May 24, 2024
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Massachusetts regulators launch probe into AI in securities industry

An AI (Artificial Intelligence) sign is seen at the World Artificial Intelligence Conference (WAIC) in Shanghai

An AI (Artificial Intelligence) sign is seen at the World Artificial Intelligence Conference (WAIC) in Shanghai, China July 6, 2023. REUTERS/Aly Song/File Photo

BOSTON, Aug 3 (Reuters) – Massachusetts securities regulators have opened an investigation into the ways in which investment firms use artificial intelligence in their interactions with investors, citing concerns about the technology’s potential unchecked use.

Massachusetts Secretary of State Bill Galvin, the state’s top securities regulator, on Thursday announced that his office had sent letters of inquiry to a number of firms using or developing AI for their businesses, including JPMorgan Chase (JPM.N) and Morgan Stanley (MS.N).

Others who received letters included Tradier Brokerage, US Tiger Securities, E*Trade, Savvy Advisors and Hearsay Systems, according to a spokesperson for Galvin, a long-serving Democrat and prominent state securities regulator.

“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.

Representatives for the companies did not immediately respond to requests for comment.

The investigation came a week after the U.S. Securities and Exchange Commission proposed requiring broker-dealers to eliminate possible conflicts of interest from the use of artificial intelligence on trading platforms.

The SEC’s proposal, which now faces a period of public comment prior to any decision on whether to adopt it, was in part inspired by 2021’s “meme stock” frenzy, in which SEC officials say predictive analytics helped drive the “gamification” of retail investors’ behavior.

Galvin’s office said he was particularly focused on what supervisory procedures the firms have in place regarding AI to ensure it will not put the companies’ interests ahead of their investor clients.

Galvin’s securities division plans to also evaluate what disclosure process firms that have already deployed AI have in place and is also examining some firms’ marketing materials that may have been created using the technology.

Reporting by Nate Raymond in Boston and Chris Prentice in Washington; Editing by Mark Porter and Andrea Ricci

Our Standards: The Thomson Reuters Trust Principles.

Nate Raymond reports on the federal judiciary and litigation. He can be reached at nate.raymond@thomsonreuters.com.

Chris Prentice reports on financial crimes, with a focus on securities enforcement matters. She previously covered commodities markets and trade policy. She has received awards for her work from the Society for Advancing Business Editing and Writing and the Newswomen’s Club of New York.

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