If FINRA Scraps Principal Pre-Approval for AI Marketing, Distributors Need to Become “Risk-Based”
Generative AI has massively increased the speed of crafting retail communications. Duly, it has triggered FINRA to address firms’ pre-approval processes.
Earlier this month, FINRA proposed a highly notable rewrite of Rule 2210 (Communication with the Public) under Regulatory Notice 26-14. It even serves to reconsider the use of performance projections and targeted returns by broker-dealers: something once unheard-of in retail investment marketing.
To do so, it aims to deviate from its requirement that a registered principal must review every retail communication before it is sent, and to make the pre-approval workflow faster, and more compliant, through a “risk-based” supervisory framework.
AI content does remain the responsibility of a firm no matter who (or what machine) drafted the copy. But there is no ignoring the popularity of GenAI, and how it has democratised the sheer volume of content production. You cannot exclude it, but continuous manual review bottlenecks cannot keep up with the technological change.
FINRA acknowledges the effect this would have on a workload, causing them to put forward a tiered oversight solution. High-risk communications (performance claims and complex products) would face greater scrutiny than low-touch material, for instance.
This leads to an operational boon for hedge funds or asset managers that are scaling their personalised content for retail inventors, if well-documented and risk-averse methodologies are made clear to FINRA staff. The practice is only beneficial if demonstrable for any given piece that has not needed principal reviews before distribution.
The back-testing of a framework against past communications is a lengthy process. So too is FINRA’s performance and returns proposal incompatible with the SEC’s Marketing Rule for advisors. It could become a headache for dually registered firms and distributors to adhere to differing standards rather than one, clear, simplified version.
At this point in time, nothing is final until mid-September. Before any FINRA moves, it’s best for marketing and IR teams to align with compliance and weigh in with trade associations, to pre-empt any possible regulatory shifts; something becoming far more common in fund marketing these days.
