Written By Stephen Burns, Kris Hanc, Sebastien Gittens and David Wainer

On December 5, 2024, the Canadian Securities Administrators (CSA) published CSA Staff Notice and Consultation 11-348: Applicability of Canadian Securities Laws and the use of Artificial Intelligence Systems in Capital Markets (the Notice). This document offers guidance on how securities legislation applies to the use and implementation of artificial intelligence (AI) by market participants.

In issuing the Notice, the CSA highlights several "overarching themes" regarding the use of AI systems in capital markets. For example, the Notice states that "it is important to note that it is the activity being conducted, not the technology itself, that is regulated"—underscoring the technology-neutral nature of Canadian securities laws. The Notice also urges market participants to develop and implement robust governance and risk management practices when deploying AI systems. Importantly, the Notice recognizes that certain AI systems have lower levels of explainability and encourages market participants to balance the need for explainability against the advanced capabilities that AI systems can offer.

The following will focus on the Notice's requirements relating to non-investment fund reporting issuers that are subject to the disclosure requirements under National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) (each a Non-IF Issuer and collectively Non-IF Issuers).

Guidance for Non-IF Issuers

As "the cornerstone of investor protection and confidence", Non-IF Issuers are generally required under securities laws to publicly disclose certain information about their business and affairs in a prospectus and on a continuous basis thereafter. When considering how disclosure regarding a Non-IF Issuer's use of AI should be addressed, the Notice states that "a materiality determination should be made by Non-IF Issuers," and any disclosure should:

1. be "tailored" (and not boilerplate);
2. account for the materiality of the use and risks of the AI systems; and
3. facilitate an investor's understanding of the use of AI systems by the Non-IF Issuer, including: (i) how the Non-IF Issuer defines and uses AI; (ii) the material risks posed by the use of AI; (iii) the impact the use of AI is likely to have on the Non-IF Issuer's business; and (iv) the material factors or assumptions used to develop any forward-looking information about the use of AI.

Disclosure of Current AI Systems Business Use

Non-IF Issuers using or developing AI systems should provide tailored disclosures when such activities are material to their operations. These disclosures should avoid generic statements and offer entity-specific insights to help investors understand the operational, financial, and risk implications of AI use. Specific details may include, for example, the nature and impact of AI applications, associated benefits and risks, material contracts, and the effect on competitive positioning. Non-IF issuers should also disclose the source and providers of the data that the AI system uses to perform its functions, and whether the AI system is developed internally or by third parties, with similar expectations extending to prospectus filings.

AI-Related Risk Factors 

Non-IF Issuers must disclose material AI-related risks in prospectus and continuous disclosure documents, avoiding boilerplate language in favor of clear, entity-specific explanations. Effective risk disclosure should outline how the board and management assess and manage AI-related risks, providing investors with a clear understanding of their impact. Issuers are encouraged to implement robust governance practices, including accountability, risk management, and oversight related to AI use. Examples of AI-related risks to consider include operational risks (such as the impact of disruptions), third party risks (relying on such third parties), ethical risks (social issues arising from the use of AI), regulatory risks (compliance and legal challenges), competitive risks (adverse impact of rapidly evolving products) and cybersecurity risks.

Promotional Statements about AI-related use

Non-IF Issuers must ensure that disclosures about their use or development of AI systems are fair, balanced, and not misleading, with a reasonable basis for any claims made. “Overly promotional” (i.e., disclosing that the Non-IF Issuer uses more AI than it actually does) or vague disclosures lacking sufficient detail may mislead investors and violate applicable securities laws. Non-IF Issuers should provide substantiated, clear definitions of their AI use, addressing both benefits and associated risks to avoid presenting an unbalanced view. Unfavorable news must be disclosed as promptly as favorable news, and Non-IF Issuers must maintain high-quality, consistent disclosure practices across all platforms, including social media, to comply with their reporting obligations.

AI and Forward-Looking Information

Non-IF Issuers should consider if any statement about its use of AI may constitute forward-looking information (FLI). If so, Non-IF Issuers must not disclose such statements unless they have a reasonable basis for doing so. Disclosure of FLI regarding the prospective or use of AI systems must: (1) be clearly identified; (2) include a caution that actual results may vary; (3) disclose the material factors or assumptions used to develop the FLI; and (4) outline risk factors that could cause actual results to differ materially from the FLI. 

The Notice provides an example wherein a Non-IF Issuer discloses that it plans to integrate AI systems into its products because it expects such integration to increase revenues by 5 percent. In that event, the Non-IF Issuer is required to disclose all the material factors and assumptions that were used to develop that estimate and provide any necessary sensitivity analysis.

As AI continues to evolve and reshape industries, its adoption in capital markets presents both opportunities and challenges. The Notice seeks to promote responsible use of AI by providing clarity on existing securities laws and inviting feedback from stakeholders to guide future guidance. Accordingly, market participants should adapt their operations to ensure that their deployment aligns with: (1) the principles of fairness, transparency, and market integrity; as well as (2) applicable securities and other laws.

If you have any questions related to how your organization should address the Notice, we invite you to contact one of the authors.

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