In a preemptive move to protect financial markets and the retirement savings system from being unfairly manipulated by AI-generated content, a bipartisan pair of senators introduced legislation to address the potential threats.
Sens. Mark Warner (D-VA) and John Kennedy (R-LA)—both members of the Senate Committee on Banking, Housing, and Urban Affairs—on Dec. 18 introduced the Financial Artificial Intelligence Risk Reduction Act (S. 3554), mandating that financial regulators address uses of AI-generated content that could disrupt financial markets.
More specifically, the legislation requires the Financial Stability Oversight Council (FSOC) to coordinate financial regulators’ response to threats to the stability of the markets posed by AI, including the use of “deepfakes” by malign actors and other practices associated with the use of AI tools that could undermine the financial system, such as trading algorithms.
S. 3554 would also require FSOC to identify gaps in existing regulations and exam standards that could hinder effective responses to AI threats and implement specific recommendations to address those gaps.
What’s more, in response to the potential magnitude of the threat, the legislation provides for treble penalties when AI is used in violations of Securities and Exchange Commission (SEC) rules, including acts of market manipulation and fraud. S. 3554 also makes clear that anyone who uses an AI model is responsible for making sure that everything that model does complies with all securities laws.
In fact, in its annual report released Dec. 14, the FSOC for the first time identified the use of AI in financial services as a vulnerability in the financial system. While AI offers potential benefits—such as reducing costs and improving efficiencies—the report warns that the use of AI can introduce certain risks, including safety-and-soundness risks like cyber and model risks. As such, the Council recommended that financial institutions, market participants, and regulatory and supervisory authorities “deepen expertise and capacity to monitor AI innovation and usage and identify emerging risks.”
“AI has tremendous potential but also enormous disruptive power across a variety of fields and industries—perhaps none more so than our financial markets,” Sen. Warner said in a statement in introducing the legislation. “The time to address those vulnerabilities is now.”
Added Sen. Kennedy, “AI is moving quickly, and our laws should do the same to prevent AI manipulation from rattling our financial markets. Our bill would help ensure that AI threats do not put Americans’ investments and retirement dreams at risk.”
The legislation was referred to the Senate Banking, Housing, and Urban Affairs Committee. A copy of the Financial Artificial Intelligence Risk Reduction Act is available here.
