Canadian securities regulators test the use of artificial intelligence

On July 15, 2021, the Ontario Securities Commission, British Columbia Securities Commission, Autorité des Marchés Financiers, and Alberta Securities Commission jointly announced that they had selected the Canadian-based technology firm, Bedrock AI Inc. (Bedrock), to support their Cross-Border Testing (CBT) initiative.

As part of the CBT initiative, the Canadian securities regulators are working with Bedrock to assess how AI technology (natural learning processing, machine learning, and computational techniques) can be used to review and process corporate disclosure requirements, identify corporate risks, and enhance the supervisory and enforcement role of regulators. The CPT initiative remains in its initial phases and will likely be subject to review and comments by market participants. However, once this technology is implemented, it will likely prompt the Canadian securities regulators to amend current regulatory practices.

This news marks the first time Canadian securities regulators have announced the incorporation of AI tools into their regulatory practices.

Firms and other market participants affected by securities regulation should take advantage of the potential benefits associated with AI technology. They should also assess how additional regulatory oversight created by AI technology will impact their day-to-day business, and consider whether they should implement internal AI technology to ensure compliance with regulatory standards

The benefits of AI in the securities industry

AI technology presents several benefits to investors, firms and regulators.

Potential benefits for investors include more efficient market transactions, enhanced access to products and services, lower costs, and improved compliance efforts that make the market fairer and safer.

For firms, this technology enables greater customer satisfaction, increased monitoring of customer identification or data, and easier compliance with new regulatory changes.

Likewise, AI technology presents advantages for regulators. AI tools can monitor customer identification and help detect financial crimes, such as money laundering, bribery, tax evasion, insider trading, or market manipulation.

Key challenges and regulatory considerations

Incorporating AI technology can also present challenges specific to securities market participants. For instance, AI tools may be subject to data bias that would hinder their effectiveness in the securities industry. Most AI tools must obtain and rely upon an underlying dataset.

For investors and firms, data biases can result in overregulation, producing unfair and discriminatory results. For their part, regulators may have to overcome the challenges of fraudulent or nefarious AI tools.

Faulty data sets can also generate false positives, which indicate that potential regulatory violations exist even whey they do not. For firms, responding to a false positive claim can create additional legal costs and disrupt day-to-day business. While for regulators, a false positive wastes time and resources that could have been used investigating other issues. 

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