Two US senators, Martin Heinrich (D-NM) and Mike Rounds (R-SD) have introduced bipartisan legislation to promote artificial intelligence (AI) innovation in the financial services industry.

The senators’ press release says their bill, The Unleashing AI Innovation in Financial Services Act, will establish regulatory guardrails at financial regulatory agencies for regulated entities to test AI projects, allowing them to experiment with cutting-edge technologies in a safe way.

On the House of Representatives side, the legislation is being led by Representatives French Hill (R-AR) and Ritchie Torres (D-NY).

Sandbox creation

The proposed law establishes regulatory guardrails for AI test projects – or regulatory sandboxes – at the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, the National Credit Union Administration and the Federal Housing Finance Agency.

(So the regulated entities included here would be banks, credit unions, investment advisers, investment companies, broker-dealers, clearing agencies, exchanges, transfer agents, etc.)

Regulated entities would apply through their primary regulator and must be able to demonstrate the project will serve the public interest (including consumer protection), enhance efficiency or increase competitiveness, and not present a systemic risk to the financial system.

“The Act is designed to foster innovation and economic growth by providing a controlled environment where new financial products and services that use AI can be tested.”

Senator Mike Rounds, co-sponsor of the bill

The goal: Enable each financial regulatory agency to apply for a license to establish an AI sandbox that enables each of them to experiment with AI test projects without what the bill’s authors call “unnecessary and unduly burdensome” regulation or an expectation of retroactive enforcement action.

Alternative compliance strategies required

Applications must do more than explain the AI test project being contemplated by the regulated entity; they must also explain alternative compliance strategies for ensuring investor and market protection.

More specifically, each agency should identify the regulation sought to be waived or modified in offering the sandbox and then propose an alternative method for the regulated entity to comply with the regulation or statute. This alternative method must include details about why the alternative method is essential to the operation of the entity.

Beyond that, the applying entity would then need to explain how the AI test project would:

• serve the public interest, improve consumer access to a financial product or service, or promote consumer protection;
• enhance efficiency or operations, foster innovation or competitiveness, improve risk management and security, or enhance regulatory compliance;
• meet the general purposes of the anti-money-laundering and countering the financing of terrorism obligations under US Code;
• not present a systemic risk to the US financial system; and
• not present a national security risk to the US.

Applicants would also have to provide an estimate of the economic impact of the AI test project if approved. Two or more regulated entities would be able to submit joint applications. The agency approving the applications is whatever financial regulatory agency that enforces the statute or regulation that is the subject of the alternative compliance strategy.

Each participant would be expected to submit an annual report on the outcomes associated with their respective sandbox to the Senate Committee on Banking, Housing, and Urban Affairs and the House’s Committee on Financial Services.

Statements from lawmakers

The sandbox is not meant to limit the authority of any financial regulatory agency in taking an enforcement action against a regulated entity with respect to any fraud related to the AI test project, the bill’s authors stressed.

“The Unleashing AI Innovation in Financial Services Act is designed to foster innovation and economic growth by providing a controlled environment where new financial products and services that use AI can be tested,” said Senator Rounds.

“By creating these sandboxes, we aim to strike a balance between encouraging innovation and maintaining consumer protection, ultimately strengthening our financial system and keeping our country at the forefront of global financial technology,” he said.

We will continue pushing for enhanced competitiveness and results while ensuring that consumers’ interests remain paramount,” added Representative Torres.