Financial agencies’ AI tests could get reprieve from enforcement

Designated officials within federal financial regulatory agencies would be able to experiment with artificial intelligence tools without fear of enforcement actions under a bipartisan, bicameral bill introduced this week.

The Unleashing AI Innovation in Financial Services Act from Sens. Mike Rounds, R-S.D., and Martin Heinrich, D-N.M., and Reps. French Hill, R-Ark., and Ritchie Torres, D-N.Y., would institute “regulatory sandboxes” for AI test projects at the Federal Reserve, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Federal Housing Finance Agency and the National Credit Union Administration.

Experimentation within those sandboxes could be done “without unnecessary or unduly burdensome regulation or expectation of retroactive enforcement actions,” the legislation states. 

Rounds, co-chair of the Senate AI Caucus and ranking member of the Senate Banking Subcommittee on Securities, Insurance, and Investment, said in a statement that the bill is “designed to foster innovation and economic growth” by allowing select agency officials to explore AI tools in test environments.

“The financial services industry has been using AI for decades, but as major advancements in the technology emerge, companies must be able to innovate,” Rounds said. “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.”

Heinrich, also an AI Caucus member, said financial agencies and private industry would be able to work together under the bill, with the goal of spurring innovation that protects consumers in the sector.

“To unlock AI’s full potential and ensure it is deployed responsibly, we need regulatory guardrails that are informed by real-life use cases,” he said in a statement. 

Per the bill text, a “regulated entity” would be required to submit an application to its financial agency detailing a description of its proposed AI test project, as well as an “alternative compliance strategy” for why a regulation should be waived or altered. 

The application would also include a proposed testing date, an economic impact estimate, and a list of limitations covering size, scope and growth. Applicants would need to make the case for why the demonstration serves the public interest, improves access to a financial product, or promotes consumer protection; how it would bolster efficiencies or competitiveness, improve regulatory compliance, or improve security and risk management; why it would not cause systemic risk to the U.S. financial system or create a national security risk; and how it is consistent with obligations under anti-money laundering and countering the financing of terrorism rules.

Federal financial agencies would have 90 days to review an application and respond to the applicant with their decision. Agencies would be tasked with delivering annual reports on the outcomes of AI test projects to the Senate Banking and House Financial Services committees.  

“As emerging technologies drive immense change within the financial sector, there is always the question of how to balance innovation with consumer protection,” Torres said in a statement. “We will continue pushing for enhanced competitiveness and results while ensuring that consumers’ interests remain paramount.”

Added Hill: “This is a pivotal step to allow both government and the private sector to collaborate and learn together, as the U.S. must lead in the development and use of AI technology.”

The role of federal financial agencies in regulating AI has been a hot topic in Washington over the past year, with SEC Chairman Gary Gensler sounding the alarm on industry’s reliance on large AI models and, more recently, House Republicans and sector leaders arguing against a rush to enact rules to govern the technology while also asking for regulatory clarity. 

Notably, the Treasury Department and IRS were not included in the legislation’s list of federal agencies that would participate in the AI sandbox initiatives. Rounds’ office did not respond to a request for comment on the reason for their omissions by the time of publication. In June, Treasury released a request for information on the opportunities and risks posed by AI.