SEBI proposes making registered intermediaries, MIIs responsible for output of AI tools

The capital-markets regulator has already mandated reporting requirements on the usage of AI/ML systems.

The market regulator has proposed that every SEBI regulated entity that uses artificial intelligence/machine learning (AI/ML) tools, either designed by the entity or procured from third parties, be made responsible for the output from the usage of these tools and the privacy of investors' data.

In a consultation paper released on November 13, the Securities and Exchange Board of India (SEBI) has said, "The use of AI/ML systems/tools are on the rise including in the financial markets to enable stakeholders to make informed decisions and thus may play an increasingly significant role in market analysis, stock selection, investment strategies and in building a portfolio in their invested securities."

The paper stated that, while this may increase efficiency and accuracy, and help with better risk management and provide other benefits, "it is equally important to ensure the protection of investors with the usage of such tools".

Therefore, the regulator has already mandated reporting requirements on the usage of AI/ML systems. Now it is proposing to assign responsibility on the intermediaries, MIIs and regulated persons.

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The paper elaborated on the meaning of artificial intelligence, as generally understood, as focussing on " executable programmes in machines and computers that can learn, reason and act in ways that would normally require human intelligence. AI techniques are designed to learn from analysing data sets and perform on the basis of minimal or without any human assistance".

It added, "AI uses ‘Machine Learning’ techniques including natural language processing (voice to text, text to systems, robo chat bots, etc), neural networks, statistical heuristics, feedback mechanism, etc, including a combination thereof to analyse large amounts of data, learning from such data and performing tasks without explicit instructions."

The proposed amendment will describe artificial intelligence as such: "the expression “artificial intelligence tools” may include any application or software programme or executable system or a combination thereof, offered by a recognized stock exchange or a recognized clearing corporation to investors/stakeholders or used internally by it to facilitate trading and settlement, carry out its activities including compliance requirements and the same is portrayed as part of the public product offering or under usage for compliance or management or other business purposes."

The proposed amendments are for the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 and the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, with respect to assigning responsibility for the use of artificial intelligence (“AI”) tools by Market Infrastructure Institutions, Registered Intermediaries and other persons regulated by SEBI.

Public comments and suggestions need to be sent in by November 28.