Merrill Lynch Highlights AI Risks as FINRA Urges Greater Oversight of Emerging Technology
From the desk of Jim Eccleston at ÍøÆسԹÏ
Financial advice firms increasingly rely on artificial intelligence to reduce costs and automate tasks traditionally performed by employees, according to reporting by InvestmentNews. At the same time, Merrill Lynch has warned that the expanded use of artificial intelligence and machine learning introduces material operational, compliance, and cybersecurity risks for advisory firms.
According to InvestmentNews, Merrill Lynch disclosed these risks in an updated wrap fee program brochure filed with the Securities and Exchange Commission for its Investment Advisory Program. In that filing, the firm stated that it uses programs and systems incorporating artificial intelligence, machine learning, probabilistic modeling, and other data science technologies, including tools developed by third parties.
Merrill cautioned that artificial intelligence tools are highly complex and may be flawed. The firm warned that such tools may hallucinate, reflect biases embedded in training data, suffer from quality issues, or otherwise produce harmful outcomes. Merrill stated that those risks require ongoing supervision and oversight, according to the disclosure cited by InvestmentNews.
The revised brochure also warned that the increased use of technology exposes Merrill, its parent Bank of America Corp., affiliated entities, clients, and service providers to heightened operational and information security risks. InvestmentNews reports that Merrill included this warning in a revised section of its disclosure titled “Investment Strategies and Risk of Loss—Information Security, Cybersecurity and Artificial Intelligence Risks.”
Likewise, FINRA raised similar concerns in its most recent annual regulatory overview, as reported by InvestmentNews. FINRA identified generative artificial intelligence, cybersecurity, and cyber-enabled fraud, manipulative trading in small-cap equities, and third-party risk as key areas of focus. FINRA warned that emerging technologies and long-standing compliance gaps are converging in ways that heighten risk for investors.
FINRA also addressed the growing use of artificial intelligence “agents,” which are systems capable of planning and executing tasks autonomously across multiple data sources and applications. As reported by InvestmentNews, FINRA warned that these tools introduce a distinct risk profile, particularly when systems operate without human approval, exceed their intended authority, prove difficult to audit, or mishandle sensitive data.
Together, Merrill Lynch’s disclosures and FINRA’s guidance illustrate the regulatory tension surrounding artificial intelligence in financial services. While firms pursue efficiency gains through new technology, regulators continue to emphasize that innovation must align with robust supervision, governance, and investor protection.
ÍøÆØ³Ô¹Ï LLC represents investors and financial advisors nationwide in securities, employment, transition, regulatory, and disciplinary matters.
Tags: eccleston, eccleston law, merrill lynch, finra, ai
