I read recently that in the not-too-distant future, the practice of law by actual human beings will become a rarity, as computers will take over those jobs, because they will be able to do the work better, cheaper and faster. Speaking as a lawyer, I find that to be a somewhat troubling prospect. I mean, this is what puts food on my table and all. So, given a choice, I would clearly vote “no” on this.
Well, yesterday, I read that all of you compliance personnel will eventually be joining me on the unemployment line. IBM announced that Watson, its super-amazing Super Computer, is now providing Watson Financial Services. Now you, too, can be replaced by a machine that does your job better and faster. (I don’t know about cheaper!) According to IBM, Watson can “[t]ransform your regulatory compliance and surveillance programs by deploying cognitive capabilities that drive the identification and understanding of regulatory requirements, improve your efficiency at addressing compliance requirements, while reducing the risk of misconduct.”
Holy cats, that sounds good. It is all too common in my experience that one of my clients get into difficulty with a regulator (and sometimes with a customer, as well) not because the firm had a lousy supervisory system or deficient written supervisory procedures, but due to good old human error. Someone appropriately delegated some supervisory function forgets to do it. Or does it but fails to document it. Then you get, essentially, what HAL 9000 said in 2001: A Space Odyssey: “I know I’ve made some very poor decisions recently, but I can give you my complete assurance that my work will be back to normal. I’ve still got the greatest enthusiasm and confidence in the mission.” No matter how well intended, and even in the absence of any demonstrable customer harm, human errors like this routinely result is regulatory scrutiny, and possible disciplinary action.
If there is a computer out there that can reduce, or, better, eliminate the possibility of errors like this, I am all in favor it.
The harder question concerns the other kind of thing that gets broker and broker-dealers in trouble: the exercise of subjective judgment. Most FINRA rules (but hardly all) have a reasonableness standard, including most notably the supervision rules. To be in compliance, all one needs to be able to demonstrate is that he or she acted reasonably. That means, necessarily, that while errors may not be encouraged, or welcomed, they can be tolerated, at least to a degree.
There are tons of events that occur every single day that call for the exercise of some subjective determination. For example, does this penny stock trade constitute a “red flag” for AML purposes? Is this structured product suitable for that particular customer? Would the addition of this business line constitute a material change requiring the filing of a 1017? Is this letter from the customer a “complaint” that requires disclosure on the RR’s Form U-4. You get the picture. Some clients do a very good job of making good, reasoned judgments, based on all pertinent facts and circumstances. But, sadly, some don’t. And even if they think they do, they do a poor job of memorializing the analysis and the reasons on which the ultimate conclusion was based.
What I don’t know is whether a computer, no matter how Super it may be, can really be relied upon to make, or even help make, the sort of subjective decisions that compliance and supervisory personnel face every day. But, I feel like as a lawyer, I make a million judgment calls a day, and if a computer is eventually going to take my job away because it can make those calls better than me, then I suppose it is possible that the same is true of anyone who works in the area of securities regulation and compliance.
This is clearly a very interesting development, and merits our attention going forward to see if, indeed, IBM has created a better mousetrap. I suppose that it is only fitting that the press release came the same week that Robert Cook announced FINRA’s Innovation Outreach Initiative, a program that, according to the press release, will “foster an ongoing dialogue with the securities industry that will help FINRA better understand financial technology (fintech) innovations and their impact on the industry.” The impact that technological innovations will have on the securities industry is obvious; it is just a matter of how much and when, not if.
As long as this doesn’t turn into HAL 9000, or Skynet, or Nomad. If that happens, please beam me up.