While AI prompted trading or compliance mechanisms in the securities market have benefits like increased efficiency, accuracy of decision making, risk management, timely reporting etc., it is equally important to ensure the protection of investors with the usage of such tools. To create a balance between using AI and ensuring investor protection, SEBI has released a consultation paper proposing changes to its regulations. The aim is to establish clear accountability for the use and management of AI tools by entities under SEBI’s supervision. In addition to already mandated reporting requirements in respect of the usage of AI/ML systems, SEBI now intends to make the entities solely responsible for all the consequences of such use including ensuring the privacy, security and integrity of the data of investors and stakeholders, especially the data maintained by it in a fiduciary capacity, throughout the processes involved.
Artificial Intelligence (“AI”) is rapidly changing the way industries operate, including the securities market. As commonly understood, AI refers to executable programmes in machines and computers that can learn, reason and act in ways similar to human intelligence. It learns from analysing data sets and performs on the basis of minimal (or even without) human assistance. For this purpose, AI uses ‘Machine Learning’ (“ML”) techniques including natural language processing (voice to text, text to systems, robo chat bots etc.), neural networks, feedback mechanism etc. including a combination thereof to analyse large amounts of data. AI tools and systems can perform tasks requiring human intelligence, such as data analysis, decision-making, and compliance. These tools are being increasingly used for trading, investment strategies, compliance operations, and investor services.
As proposed in the consultation paper, the expression ‘AI’ would mean any “application or software programme or executable system or a combination thereof” offered by the depository to investors/stakeholders. It would also include such application/programme/system which is used internally by the depository to facilitate trading and settlement, carry out its activities including for compliance requirements and the same is portrayed as part of the public product offering or under usage for compliance or management or other business purpose.
The consultation paper has suggested to insert new provisions for “Usage of Artificial Intelligence Tools” in the three following regulations:
- The SEBI (Intermediaries) Regulations, 2008
- The Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 and
- The SEBI (Depositories and Participants) Regulations, 2018
The said provisions would make the intermediary, stock exchange, clearing corporation and depository using artificial intelligence solely responsible, in a fiduciary capacity throughout the processes involved, for the privacy, security and integrity of investors’ data if it uses artificial intelligence tools or technologies for conducting its business and servicing its clients or constituents. What is equally interesting is that the consultation paper suggests that they shall also be solely responsible for the output arising from such tools and techniques that is relied upon or dealt with. They will also be solely responsible for compliance with laws. Such AI or ML techniques may be either designed by the entity itself or procured from any third-party technology service providers. Further, this responsibility would be assigned to the entities irrespective of the scale and scenario of adoption of such tools by them.
These proposed changes could lead to stronger investor trust and better data safeguards, since entities using AI would be required to maintain high privacy and security standards. By clarifying who is accountable for the results produced by AI tools, SEBI aims to make market participants more cautious about how they deploy and manage advanced technologies. In the long run, this framework may encourage more responsible innovation, as entities balance the benefits of AI-driven processes with the need to protect investor interests and uphold market integrity.
Source: https://www.sebi.gov.in/reports-and-statistics/reports/nov-2024/proposed-amendments-with-respect-to-assigning-responsibility-for-the-use-of-artificial-intelligence-tools-by-market-infrastructure-institutions-registered-intermediaries-and-other-persons-regulated-b-_88470.htm
Written by: Sanchita Agarwal
Co-authored by: Amiya Mukherjee
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