FINRA Regulatory Notice 25-07: A Practical Guide to Supervising AI Tools in 2025

FINRA Regulatory Notice 25-07, released on April 14, 2025, marks a significant shift in how broker-dealers must approach AI supervision. This notice extends Rule 3110 supervisory duties to generative AI workflows and proposes modernizing branch and remote supervision requirements. (FINRA AI Applications)

For compliance teams, this isn't just another regulatory update to file away. It's a call to action that requires immediate attention and strategic planning. The comment period ends July 14, 2025, giving firms a narrow window to prepare for what's coming next.

Understanding FINRA's AI Supervision Framework

FINRA's approach to AI supervision builds on existing Rule 3110 requirements but extends them into new territory. The notice recognizes that AI-based applications are increasingly being used across broker-dealer operations, transforming various functions within these organizations. (FINRA AI Applications)

The regulatory framework focuses on three key areas:

Real-time monitoring requirements: Firms must implement systems that can track AI outputs as they're generated, not just review them after the fact. This represents a fundamental shift from traditional post-hoc compliance reviews to continuous oversight.

Documentation standards: Every AI interaction, decision point, and output must be logged and retrievable. This goes beyond simple record-keeping to create an audit trail that regulators can follow.

Supervisory controls: Traditional supervisory structures need updating to handle AI workflows. This means training supervisors on AI capabilities and limitations, and establishing clear escalation procedures when AI systems flag potential issues.

Many large firms have already started establishing centers of excellence to review, share, and build expertise around AI use across their organizations. (FINRA AI Applications) But smaller firms often struggle with where to start.

Key Changes to Rule 3110 Supervisory Duties

The notice proposes specific amendments to Rule 3110 that directly impact how firms supervise AI-enabled activities. These changes aren't suggestions - they're requirements that will become enforceable once the rule-making process concludes.

Expanded scope of supervision: Traditional supervision focused on human activities. Now, firms must supervise AI systems as if they were employees, with similar oversight requirements and accountability measures.

Enhanced training requirements: Supervisors need specific training on AI systems used within their areas of responsibility. This includes understanding how these systems make decisions, their limitations, and potential failure modes.

Modified reporting structures: The notice suggests that firms may need to designate specific AI oversight roles or modify existing supervisory hierarchies to accommodate AI supervision requirements.

Compliance teams should note that these changes align with broader industry trends. In 2024, the SEC imposed over $600 million in penalties across more than 70 financial institutions for recordkeeping violations. (SEC Rule 17a-4) The message is clear: regulators are taking compliance seriously, and AI supervision will be no exception.

Modernizing Branch and Remote Supervision

One of the most practical aspects of Notice 25-07 addresses the reality of modern work arrangements. The traditional model of branch supervision, designed for physical offices, doesn't fit today's hybrid and remote work environments.

Remote supervision protocols: Firms must establish clear procedures for supervising AI use by remote employees. This includes ensuring that home offices have appropriate security measures and that AI tools used remotely meet the same standards as those used in traditional offices.

Technology infrastructure requirements: Remote supervision requires robust technology infrastructure. Firms need systems that can monitor AI use regardless of location and ensure consistent application of supervisory controls.

Communication standards: The notice emphasizes the importance of clear communication channels between remote employees using AI tools and their supervisors. This includes regular check-ins, reporting procedures, and escalation protocols.

The shift toward remote work has created new compliance challenges. Since late 2021, over 100 firms have been fined exceeding $2 billion for recordkeeping failures due to 'off-channel communications' sweep. (SEC Rule 17a-4) AI supervision in remote environments adds another layer of complexity that firms must address.

Practical Implementation Checklist

Based on Notice 25-07's requirements, here's a practical checklist for compliance teams:

Immediate actions (before July 14, 2025 comment deadline):

• Review current AI tools and workflows to identify supervision gaps

• Assess existing Written Supervisory Procedures (WSPs) for AI-related content

• Identify staff who need AI supervision training

• Document current AI use cases and associated risks

Short-term implementation (Q3-Q4 2025):

• Update WSPs to include AI supervision requirements

• Implement real-time AI monitoring systems

• Train supervisory staff on AI oversight responsibilities

• Establish AI-specific reporting and escalation procedures

Long-term compliance (2026 and beyond):

• Regular review and testing of AI supervision controls

• Ongoing training programs for new AI tools and updates

• Integration of AI supervision into regular examination preparation

• Continuous monitoring and improvement of AI oversight processes

Compliance reviews have become increasingly important as regulatory scrutiny intensifies. In 2024, the SEC ordered financial companies to pay $8.2 billion in fines and penalties, a 67% increase from 2023. (Compliance Review) This trend suggests that AI supervision will face similar scrutiny.

Technology Solutions for AI Supervision

The notice doesn't just identify problems - it points toward solutions. Modern compliance technology can automate many of the supervision requirements outlined in Notice 25-07.

Real-time monitoring capabilities: Advanced compliance platforms can track AI outputs in real-time, flagging potential issues before they become problems. This proactive approach aligns with FINRA's emphasis on continuous supervision rather than periodic reviews.

Automated documentation: Instead of manual logging, automated systems can capture every AI interaction, creating comprehensive audit trails without additional staff burden.

Risk-based alerting: Smart systems can prioritize alerts based on risk levels, ensuring that supervisors focus their attention on the most critical issues first.

The market for RegTech is projected to reach $21 billion by 2027, reflecting the growing demand for technology solutions to compliance challenges. (Compliance Review) AI supervision represents a significant portion of this growth.

Firms exploring AI tools built by financial technology startups and vendors need to ensure these solutions meet FINRA's supervision requirements. (FINRA AI Applications) This means evaluating not just the AI capabilities but also the supervision and compliance features.

Written Supervisory Procedures Updates

Notice 25-07 makes it clear that existing WSPs need significant updates to address AI supervision. This isn't about adding a few paragraphs - it requires a comprehensive review of supervisory procedures.

AI-specific policies: Firms need clear policies governing AI use, including approved tools, prohibited applications, and escalation procedures for AI-related issues.

Supervision protocols: Traditional supervision protocols need modification to address AI-specific risks and requirements. This includes defining roles and responsibilities for AI oversight.

Training requirements: WSPs must specify training requirements for both AI users and supervisors, including initial training and ongoing education as AI tools evolve.

Documentation standards: Clear standards for documenting AI use, decisions, and outcomes must be established and integrated into existing recordkeeping procedures.

Luthor's platform can help automate many of these WSP updates, providing templates and guidance based on current regulatory requirements. (Luthor Compliance) This automation reduces the time and effort required to bring WSPs into compliance with Notice 25-07.

Industry Impact and Timeline

The impact of Notice 25-07 extends beyond individual firms to the entire securities industry. With over 3,300 registered brokerage firms under SEC oversight, the implementation challenges are substantial. (SEC Rule 17a-4)

Comment period significance: The July 14, 2025 comment deadline isn't just a formality. FINRA will use industry feedback to refine the final rules, making this an opportunity for firms to influence the regulatory outcome.

Implementation timeline: While the notice doesn't specify an implementation deadline, industry observers expect final rules by late 2025 or early 2026, with compliance required within 12-18 months thereafter.

Competitive implications: Firms that proactively implement AI supervision controls may gain competitive advantages, while those that wait may face implementation challenges and potential regulatory scrutiny.

FINRA's annual budget supports an organization of about 4,000 employees dedicated to regulatory programs, indicating the resources available for enforcement once these rules take effect.

Cost Considerations and ROI

Implementing AI supervision controls requires investment, but the cost of non-compliance is typically much higher. On average, businesses spend about 25% of their revenue on compliance, and nearly 1 in 5 firms estimate over half of their revenue goes to compliance-related costs.

Technology investment: Modern compliance platforms require upfront investment but can reduce long-term compliance costs through automation and efficiency gains.

Training costs: Staff training represents a significant but necessary expense. However, well-trained staff reduce the risk of compliance failures and associated penalties.

Opportunity costs: Firms that delay implementation may face rushed compliance efforts later, which are typically more expensive and less effective than planned implementations.

The good news is that 48% of compliance teams believe AI could improve internal efficiency and 35% say it would help them keep up with fast-changing regulations. This suggests that AI supervision tools can provide benefits beyond mere compliance.

Preparing for Examinations

FINRA employs a combination of routine examinations, continuous surveillance, and enforcement actions to ensure member firms comply with regulations. AI supervision will certainly be included in future examination cycles.

Documentation readiness: Examiners will expect to see comprehensive documentation of AI supervision controls, including policies, procedures, training records, and monitoring logs.

Staff preparedness: Supervisory staff should be prepared to explain AI oversight procedures and demonstrate their understanding of the systems they supervise.

System demonstrations: Firms should be ready to demonstrate their AI supervision systems, showing how they monitor, document, and control AI use.

Compliance reviews are proactive measures that organizations take to minimize risks and strengthen their compliance frameworks. (Compliance Review) Regular self-assessments of AI supervision controls can help identify and address issues before examinations.

Looking Ahead: The Future of AI Supervision

Notice 25-07 represents just the beginning of AI regulation in the securities industry. As AI technology continues to evolve, supervision requirements will likely become more sophisticated and comprehensive.

Emerging technologies: New AI capabilities will require updated supervision approaches. Firms should build flexible systems that can adapt to changing technology and regulatory requirements.

Cross-regulatory coordination: FINRA's approach to AI supervision will likely influence other regulators, creating industry-wide standards for AI oversight.

International considerations: Global firms must consider how AI supervision requirements in different jurisdictions interact and potentially conflict.

AI agents represent a significant shift in conducting audits, assessing risks, and managing compliance. (AI Agents Transform Audit) These autonomous programs can perform tasks and make decisions based on predefined logic, data analysis, and contextual learning, offering new possibilities for compliance automation.

Final Thoughts and Next Steps

FINRA Regulatory Notice 25-07 isn't just another regulatory update - it's a fundamental shift in how the securities industry must approach AI supervision. The notice extends traditional supervisory duties into new territory while modernizing existing requirements for today's work environment.

The key takeaway is that preparation starts now. Firms that wait until final rules are published will face compressed implementation timelines and potentially higher costs. Those that begin planning and implementing controls now will be better positioned for compliance and may gain competitive advantages.

For compliance teams feeling overwhelmed by these requirements, remember that 90% of risk and compliance teams who have embraced AI say it's already positively impacting their work. The technology exists to meet these challenges - it's a matter of implementing the right solutions.

Luthor's AI-powered compliance platform can help automate many of the supervision requirements outlined in Notice 25-07, from real-time AI output monitoring to automated policy updates. (Luthor Marketing Compliance AI) Our platform provides the real-time risk detection and continuous monitoring capabilities that modern compliance teams need to stay ahead of regulatory requirements.

If you're ready to tackle AI supervision requirements with confidence, we'd love to show you how our platform can streamline your compliance processes and keep you audit-ready. Request demo access to see how Luthor can help you meet FINRA's evolving expectations while reducing the time, effort, and risk associated with AI compliance.

Frequently Asked Questions

What is FINRA Regulatory Notice 25-07 and why is it important?

FINRA Regulatory Notice 25-07, released on April 14, 2025, extends Rule 3110 supervisory duties to generative AI workflows and modernizes branch supervision requirements. This notice represents a significant shift in how broker-dealers must approach AI supervision, requiring firms to implement comprehensive oversight frameworks for AI tools used in securities operations.

How does FINRA Notice 25-07 impact existing compliance frameworks?

The notice requires firms to integrate AI supervision into their existing compliance management systems, similar to how marketing compliance AI tools must align with advertising regulations. Given that the SEC imposed over $600 million in penalties in fiscal year 2024 for recordkeeping violations, firms must ensure their AI supervision meets the same rigorous standards as traditional compliance processes.

What are the key supervision requirements for AI tools under Notice 25-07?

Firms must establish written supervisory procedures specifically for AI applications, designate qualified supervisors for AI workflows, and maintain comprehensive records of AI decision-making processes. The requirements also include regular testing and validation of AI systems, similar to how firms must maintain compliance checklists for other regulatory requirements.

How should firms prepare for AI supervision compliance in 2025?

Firms should conduct comprehensive compliance reviews of their current AI usage, establish AI governance committees, and implement real-time monitoring systems. With the RegTech market projected to reach $21 billion by 2027, investing in automated compliance solutions can help firms stay ahead of evolving AI supervision requirements while reducing manual oversight burdens.

What are the penalties for non-compliance with AI supervision requirements?

While specific penalties for AI supervision violations aren't detailed in Notice 25-07, FINRA's enforcement history suggests significant consequences. Given that over 100 firms have been fined exceeding $2 billion since 2021 for recordkeeping failures, and the SEC ordered $8.2 billion in fines in 2024 (a 67% increase from 2023), firms should expect substantial penalties for AI supervision violations.

How do AI agents fit into the new supervision framework?

AI agents, which are autonomous programs that perform tasks and make decisions based on predefined logic and contextual learning, require enhanced supervision under Notice 25-07. Unlike traditional robotic process automation, AI agents adapt and learn from experience, making them more complex to supervise and requiring specialized oversight procedures to ensure compliance with securities regulations.

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