New guidance from the Canadian Securities Administrators (CSA) not only sets out regulators’ views on how existing securities rules apply to the industry’s use of artificial intelligence (AI) tools but also ponders whether future reforms will be needed to specifically address AI risks.
In a staff notice, the CSA issued some new guidance for the securities industry — registered firms, issuers, investors and marketplaces — on the compliance considerations that arise from the use of AI under existing rules.
That guidance “highlights the importance of maintaining transparency, ensuring accountability and mitigating risks to foster a fair and efficient market environment,” the regulators said. For instance, it points out how situations where claims about a firm’s use of AI are overhyped — a practice known as AI washing — could represent a breach of securities rules.
“Such conduct may be misleading to the public or constitute a misrepresentation, as defined by securities legislation, and may lead to misinformed investment decisions,” the notice said.
“To avoid AI washing, vague and unsubstantiated statements that incorporate jargon in order to attract investors should not be made,” the CSA advised.
The guidance also warns against fully turning over investment decisions to an AI model.
“While it may be possible to use AI systems that design portfolios or execute portfolio management autonomously on a fully discretionary basis without a registered individual making the ultimate decisions, we are of the view that it would be challenging for a registrant using such a system to demonstrate proper compliance with securities laws,” the notice said.
“At the current stage of development of AI systems, we do not believe it is possible to use an AI system as a substitute for an advising representative acting as decision-maker for clients’ investments and consistently satisfy regulatory requirements,” it added.
However, the guidance suggests that AI could be used to help with investment research, or to alert an advisor to developments that may cause them to make portfolio changes.
“We do not regard this use as inherently problematic so long as the registrant has taken reasonable steps to verify the quality and accuracy of the information sources using AI systems …,” the notice said. It also suggested that registrants should not automatically act on this type of information but, rather, that they treat the data “… as no more than an input for their own decision-making, so that trades are ultimately recommended or directed by the registrant,” it said.
For fund managers that aim to rely on AI systems, to help them meet their fiduciary obligations to investors, the guidance said that these systems “require careful oversight and understanding by [fund managers] to ensure that such systems are explainable, transparent, and free from biases and conflicts of interest.”
Alongside the new guidance, the notice also sets out a series of consultation questions, seeking feedback on the possible need for future regulatory changes to accommodate advancements in AI.
“We are committed to providing market participants with clarity on the responsible use of AI systems to ensure Canadian capital markets remain competitive and secure,” said Grant Vingoe, CEO of the Ontario Securities Commission (OSC), in a release.
“This consultation is an important step in fostering trust and transparency as AI systems continue to reshape the capital markets landscape,” he said.
The deadline for responding to the consultation is March 31, 2025.
“The rapid evolution of AI provides opportunities and challenges for Canadian capital markets. Our goal is to support responsible innovation that benefits investors and market participants, while addressing risks associated with the use of these systems,” said Stan Magidson, chair of the CSA and chair and CEO of the Alberta Securities Commission (ASC).