U.S. senators propose huge fines for AI-driven securities fraud or market manipulation

U.S. Senators Eye Tough Penalties for AI-Fueled Securities Fraud or Market Manipulation

Senators Mark Warner (D-Virginia) and John Kennedy (R-Louisiana) have proposed a comprehensive bill to tackle potential risks artificial intelligence (AI) could pose to the U.S. financial system.

The proposed legislation empowers the Securities and Exchange Commission (SEC) to levy triple penalties on companies that utilize AI to violate regulatory standards. Furthermore, it authorizes several regulatory bodies to explore new avenues for regulating AI usage within the financial sector.

For instance, an advisory committee led by the Department of the Treasury was tasked with conducting a series of tabletop exercises to examine how the financial sector can withstand AI-related disruptions, which could involve automated trading algorithms, among others.

The bill also mandates the Financial Stability Oversight Council (FSOC) to coordinate government efforts in assessing AI risks and put forth specific recommendations that regulatory bodies could translate into rules or regulations.

"AI presents not only immense potential but also immense disruptive power across numerous sectors and industries – arguably, none more so than our financial markets," Warner stated. "Now is the time to address these vulnerabilities."

The legislation follows warnings issued by the FSOC, marking its first time raising AI-related risks for the financial system. The Bank of England also voiced similar concerns earlier in the month.

"AI is advancing rapidly, and our laws should work to prevent AI manipulation from disrupting our financial markets," Kennedy commented. "Our legislation will help ensure that AI threats do not overburden the investments and retirement savings of Americans."

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Background:

While the proposed U.S. legislation addressed AI risks in the finance sector, there are several other initiatives and bills that tackle broader aspects of AI regulation and digital asset oversight, which could indirectly impact AI-driven securities fraud or market manipulation regulations. Among them:

1. FIT21 Legislation: The bipartisan FIT21 bill seeks to clarify digital asset regulations, combat fraud, and protect market participants by establishing clear digital asset definitions, assigning regulatory oversight, and upping disclosure, registration, and compliance requirements tailored to digital assets.
2. SEC's Cyber and Emerging Technologies Unit (CETU): The CETU, a new unit within the SEC, will focus on tackling misconduct in the crypto and AI spaces using advanced technologies like AI and machine learning, as well as investigating fraudulent activities via social media platforms, the dark web, or deceptive websites.
3. Executive Order on Digital Financial Technology: The Executive Order aims to strengthen U.S. leadership in digital financial technology by providing regulatory clarity and setting clear jurisdictional boundaries for digital asset regulators. The order also created a Working Group on Digital Asset Markets to evaluate regulations affecting the digital asset sector and address concerns related to market structure, oversight, consumer protection, and risk management.

While these initiatives do not specifically target AI-driven securities fraud or market manipulation, they collectively work towards enhancing regulatory oversight and combating fraud in the digital asset and AI sectors, which could indirectly address potential concerns related to AI-driven financial misconduct.