FINRA Cautions Broker/Dealers on Gen AI Hallucinations

Core Insights - Brokerage regulators are emphasizing the need for firms to be cautious about the risks associated with hallucinations when utilizing generative artificial intelligence (gen AI) tools in their operations [1] Regulatory Oversight - The Financial Industry Regulatory Authority (FINRA) released its 2026 regulatory oversight report, which aims to provide insights to help firms enhance resilience and strengthen compliance programs [2] - The report includes a new section on gen AI, indicating that existing FINRA rules will apply to gen AI as they do for other technology tools, covering areas such as supervision, communications, recordkeeping, and fair dealing [3] Applications of Generative AI - The primary use of gen AI among member firms is for summarization and information extraction, which involves condensing large volumes of text and extracting key information from unstructured documents [4] - Other applications include question answering, sentiment analysis, language translation, financial modeling, and synthetic data generation [4] Risk Management and Compliance - FINRA advises firms to establish procedures to identify instances of hallucinations, which occur when AI generates inaccurate or misleading information that could affect decision-making [5] - Firms should also be aware of bias in gen AI outputs, which can arise from limited or incorrect training data, including outdated data leading to concept drifts [6] - Cybersecurity policies must address risks related to the use of gen AI, whether by the firm or third-party vendors [6] Testing and Accountability - FINRA recommends that firms test their gen AI tools, focusing on privacy, integrity, reliability, and accuracy, while monitoring prompts, responses, and outputs to ensure proper functionality [6] - Suggested practices include storing prompt and output logs for accountability, tracking model versions, and conducting human-in-the-loop reviews of model outputs to check for errors and bias [7]