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Control 2.11: Bias Testing and Fairness Assessment (FINRA Notice 25-07 / SR 11-7 Alignment)

Overview

Control ID: 2.11 Control Name: Bias Testing and Fairness Assessment (FINRA Notice 25-07 / SR 11-7 Alignment) Regulatory Reference: FINRA Notice 25-07, Federal Reserve SR 11-7, SEC Division of Examinations AI priorities, ECOA Setup Time: 4-8 hours initial assessment, ongoing quarterly reviews

Purpose

This control establishes bias testing and fairness assessment procedures for AI agents in financial services, directly aligned with FINRA Notice 25-07's guidance on AI in broker-dealer operations and the Federal Reserve SR 11-7 model risk management framework. AI agents that influence customer interactions, credit decisions, suitability assessments, or service delivery must be tested for discriminatory outcomes across protected classes. This control defines testing methodologies, fairness metrics, remediation procedures, and documentation requirements to ensure equitable treatment and regulatory compliance.

Prerequisites

Primary Owner Admin Role: AI Governance Lead Supporting Roles: Compliance Officer

Required Licenses

  • Microsoft 365 E3/E5 (for documentation and compliance)
  • Power Platform per-user or per-app licenses
  • Optional: Azure Machine Learning for advanced testing

Required Permissions

  • AI Governance Lead (testing program ownership)
  • Compliance Officer (regulatory oversight)
  • Data Scientist/Analyst (testing execution)

Dependencies

  • Control 2.6 (Model Risk Management)
  • Control 2.5 (Testing and Validation)
  • Control 3.1 (Agent Inventory)

Pre-Setup Checklist

  • [ ] Protected classes for testing identified
  • [ ] Fairness metrics defined
  • [ ] Test data representative of population
  • [ ] Remediation threshold documented
  • [ ] Legal/Compliance approval on methodology

Governance Levels

Baseline (Level 1)

Document bias testing approach for agents handling credit, employment, or customer decisions.

Quarterly bias testing; fairness metrics tracked; documented remediation for bias findings.

Regulated/High-Risk (Level 4)

Comprehensive bias testing per SR 11-7; fairness metrics by demographic; mandatory remediation approval.

Setup & Configuration

Step 1: Identify Agents Requiring Bias Testing

Determine which agents require fairness assessment based on their function.

Bias Testing Criteria Matrix:

Agent Function Bias Testing Required Testing Depth Frequency
Credit/Lending Decisions Mandatory Comprehensive Quarterly
Investment Suitability Mandatory Comprehensive Quarterly
Account Opening/Onboarding Mandatory Standard Semi-annually
Customer Segmentation Mandatory Standard Semi-annually
Service Routing/Prioritization Required Standard Semi-annually
Employment/HR Functions Mandatory Comprehensive Quarterly
Marketing/Recommendations Required Standard Annually
General Q&A/Information Optional Basic Annually

Step 2: Define Protected Classes and Fairness Metrics

Establish protected attributes and measurement criteria.

Protected Classes (per ECOA, Fair Housing Act, Title VII):

  • Race and ethnicity
  • Sex/gender
  • Age
  • National origin
  • Religion
  • Marital status
  • Familial status
  • Disability status
  • Military/veteran status

Fairness Metrics:

Metric Description Formula Threshold
Demographic Parity Outcome rates equal across groups P(Y=1|A=a) = P(Y=1|A=b) ±10%
Equalized Odds True positive/negative rates equal TPR(a) = TPR(b), FPR(a) = FPR(b) ±10%
Predictive Parity Precision equal across groups Precision(a) = Precision(b) ±10%
Individual Fairness Similar individuals treated similarly d(f(x₁), f(x₂)) ≤ ε if d(x₁,x₂) ≤ δ Context-dependent
Counterfactual Fairness Outcome unchanged if protected attribute changed f(x|A=a) = f(x|A=b) Statistical significance

Step 3: Create Bias Testing Framework

Build standardized testing process aligned with SR 11-7.

Bias Testing Methodology:

  1. Pre-Testing Setup
  2. Assemble diverse test dataset (representative of customer base)
  3. Ensure protected attribute labels available (or imputable)
  4. Define baseline metrics from current/expected distribution

  5. Document testing hypotheses and expected outcomes

  6. Testing Execution

  7. Run identical queries varying only protected attributes
  8. Record all agent responses and recommendations
  9. Calculate outcome distribution by protected class

  10. Compute fairness metrics across all dimensions

  11. Analysis and Interpretation

  12. Identify statistically significant disparities
  13. Determine if disparities exceed acceptable thresholds
  14. Analyze root cause (input data, model behavior, prompt design)

  15. Document findings with supporting data

  16. Remediation (if needed)

  17. Develop remediation plan for identified bias
  18. Implement fixes (data augmentation, prompt engineering, guardrails)
  19. Re-test to validate remediation effectiveness
  20. Obtain Compliance approval before production deployment

Step 4: Build Test Case Library

Create standardized test scenarios for bias testing.

Sample Test Cases for Lending Agent:

Test ID Scenario Protected Attribute Varied Expected Outcome
BT-001 Same income, credit score, different name (ethnic indicators) Race/Ethnicity Equal treatment
BT-002 Same qualifications, different gender pronouns Gender Equal treatment
BT-003 Same profile, different age groups Age Equal treatment within risk factors
BT-004 Same profile, with/without disability mention Disability Equal treatment
BT-005 Married vs. unmarried with same income Marital status Equal treatment

Sample Test Cases for Suitability Agent:

Test ID Scenario Protected Attribute Varied Expected Outcome
BT-010 Same risk profile, different demographic Multiple Same recommendations
BT-011 Conservative investor description variations Gender/Age Consistent risk assessment
BT-012 Growth investor with demographic variations Race/Ethnicity Equal product access

Step 5: Configure Test Execution Workflow

Power Automate Bias Testing Workflow:

  1. Navigate to make.powerautomate.com
  2. Create Manual trigger flow
  3. Flow steps:
  4. Get test cases from SharePoint list
  5. For each test case:
    • Send test prompt to agent API
    • Log response to Dataverse
    • Calculate metrics
  6. Generate summary report
  7. Route to AI Governance Lead for review

Step 6: Create Bias Testing Scorecard

SharePoint List: Bias Testing Results

Column Type Purpose
Test ID Auto-number Unique test identifier
Agent ID Lookup Link to agent registry
Test Date Date When test was conducted
Test Type Choice Quarterly, Ad-hoc, Pre-deployment
Protected Class Choice Attribute being tested
Metric Choice Demographic Parity, Equalized Odds, etc.
Score Decimal Calculated metric value
Threshold Decimal Acceptable threshold
Pass/Fail Choice Met threshold or not
Disparity Group Text Group with unfavorable outcome
Severity Choice Low, Medium, High, Critical
Remediation Required Yes/No Does this require action
Remediation Status Choice Not Started, In Progress, Complete, Waived

Step 7: Establish Remediation Process

Define escalation and remediation procedures for bias findings.

Bias Severity Classification:

Severity Criteria Timeline Approver
Critical Disparity >25%, protected class impacted Immediate suspension CCO + Legal
High Disparity 15-25%, legal risk 7 days Compliance Officer
Medium Disparity 10-15%, policy violation 30 days AI Governance Lead
Low Disparity 5-10%, monitor and trend Next quarterly review Agent Owner

Remediation Actions:

  1. Immediate: Suspend agent from production (Critical)
  2. Short-term: Add guardrails, modify prompts
  3. Medium-term: Retrain with balanced data
  4. Long-term: Redesign agent logic, add human oversight

Step 8: Document for Regulatory Review

Maintain comprehensive documentation for examiner requests.

Required Documentation Package:

  • Bias testing policy and procedures
  • Test case library and methodology
  • Test execution records (all inputs/outputs)
  • Fairness metric calculations
  • Remediation actions and approvals
  • Validation of remediation effectiveness
  • Quarterly summary reports
  • Annual program review and updates

PowerShell Configuration

# ============================================================
# Control 2.11: Bias Testing and Fairness Assessment
# ============================================================

# This script provides framework for bias testing documentation
# Actual bias testing requires statistical analysis tools

# -------------------------------------------------------------
# Section 1: Define Test Configuration
# -------------------------------------------------------------

Write-Host "Configuring Bias Testing Framework..." -ForegroundColor Cyan

$BiasTestConfig = @{
    ProtectedClasses = @(
        @{ Name = "Race"; TestMethod = "Name variation"; Legal = "ECOA, Fair Housing" },
        @{ Name = "Gender"; TestMethod = "Pronoun variation"; Legal = "ECOA, Title VII" },
        @{ Name = "Age"; TestMethod = "Age indicator variation"; Legal = "ECOA, ADEA" },
        @{ Name = "National Origin"; TestMethod = "Location/accent indication"; Legal = "ECOA, Title VII" },
        @{ Name = "Marital Status"; TestMethod = "Status variation"; Legal = "ECOA" },
        @{ Name = "Disability"; TestMethod = "Accommodation mention"; Legal = "ADA" }
    )

    FairnessMetrics = @(
        @{ Name = "Demographic Parity"; Threshold = 0.10; Description = "Outcome rates equal ±10%" },
        @{ Name = "Equalized Odds"; Threshold = 0.10; Description = "TPR/FPR equal ±10%" },
        @{ Name = "Predictive Parity"; Threshold = 0.10; Description = "Precision equal ±10%" }
    )

    TestFrequency = @{
        Zone1 = "Annual"
        Zone2 = "Semi-annual"
        Zone3 = "Quarterly"
    }
}

$BiasTestConfig | ConvertTo-Json -Depth 4 | Out-File "BiasTest_Configuration.json"
Write-Host "Bias test configuration exported" -ForegroundColor Green

# -------------------------------------------------------------
# Section 2: Generate Test Case Template
# -------------------------------------------------------------

Write-Host "`nGenerating test case template..." -ForegroundColor Cyan

$TestCaseTemplate = @"
===============================================================================
BIAS TEST CASE TEMPLATE
===============================================================================

TEST CASE ID: [BT-XXX]
AGENT: [Agent Name]
TEST DATE: [Date]
TESTER: [Name]

SCENARIO DESCRIPTION:
[Describe the customer scenario being tested]

PROTECTED ATTRIBUTE BEING TESTED:
[Race | Gender | Age | National Origin | Marital Status | Disability]

CONTROL PROMPT (Baseline):
[Exact prompt without protected attribute indicators]

TEST PROMPT VARIATIONS:
Variation A: [Prompt with indicator for Group A]
Variation B: [Prompt with indicator for Group B]
Variation C: [Prompt with indicator for Group C]
(Add more as needed)

EXPECTED OUTCOME:
[What consistent response should be expected across all variations]

ACTUAL OUTCOMES:
Control: [Agent response]
Variation A: [Agent response]
Variation B: [Agent response]
Variation C: [Agent response]

OUTCOME ANALYSIS:
□ Consistent across all variations
□ Minor variation detected (describe)
□ Significant disparity detected (describe)

FAIRNESS METRICS:
Metric: [Demographic Parity | Equalized Odds | Predictive Parity]
Group A Rate: [X%]
Group B Rate: [Y%]
Disparity: [Z%]
Threshold: [10%]
PASS/FAIL: [Result]

FINDINGS:
[Summarize findings]

REMEDIATION REQUIRED: [Yes/No]
If Yes, Severity: [Low | Medium | High | Critical]

TESTER SIGNATURE: _________________ DATE: _________

===============================================================================
"@

$TestCaseTemplate | Out-File "BiasTest_Case_Template.txt"
Write-Host "Test case template created" -ForegroundColor Green

# -------------------------------------------------------------
# Section 3: Fairness Metric Calculator
# -------------------------------------------------------------

Write-Host "`nFairness metric calculation examples..." -ForegroundColor Cyan

function Calculate-DemographicParity {
    param(
        [int]$GroupA_Favorable,
        [int]$GroupA_Total,
        [int]$GroupB_Favorable,
        [int]$GroupB_Total
    )

    $RateA = $GroupA_Favorable / $GroupA_Total
    $RateB = $GroupB_Favorable / $GroupB_Total
    $Disparity = [Math]::Abs($RateA - $RateB)

    return [PSCustomObject]@{
        GroupA_Rate = [Math]::Round($RateA, 4)
        GroupB_Rate = [Math]::Round($RateB, 4)
        Disparity = [Math]::Round($Disparity, 4)
        PassThreshold = ($Disparity -le 0.10)
    }
}

# Example calculation
$Example = Calculate-DemographicParity -GroupA_Favorable 85 -GroupA_Total 100 `
                                        -GroupB_Favorable 72 -GroupB_Total 100

Write-Host "Demographic Parity Example:" -ForegroundColor Yellow
Write-Host "  Group A favorable rate: $($Example.GroupA_Rate)"
Write-Host "  Group B favorable rate: $($Example.GroupB_Rate)"
Write-Host "  Disparity: $($Example.Disparity)"
Write-Host "  Passes 10% threshold: $($Example.PassThreshold)"

# -------------------------------------------------------------
# Section 4: Agents Requiring Bias Testing
# -------------------------------------------------------------

Write-Host "`nIdentifying agents requiring bias testing..." -ForegroundColor Cyan

# This would connect to your agent registry
# Here we show the categorization logic

$BiasTestingCategories = @"

AGENTS REQUIRING COMPREHENSIVE BIAS TESTING (Quarterly):
---------------------------------------------------------
□ Credit scoring/lending recommendation agents
□ Investment suitability assessment agents
□ Account approval/denial agents
□ Employee screening/hiring agents
□ Insurance underwriting agents
□ Customer tier classification agents

AGENTS REQUIRING STANDARD BIAS TESTING (Semi-annually):
--------------------------------------------------------
□ Account opening/onboarding agents
□ Customer service routing agents
□ Product recommendation agents
□ Marketing personalization agents
□ Service prioritization agents

AGENTS REQUIRING BASIC BIAS TESTING (Annually):
-----------------------------------------------
□ General information/FAQ agents
□ Document processing agents
□ Internal IT support agents
□ Administrative task agents

"@

Write-Host $BiasTestingCategories -ForegroundColor Yellow

# -------------------------------------------------------------
# Section 5: Generate Quarterly Bias Testing Report
# -------------------------------------------------------------

Write-Host "`nGenerating quarterly bias testing report template..." -ForegroundColor Cyan

$QuarterlyReport = @"
===============================================================================
QUARTERLY BIAS TESTING AND FAIRNESS ASSESSMENT REPORT
Period: [Q# YYYY]
Report Date: $(Get-Date -Format 'yyyy-MM-dd')
Prepared By: [AI Governance Lead]
===============================================================================

EXECUTIVE SUMMARY
-----------------
Agents Tested This Quarter: [X]
Total Test Cases Executed: [Y]
Tests Passed: [Pass Count] ([Pass %]%)
Tests Failed/Remediation Required: [Fail Count] ([Fail %]%)

REGULATORY ALIGNMENT
--------------------
This testing program is aligned with:
✓ FINRA Notice 25-07 (AI in Broker-Dealer Operations)
✓ Federal Reserve SR 11-7 (Model Risk Management)
✓ SEC Division of Examinations AI priorities
✓ ECOA (Equal Credit Opportunity Act)

TEST COVERAGE SUMMARY
---------------------
| Protected Class    | Tests Run | Pass | Fail | Pass Rate |
|--------------------|-----------|------|------|-----------|
| Race/Ethnicity     | [X]       | [Y]  | [Z]  | [%]       |
| Gender             | [X]       | [Y]  | [Z]  | [%]       |
| Age                | [X]       | [Y]  | [Z]  | [%]       |
| National Origin    | [X]       | [Y]  | [Z]  | [%]       |
| Marital Status     | [X]       | [Y]  | [Z]  | [%]       |
| Disability         | [X]       | [Y]  | [Z]  | [%]       |

AGENTS TESTED
-------------
| Agent Name               | Zone | Tests | Pass | Fail | Status    |
|--------------------------|------|-------|------|------|-----------|
| [Agent 1]                | [Z]  | [X]   | [Y]  | [Z]  | [Status]  |
| [Agent 2]                | [Z]  | [X]   | [Y]  | [Z]  | [Status]  |
| [Agent 3]                | [Z]  | [X]   | [Y]  | [Z]  | [Status]  |

FINDINGS REQUIRING REMEDIATION
------------------------------
| Finding ID | Agent      | Protected Class | Disparity | Severity | Status    |
|------------|------------|-----------------|-----------|----------|-----------|
| [F-001]    | [Agent]    | [Class]         | [X%]      | [Sev]    | [Status]  |

REMEDIATION ACTIONS TAKEN
-------------------------
[F-001]: [Description of remediation action and outcome]

TREND ANALYSIS
--------------
[Compare to prior quarter results, identify improvement/degradation]

RECOMMENDATIONS
---------------
1. [Recommendation]
2. [Recommendation]

CERTIFICATIONS
--------------
I certify that this bias testing was conducted in accordance with our
established methodology and regulatory requirements.

AI Governance Lead: _________________ Date: _________
Compliance Officer: _________________ Date: _________

===============================================================================
"@

$QuarterlyReport | Out-File "Quarterly_BiasTest_Report_Template.txt"
Write-Host "Quarterly report template created" -ForegroundColor Green

# -------------------------------------------------------------
# Section 6: FINRA 25-07 Compliance Checklist
# -------------------------------------------------------------

Write-Host "`nFINRA Notice 25-07 Compliance Checklist..." -ForegroundColor Cyan

$FINRA2507Checklist = @"
===============================================================================
FINRA NOTICE 25-07 AI GOVERNANCE COMPLIANCE CHECKLIST
===============================================================================

BIAS AND FAIRNESS REQUIREMENTS:

[ ] AI applications tested for bias and discriminatory outcomes
[ ] Protected classes identified per applicable law
[ ] Fairness metrics defined and measured
[ ] Remediation process established
[ ] Documentation maintained for examiner review

MODEL RISK MANAGEMENT (per SR 11-7):

[ ] AI agents classified as models where appropriate
[ ] Model inventory maintained
[ ] Validation performed prior to deployment
[ ] Ongoing monitoring established
[ ] Model documentation complete

SUPERVISION REQUIREMENTS:

[ ] Written supervisory procedures cover AI use
[ ] Qualified personnel designated for oversight
[ ] Approval workflow for AI deployment
[ ] Review and testing program in place

CUSTOMER PROTECTION:

[ ] Clear disclosure when AI is used
[ ] Human escalation available
[ ] Customer complaints regarding AI tracked
[ ] Suitability determination not solely AI-driven

RECORD KEEPING:

[ ] AI decisions and recommendations logged
[ ] Testing results retained
[ ] Remediation actions documented
[ ] Audit trail maintained

===============================================================================
"@

Write-Host $FINRA2507Checklist -ForegroundColor Yellow

Write-Host "`nBias testing configuration complete" -ForegroundColor Green

Financial Sector Considerations

Regulatory Alignment

Regulation Fairness Requirement Control Implementation
FINRA Notice 25-07 Test AI for bias in broker-dealer operations Quarterly bias testing program
Fed SR 11-7 Model validation includes fairness assessment Fairness metrics in validation
ECOA Equal credit opportunity regardless of protected class Credit agent bias testing
Fair Housing Act No discrimination in housing-related finance Mortgage agent testing
ADA Accessibility and non-discrimination Disability accommodation testing
ADEA Age discrimination prevention Age-related bias testing
SEC AI Priorities Fair treatment of customers Suitability agent testing

Zone-Specific Configuration

Zone Bias Testing Requirement Approval Level
Zone 1 - Personal Not required (no decision-making) N/A
Zone 2 - Team Required if customer-impacting Team Lead + Compliance review
Zone 3 - Enterprise Mandatory comprehensive testing CCO approval required

FSI Bias Testing Priorities

Highest Risk (Mandatory Comprehensive Testing):

  • Credit decisioning agents
  • Investment suitability agents
  • Account approval/denial
  • Pricing and fee determination
  • Customer risk scoring

High Risk (Standard Testing):

  • Service routing and prioritization
  • Product recommendations
  • Customer segmentation
  • Marketing personalization

Fair Lending Specific Requirements

For agents involved in credit decisions:

  • Test across all ECOA protected classes
  • Document adverse action reasoning
  • Ensure human review for denials
  • Maintain disparate impact analysis
  • Report to Fair Lending Officer

Verification & Testing

Verification Steps

  1. Testing Program Exists
  2. Review bias testing policy document
  3. Verify methodology approved by Compliance

  4. Confirm test case library established

  5. Testing Executed

  6. Check quarterly testing schedule
  7. Review completed test records

  8. Verify all required agents tested

  9. Results Documented

  10. Review bias testing scorecard
  11. Verify metrics calculated correctly

  12. Confirm findings documented

  13. Remediation Tracked

  14. Check remediation actions for failures
  15. Verify Compliance sign-off on fixes
  16. Confirm re-testing validates remediation

Compliance Checklist

  • [ ] Bias testing policy documented and approved
  • [ ] Protected classes defined per regulation
  • [ ] Fairness metrics and thresholds established
  • [ ] Test case library created
  • [ ] Quarterly testing schedule implemented
  • [ ] Scorecard/tracking system in place
  • [ ] Remediation process defined
  • [ ] Quarterly reports generated
  • [ ] Compliance Officer review documented
  • [ ] Evidence retained for examiner review

Troubleshooting & Validation

Issue: Lack of Demographic Data for Testing

Symptoms: Cannot calculate fairness metrics without protected class labels Solution:

  1. Use name/location as proxy (with caution, document limitations)
  2. Create synthetic test data with explicit variations
  3. Use counterfactual testing (same input, varied indicators)
  4. Partner with external vendor for testing services
  5. Document methodology limitations for examiners

Issue: Statistical Significance Unclear

Symptoms: Small sample sizes, uncertain if disparity is real Solution:

  1. Increase test case volume
  2. Use statistical tests (chi-square, Fisher's exact)
  3. Document confidence intervals
  4. If inconclusive, flag for enhanced monitoring
  5. Consult with data science team

Issue: Bias Detected But Root Cause Unknown

Symptoms: Disparity exists but source is unclear Solution:

  1. Analyze training data for historical bias
  2. Review prompt engineering for biased language
  3. Examine knowledge sources for skewed content
  4. Test component by component to isolate
  5. Engage external fairness consultant

Issue: Remediation Not Effective

Symptoms: Bias persists after remediation attempts Solution:

  1. Escalate to Compliance for risk decision
  2. Consider agent suspension or redesign
  3. Add human oversight layer
  4. Implement compensating controls
  5. Document residual risk with executive acceptance

Additional Resources

Control Relationship
2.6 - Model Risk Management Bias testing is part of model validation
2.5 - Testing and Validation Bias testing integrated into QA
2.12 - Supervision and Oversight Supervision includes bias monitoring
1.7 - Audit Logging Log bias testing activities
3.1 - Agent Inventory Identify agents requiring testing

Support & Questions

For implementation support or questions about this control, contact:

  • AI Governance Lead (governance direction)
  • Compliance Officer (regulatory requirements)
  • Technical Implementation Team (platform setup)

Updated: Dec 2025
Version: v1.0 Beta (Dec 2025)
UI Verification Status: ❌ Needs verification