CRS Reviews Artificial Intelligence Use in Capital Markets
The Congressional Research Service ("CRS") reviewed how artificial intelligence ("AI") is being used in capital markets and policy considerations for Congress and regulators.
In an "In Focus" Report, the CRS explained that firms use AI for investment research, trading, portfolio management, robo-advisory services, compliance monitoring, and risk management. The CRS added that large language models are increasingly applied to investor communication, code generation, and document analysis, while regulators have observed machine learning uses in trade surveillance, options pricing, and sentiment analysis.
The CRS said that the SEC identified 30 AI use cases, including detecting market manipulation, analyzing filings, and enhancing internal collaboration. The CRS noted that recent federal guidance requires agencies to create AI strategies, share resources, and prepare their workforce for AI adoption. The SEC recently launched an AI Task Force and convened industry roundtables to discuss risks, costs, and governance. The CRS recalled that a 2023 proposal on predictive data analytics was later withdrawn, leaving the future of AI-specific rulemaking uncertain.
The CRS said that AI raised significant questions around governance, investor protection, and systemic stability. CRS highlighted specific concerns over explainability, accountability, and misleading "AI washing" in disclosures. It flagged additional risks from reliance on only a few large providers, herding effects from common models, potential algorithmic collusion, bias in training data, and vulnerabilities tied to data security and cyberattacks. The CRS also stressed the financial, environmental, and workforce transition costs of adoption.
The CRS outlined potential approaches Congress an regulators might consider when assessing whether current securities laws address these AI risks adequately, including enabling regulatory sandboxes, expanding data monitoring, strengthening oversight tools, and coordinating responses to systemic risks.