Here is an initial quick summary of notes taken from sessions I attended at the FINRA conference 2023 May 16-18. Perhaps these notes can help with your write-up of the event or alternatively give you a quick view into what was discussed. As you will see below, some of these points relate to each other, while others stand more on their own. I plan to expand more thoroughly into select topics in future, so stay tuned for more.
AI and Analytics:
- FINRA is currently studying the use of generative AI internally to automate and provide insights into their tasks.
- Large Language Models like ChatGPT hold much promise especially as we move towards more trend-based reviews. We must evaluate the risks involved such as inaccuracies and bias.
- Over-reliance on AI can be catastrophic as it may introduce systemic risk as a single point of failure.
- Augmented Intelligence may be the answer, where humans and AI interact together. Humans are especially good at asking questions.
- Transparency will be key. There is no requirement to understand all technical aspects of how an AI model functions but there is a strong requirement to understand how the system is producing its conclusions, what biases exist, and what factors contribute to its scoring.
- The industry needs to embrace AI as a future certainty. AI is no longer a “nice to have”, you need to be starting down this path now. If you have not already, start small, set measurable targets, and grow into AI from there.
- A lot of focus on the Care Obligation, specifically around ensuring that firms provide the best reasonable alternative. This is more than simply comparing share classes.
- Other factors should also be considered, such as tax implications.
- There should be heightened scrutiny for complex products, concentration, excessive trading, double dipping, variable annuity exchanges and the like.
- When it comes to AI, even chatbots need to follow REG BI in any recommendations they might make. Are they free from bias? Are their suggestions in the BI of the client?
- A lot of this is covered in REG BI, ACATS fraud, and other topics brought up during the conference, but calling out Seniors as a separate section is warranted given how much FINRA is focusing on seniors right now.
- Not only has fraud been on the rise against seniors, but the percentage of the population of retirement age is increasing.
- Ensure additional scrutiny exists around the treatment of seniors. Especially when it comes to concentration, complex products, unusual withdrawals, and changes in account profiles.
- What are you doing today to protect this vulnerable segment of your client base?
Off Channel Communications
- Nothing new in terms of the law but recent enforcement should drive action.
- Organizations need to consider how text messages are generated: they might contain voice clips, emojis and acronyms. Are they being properly captured and are policies aligned contextually?
- Ensuring that the “tone from the top” strongly enforces off-channel restrictions to ensure the behavior is curtailed moving forward.
- This requirement is really around having a “reasonably designed system” to identify Off Channel Communications and Signaling.
- Nothing fundamental about crypto indicates it cannot be treated under the existing regulatory framework.
- The crypto space less compliant. FINRA has studied crypto client communications and found them to be four times more likely to be non-compliant than non-crypto communications.
- Clients to need to properly understand they are potentially leaving a non-regulated space, ensure proper disclosure, and communicate clearly who is issuing the product. You must have proper communication around the entire transaction.
- Regulators are watching closely for customer complaints as well as OBAs and PSTs.
- Specific exams in this area are likely on their way.
- Focus needs to be on the risker activities. All material activities need to be disclosed but not all activities need to be actively monitored.
- The recent rise in Social Media Influencer activities and promotions around Crypto may require an update to existing policies.
- Firms should be pursuing additional required forms of identification.
- Consider tools that identify known bad email addresses and other types of identification.
- Spot trends where the same email, IP address, or phone number is used multiple times for multiple accounts.
- Consider allowing the funds in but placing a delay on funds moving out.
- Balance allows your business to flow but to also protects your clients.
Obviously, there was much more detail to each of these topics than these points above. There were also many more topics covered that I have not mentioned here. But hopefully, these notes can provide some insight to you all. Overall, the event was excellent, and the sessions were all top-notch. If you have not been to the FINRA conference before or have not been lately, I strongly recommend it.
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