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The state of Massachusetts has formally launched an investigation into the application of artificial intelligence (AI) in the securities industry amid fears that investors could lose funds from their use.

Massachusetts Secretary of the Commonwealth William Galvin confirmed the start of the probe on industry firms using AI tools to improve consumer services. As part of the investigation, the state’s securities watchdog issued letters to firms using AI, seeking information on the integration with their offerings.

The securities watchdog said it started the investigation following concerns about potential conflicts of interest between firms and clients, and firms are expected to provide the regulator with information on how they plan to address these conflicts by August 16.

“Of particular interest to Galvin are the supervisory procedures that firms have in place regarding artificial intelligence, and whether those systems ensure that the AI will not put the interests of the firm ahead of the interests of their clients,” the regulator said.

Galvin stated that investors in securities could experience huge losses resulting from the unregulated use of AI in influencing their investment decisions.

“If deployed without the guardrails necessary to ensure proper disclosure and consideration of conflicts, I am concerned that this technology could result in harm to investors,” said Galvin.

Asides from conflict-of-interest cases, the regulator is keen on investigating the use of AI-generated material in promoting their services. Galvin called on state securities watchdogs across the United States to pay special attention to the increasing adoption of AI in the industry, warning them to adopt an “investor-first” stance to ensure safe usage.

AI has made its debut in several facets of the U.S. economy, with the word appearing in the earnings calls of several U.S.-based firms. S&P 500 companies like Alphabet (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), Intel (NASDAQ: INTC), and Meta (NASDAQ: META) mentioned AI 300% more in their Q2 earnings call, rolling out novel AI services for their users.

Generative AI appears to be the most significant driver of growth for AI, with OpenAI’s ChatGPT and Google’s Bard deployed in use cases across finance, Web3, art, and programming.

In an attempt to ensure safe usage, a bipartisan group of U.S. lawmakers in June proposed the creation of a national AI commission as a step toward establishing a robust framework for AI regulation.

Tough times for AI

Although AI has enjoyed a prolific run in the last 12 months, there are fears that incoming AI legislation could stifle innovation in the sector. Across the Atlantic, the European Union is proceeding with its AI Act, proposing to introduce blanket bans on using AI in specific situations.

Tech executives cautioned that the rules might hinder AI growth in the region, potentially compelling developers to leave, and expressed worries about the future of open-source AI if the EU continues with its AI Act, urging regulators to conduct a review.

Watch: Does AI know what it’s doing?

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