Wall Street Cops Behind in AI Oversight

Hi! You’re reading AI Street, a weekly newsletter about how AI is reshaping financial services. I’m Matt Robinson and every Thursday I share the latest news, analysis and AI tools for investors.

REGULATION
Wall Street Regulators Behind in AI Oversight: Senate Report

Wall Street’s main regulators are behind in overseeing how hedge funds are using artificial intelligence to make investment decisions, creating a potential threat to financial stability, according to a recent Senate report.

The report, directed by U.S. Senator Gary Peters (D-MI), warned that current rules and recent regulatory actions are insufficient in addressing the evolving uses of AI by hedge funds.

The report obtained information from six different hedge funds and how they’re using AI to invest. The report found that there was no consensus on when a human needs to intervene in, how risks are classified and how various terms are defined. Some hedge funds are researching use cases for generative AI, a type of machine-learning that creates new content based on prompts. None of the hedge funds are using Gen AI widely for trading strategies.

Among the staff’s concerns:

• AI can amplify herding behavior, where disparate investors make similar investment decisions based on the same trading signal.

• Hedge funds don’t have uniform plans in place on when a human should review a trading decision.

• Regulators including the Securities and Exchange Commission and the Commodity Futures Trading Commission have not clarified how current regulation applies to the funds’ use of AI.

Staff recommendations include:

• Create a uniform definition and standard of how hedge funds name and use AI in investment decisions.

• Clarify how current rules affect AI disclosures and examine whether there are gaps in their rules and propose new rules to address specific risks.

• Require standardized audits of AI trading systems and audit trail disclosures for investors and establish clear guidelines for how these audits should be conducted.

The warning comes as investment and use cases of AI are expanding across Wall Street. Last year, SEC chair Gary Gensler said that an AI-triggered financial crisis is nearly unavoidable in the next decade in part because of individual-investor focus of U.S. regulations.

The committee obtained information from well-known hedge funds and how they’re implementing the technology including from Citadel LLC, Renaissance Technologies and Bridgewater Associates.

BIG PICTURE

U.S. financial regulation is a disclosure-based system that hinges on “materiality,” or important information that a reasonable investor would want to know. Not an easy question to answer regarding AI.

Read the full 45-page Senate report.

European Commission Seeks Input on Regulating AI in Finance

The European Commission is seeking guidance from financial firms in how they’re using AI in order to effectively implement the recently passed AI Act.

The new legislation notes two high-risk cases for the financial sector, using AI to evaluate the creditworthiness of a person and to price life insurance. The EU adopted the AI Act in March becoming the first jurisdiction to police the emerging technology and make it safe for individuals and businesses.

Comments may be submitted until September 13.

AI BANKERS
Citi Says Finance Jobs Most at Risk of AI Disruption

Citigroup says that AI is likely to displace more finance jobs than any other sector, according to a new 124-page report from the bank on how AI will impact finance.

Just over half of banking roles have a higher potential for automation, the highest among any other sector including insurance and software.

AI will “profoundly change the future of finance and banking,” potentially driving global banking profits to $2 trillion by 2028, a 9% increase over the next five years, according to the report.

While the new technology may make some roles obsolete, it may not meaningfully reduce banks’ headcount because AI will create new roles.

Read the full report here.

FUNDRAISING
Linq Raises $6.6 Mln for AI + Fundamental Analysis Platform

Boston-based Linq raised the cash in a seed funding round to streamline financial research by automating time-consuming tasks, such as summarizing earnings calls.

• The funding round was led by InterVest and Atinum, with participation from TechStars, Kakao Ventures, Smilegate Investment and Yellowdog. (TechCrunch)

• The company uses a finance domain and large language models to build financial models, scan research and analyze regulatory filings.

• Current users include professionals at Goldman Sachs, JPMorgan and Bain & Co., according to Linq’s website.

Investment Data Platform FINBOURNE Raises $70 Million

The London-based investment data platform has raised £55 million ($70 million) in Series B funding. Highland Europe and AXA Venture Partners led the fundraising.

• The company’s platform functions across across portfolio management, fund accounting, order management, and compliance according to FINBOURNE.

• Clients include Northern Trust, HSBC and the London Stock Exchange. (TechCrunch)

PRODUCT LAUNCHES
nCino Unveils AI-Powered Banking Advisor

Banking software provider, nCino, launched an AI co-pilot called Banking Advisor that’s designed to help manage portfolios, reduct manual tasks and help comply with regulatory requirements, the Wilmington, North Carolina-based company said in a June 17 statement.

The tool can help bankers “chat” with PDF documents such as credit policies and market data, write new deal and credit memo narratives and streamline data automation.

nCino, which has a current market value of about $3.6 billion, reported record gross sales in its fiscal first quarter, which jumped 13% year-over-year to $128 million. (PYMNTS)

NatWest launches Cora+, Among First U.K. Banks to Use Generative AI

NatWest announced the launch of Cora+, an upgrade to its digital assistant, that’s designed to provide more nuanced answers to customer queries, becoming one of the first U.K. banks to use generative AI through a digital assistant.

Developed with IBM, the assistant will be rolled out in a 12-week pilot program and answer in a more conversational tone, NatWest said in a June 10 statement. Previously, when a customer asked about a mortgage or lending product, a link would be provided to a general page. Cora+ will be able to understand the context to provide more accurate responses for certain queries.

In 2023, the digital assistant helped customers with 10.8 million queries in their day-to-day banking needs, an increase from about 5 million in 2019.

ALSO IN THE NEWS
Deloitte Australia Hands AI to All Staff After Positive Trials (Bloomberg Law)

• Deloitte Australia rolled out a new artificial intelligence platform to its 13,000 on June 17, after trials found it improved productivity for about two-thirds of staff.

How AI is transforming finance (Bank of International Settlements)

• A study from the Bank of International Settlements examines how AI will impact financial intermediation, insurance, asset management and payments.

IMF Report on AI Raises 'Profound Concerns About Massive Labor Disruption' (Inc.) (IMF Report)

• Researchers at the International Monetary Fund recommended that countries use taxes to account for some of the downsides of AI.

Gen AI Cut Lawyers’ Drafting Time in Half, UK’s Ashurst Says (Bloomberg Law)

• Ashurst lawyers using generative AI were able to write the first draft of briefs in about half the time it took them on their own, according to the firm’s five-month experiment involving more than 400 staff.

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