SEBI proposes stricter accountability for AI/ML use in financial markets

Market infrastructure institutions and intermediaries will now be held accountable for the use of artificial intelligence (AI) and machine learning (ML) tools, under the latest proposed norms by the Securities and Exchange Board of India (SEBI). Under these regulations, entities such as mutual funds, stockbrokers, and third-party providers will be solely responsible for safeguarding investor data privacy, security, and integrity.

The consultation paper, released on November 13, outlines amendments allowing SEBI to take action in case of lapses in AI/ML usage. SEBI stresses these entities must ensure data privacy, be accountable for actions based on AI outputs, and uphold fiduciary responsibility for investor data, all while complying with applicable laws.

The proposed amendments pertain to the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018, the SEBI (Depositories and Participants) Regulations, 2018, and the SEBI (Intermediaries) Regulations, 2008.

“The board may, in case of violation of the provisions [of sub-regulation (1)], take such action as it may deem fit including action under Chapter V of these regulations,” the consultation paper said.

SEBI has defined "artificial intelligence tools" to clarify their application in the proposed norms. These tools may include software programs, executable systems, or a combination used by stock exchanges, clearing corporations, or internally within entities for trading, settlement, compliance, or other business activities, whether offered to investors or used internally.

SEBI has already mandated reporting requirements for AI/ML systems used by stockbrokers, depository participants, market infrastructure institutions (MIIs), and mutual funds through three circulars issued in 2019. Now SEBI seeks to assign responsibility to the intermediaries, MIIs and regulated persons to ensure investor protection.

In October, SEBI issued a consultation paper outlining guidelines for platforms using AI/ML to prevent fraud, impersonation, and the activities of unregistered entities. To comply, platforms must implement AI/ML solutions and register as specified digital platforms (SDPs) under SEBI.

AI and ML tools are increasingly used in financial markets to improve efficiency, decision-making, risk management, and investor access. These technologies help streamline operations for intermediaries and securities market institutions, enhancing market analysis, stock selection, investment strategies, and portfolio building. However, while their adoption is vital, SEBI emphasises the importance of safeguarding investors.