How Broker-Dealers Approve AI Tools: A Supervisory Process

An approved AI tools list at a broker-dealer is the output of its supervisory system under FINRA Rule 3110. In Regulatory Notice 24-09, FINRA says its rules are "intended to be technology neutral" and apply whether a firm builds generative AI tools or uses them "through embedded features in existing third-party products." Approval runs through the firm's written supervisory procedures (WSPs), vendor management and books-and-records procedures. The adviser version is section 2 of the AI policy page.

The rules the process has to satisfy

• Rule 3110, supervision. A supervisory system "reasonably designed to achieve compliance with applicable securities laws and regulations," and written procedures "to supervise the types of business in which it engages." Rule 3110(b)(7) requires a firm to amend its WSPs promptly "as changes occur in its supervisory system" and to communicate the changes to the associated persons they affect.
• Rule 3120, supervisory controls. Designated principals establish, maintain and enforce supervisory control procedures that "test and verify that the member's supervisory procedures are reasonably designed" and amend them where testing shows a need. They report to senior management "no less than annually."
• Notice 24-09. Where a firm uses generative AI as part of its supervisory system, FINRA says its policies and procedures "should address technology governance, including model risk management," and "data privacy and integrity, reliability and accuracy of the AI model."
• 2026 Annual Regulatory Oversight Report. FINRA says using GenAI "can implicate rules regarding supervision, communications, recordkeeping and fair dealing." Among practices to consider, it lists "formal review and approval processes to assess and evaluate GenAI opportunities and the necessary controls," involving "both business and technology experts."
• Notice 21-29, vendor management. Rule 3110's supervisory obligation "extends to activities or functions it may outsource to a Vendor."

Step 1: Intake

Each request starts in writing and records:

• what the tool is, who sells it, and which model and version it uses, where the vendor discloses it
• the business purpose and the supervised activity it touches
• the data it will have access to, and whether any of it is customer information
• what it produces: internal notes, customer communications, records, or actions in other systems
• whether it can change data or send anything in other systems without a person approving each step

AI features that a vendor adds to software the firm already uses come through the same intake, because Notice 24-09 covers AI embedded in third-party products.

Step 2: Classify the tool

Where every answer is no, as with a writing assistant used on internal documents with no customer data, a lighter review can fit. Write down why.

Step 3: Vendor due diligence

Notice 21-29 lists questions for firms, including whether the firm evaluates "Vendors' controls and due diligence of Vendors' sub-contractors," and whether contracts cover "protection of non-public, confidential and sensitive firm and customer information" and "ownership and disposition of firm and customer data at the end of the Vendor relationship." It also covers "Monitoring and assessing the accuracy and quality of the Vendor's work product." Among the problems FINRA describes, firms "failed to perform adequate due diligence to verify Vendors' ability to maintain books and records," so confirm that before approval.

FINRA's 2026 report adds AI items for vendors supporting mission-critical systems: "assessing the third-party vendor's use of GenAI in their products or services," contract language "that prohibits firm or customer sensitive information from being ingested into a third-party vendor's open-source GenAI tool," and "validating data protection controls in third-party vendor contracts."

Under amended Regulation S-P, a vendor that "receives, maintains, processes, or otherwise is permitted access to customer information" through its services to the firm is a service provider. The firm needs written policies and procedures "reasonably designed to require oversight, including through due diligence and monitoring, of service providers," including notice to the firm "as soon as possible, but no later than 72 hours" after the provider becomes aware of a breach affecting a customer information system it maintains.

General vendor questions are in questions to ask an AI vendor and reading a SOC 2 report.

Step 4: Records

Decide before approval what the tool creates and where it is kept. Rule 17a-4(b)(4) covers communications relating to the business, including inter-office communications, kept "not less than three years, the first two years in an easily accessible place." Rule 4511 requires FINRA records with no specified period to be kept "at least six years," in a format that complies with Rule 17a-4. Electronic records need either a complete time-stamped audit trail that allows the original to be re-created, or non-rewriteable, non-erasable storage. The AI records guide maps each AI record type to these rules.

Step 5: Communications review

If staff use the tool to draft anything a customer will read, Rule 2210 applies to the result. Correspondence goes to "25 or fewer retail investors within any 30 calendar-day period" and is reviewed under Rule 3110(b)(4). A retail communication goes to more than 25, and a qualified principal must approve it "before the earlier of its use or filing." Content must be "fair and balanced," with no "false, exaggerated, unwarranted, promissory or misleading statement or claim." FINRA's advertising FAQs add that chatbot communications may be correspondence, retail or institutional communications, depending on who receives them.

Step 6: Test before approval

FINRA's 2026 report describes testing to understand "the capabilities, limitations and performance of the model," in areas "such as privacy, integrity, reliability and accuracy." A workable test: run the tool on past cases where the right answer is known, have the supervising principal score the results, and keep the test file with the approval.

Step 7: Approve and amend the WSPs

The approval names the supervising principal, the approved uses, the uses that are not allowed and the review method. Amend the WSPs promptly to describe how the tool is supervised, and send the change to the associated persons who will use it, as Rule 3110(b)(7) requires. Then add the tool to the register.

The approved-tools register

Among effective practices, FINRA's 2026 report lists an inventory of "all third-party vendor-provided services, hardware, systems and software components," including the version, used by the firm. Its GenAI section lists "tracking which model version was used and when." One row per approved tool:

Monitoring and re-approval

FINRA's 2026 report describes "ongoing monitoring of prompts, responses and outputs," which "may include storing prompt and output logs for accountability and troubleshooting," along with "human-in-the-loop review of model outputs." Review a tool again when:

• the vendor changes the model, the terms of service or where data is processed
• the vendor adds an AI feature to a product the firm already uses
• an incident or customer complaint involves the tool
• supervisory control testing under Rule 3120 comes round

AI agents

For agent tools, which FINRA describes as "capable of autonomously performing and completing tasks on behalf of a user," its report lists questions firms may consider: "how to monitor agent system access and data handling," where to have "human in the loop" oversight, "how to track agent actions and decisions," and how to establish "guardrails or control mechanisms to limit or restrict agent behaviors, actions or decisions." A first approval can limit an agent to read-only access, or require a person to confirm each action, and widen its scope after testing.