Artificial Intelligence in Compliance
Traditional programming uses logic-based algorithms, whereas AI uses a data-up approach. As more data is provided AI can "learn" and refine the output for potentially better outcomes. There are three types of AI; generative, analytical, and functional. Each type has very different applications. To frame how AI impacts compliance, it is helpful to segregate the use of AI inside and outside the Compliance Department.
When assessing the compliance implications of the use of AI outside the compliance department it is helpful to understand how AI is being used and determine if this is adequately addressed through existing policies and procedures. For example, a marketing department may be using generative AI to help create marketing pieces. Existing marketing policies and procedures can be applied to marketing content, regardless of how they are produced, so there is no gap in the policies and procedures.
The use of AI within the compliance department typically will not have many regulatory or compliance implications. For example, generative AI could be used to create training materials or draft policies and procedures. Analytical AI could be used to refine surveillance and exception reports, again with few regulatory implications.
The SEC has pursued enforcement against firms for the use of AI, specifically predictive data analytics, that create a conflict of interest. On August 10, 2023, the SEC proposed Rules around the use of covered technologies that create conflicts of interest. For now, firms probably don't need additional policies and procedures but probably should add AI-related items such as the use of predictive data analytics to their risk and conflicts inventories.
The use of AI is growing exponentially, and firms need to assess the compliance implications and react appropriately.
This information comes from Brian Jacobson, director at Oyster and Craig Watanabe, Director IA Compliance at DFPG Investments, LLC whose article Artificial Intelligence in Compliance appeared in the September 2023 edition of NSCP Currents. To receive important information such as this and to review the risks and the associated compliance and supervision suggestions, join NSCP today to receive NSCP Currents and stay up to date on issues such as this that matter most for the financial services industry. Members can access the full article here.
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