laws include, Colorado, Connecticut, Utah, and Virginia. There is no federal privacy act at this time.

However, there are several federal consumer protection laws like the Federal Trade Commission Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, among others that can be adapted to regulate the adoption of AI systems in the finance industry.

As a protective measure against AI bias, Fair Lending and Anti-Discrimination laws that hold financial institutions accountable to fair lending practices may be tailored to include the use of AI systems.

As AI systems get more sophisticated and more autonomous, the potential for lack in human oversight increases, making regulation even more important. In the absence of regulations addressing these issues as they pertain to AI, regulators may integrate the Federal Reserve Board’s Comprehensive Capital Analysis and Review (CCAR) and the Dodd-Frank Act.

In fact, the CCAR and the Dodd-Frank Act together, could address several areas of concern in the use of AI in the finance and securities industries as those acts together serve to measure an organization or business’ financial stability and resilience.

Financial institutions are currently required to implement stringent Anti-money laundering procedures to prevent money laundering and financing for terrorist organizations. Although there is no regulation in place for AI, regulators are encouraging industry members to implement AI systems programmed to recognize suspicious activity or trends according to ALM regulations.

The use of AI in high-frequency trading is one of the major benefits in securities. With the ability to automate actions, and process large amounts of data and activities simultaneously, AI provides a major advantage to the process but also greatly increases the risk of market manipulation. Existing regulations such as the Securities Exchange Act of 1934 (Exchange Act), the Securities Act of 1933, again – the Dodd-Frank Wall Street Reform and Consumer Protection Act can be used to address issues that arise in high-frequency trading.


The rapid evolution of Artificial Intelligence and its ability to learn is as exciting as it is alarming.  But as is evident in its wide-spread adoption and adaptation to various industries including Finance and Securities, it is safe to say that AI is here to stay.

Since the United Kingdom has yet again beat the United States to executing technology-smart regulations, and other countries are following suit, US legislators are well aware that the proverbial fire has been lit, and the need for guidance and regulations is paramount.

The tricky part is that although regulatory and compliance agencies like the SEC or FINRA are yet to enact any laws, it is only a matter of time before “recommended best practices” becomes compliance violations against professionals in finance.

Jacko Law Group recommends that firms and individuals in these industries begin to implement AI best practices immediately by first understanding existing regulations that could be applied to AI adoption. In addition, implementing a vigorous set of policies and procedures for data collection, security, and use is going to be extremely important and well worth the effort when the SEC comes knocking. In addition, it is strongly suggested to conduct regular risk assessments modified to account for AI, as a way to identify and address any issues or challenges.

Proving robust and consistent human oversight will be critical and can be accomplished by integrating checks and balances and enlisting human experts in all parts of AI system implementation and use, including design and development and decision-making.

Finally, as in all other aspects of compliance and regulatory best practices, maintaining thorough records of processes and procedures, and anything else that clearly shows compliance efforts will be beneficial.

Jacko Law Group, PC works with a range of finance and securities professionals to meet the stringent regulatory and compliance requirements set by the SEC, FINRA and states. We help our clients demonstrate their commitment to the ethical and compliant use of Artificial Intelligence in their businesses.

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