CSA Guidance on AI in Capital Markets: Key Insights

In response to the growing use of artificial intelligence in Canadian capital markets, the Canadian Securities Administrators (CSA) recently provided guidance on how existing securities laws apply to AI systems. The CSA’s Staff Notice and Consultation 11-348 seeks feedback from stakeholders on potential changes needed to adapt to the rise of AI, with comments due by March 31, 2025.

Key Themes Regarding AI Systems in Capital Markets
The CSA outlined several key themes related to the use of AI systems in capital markets:
1. Technology and Securities Regulation: While securities laws are technology-neutral, different technologies may be regulated differently based on the activity they perform.
2. AI Governance & Oversight: Policies should be in place to address the unique risks of AI systems, including human oversight and AI literacy.
3. Explainability: The transparency and accountability of AI systems must be balanced with advanced capabilities for compliance with securities laws.
4. Disclosure: Proper disclosure of AI usage is crucial to meet existing disclosure obligations and avoid “AI washing.”
5. Conflicts of Interest: Guarding against conflicts of interest in AI decision-making is essential, given factors such as biased data sets or lack of explainability.

Specific Guidance for Market Participants
For various regulated industry participants, the CSA provided specific guidance:
1. Registrants:
– Disclose AI use that changes service offerings.
– Maintain records of compliance.
– Avoid outsourcing registerable activities without verification and addressing conflicts of interest.

2. Advisers and Dealers:
– Ensure human oversight, explainability, and regular testing in AI-related activities.
– Use caution when depending on AI to autonomously manage portfolios, as regulatory requirements may be challenging to meet.

3. Investment Fund Managers (IFMs):
– Provide oversight of AI systems to ensure transparency and avoid biases and conflicts of interest.
– Disclose AI usage as part of the investment strategy, with investor approval for material changes.
– Maintain transparency for funds using AI to track indices.

The CSA’s guidance aims to help market participants navigate the evolving landscape of AI in capital markets while upholding the necessary standards of transparency, oversight, and compliance with securities laws. Stakeholders are encouraged to offer feedback to shape future regulatory requirements around AI usage in Canadian capital markets.