California Takes the Lead: New AI Regulations Set the Stage for Transparency and Security
Artificial Intelligence (AI) in the Spotlight
Artificial intelligence (AI) has transformed from a technological curiosity into a pressing topic of public discourse. Recent conversations revolve around AI developers and the urgent need for transparency regarding their technologies. At the forefront of this regulatory movement is California, a state synonymous with innovation and now establishing significant boundaries around AI usage. In 2024, California’s legislature concluded its session by passing four pivotal AI-related bills, which aim to ensure that the burgeoning field of AI is transparent and secure for users.
Join the Conversation on AI Legislation
With their extensive expertise, the Data Privacy team at Husch Blackwell has been tracking California’s efforts to regulate AI throughout the year. As the dust settles on the 2024 legislative session, they have shared a comprehensive overview of the new bills affecting AI. For those interested in the ins and outs of these developments, we highly recommend checking out their insights on the Byte Back blog.
California’s Influence on National Standards
Historically, California has pioneered regulatory frameworks, influencing both state and national policies around technology. Laws like the California Consumer Privacy Act and the California Commercial Financing Disclosure Laws serve as notable examples. The recent wave of AI legislation is poised to shape future standards in an industry that is rapidly evolving. While these new laws may appear to target California-based developers, the reality is that many developers operate within California’s tech hubs, meaning the potential impacts on users could ripple out far beyond the state’s borders.
Shining a Light on Training Data: AB 2013
Among the new regulations, Assembly Bill 2013 (AB 2013), introduced by Assembly Member Jacqui Irwin, is noteworthy. This bill seeks to enhance transparency about the training data utilized by generative AI systems. Effective January 1, 2026, developers will be required to publish detailed documentation on their websites regarding the datasets used in their AI systems. This mandate includes a comprehensive summary that covers key aspects such as the sources, purpose, size, and any copyrighted or personal information contained within the datasets.
Compliance Requirements for Developers
The specifics of AB 2013 require developers to disclose whether the data was purchased, licensed, or modified, along with details on the timeline for data collection. Certain exceptions apply, with exclusions for AI systems employed in security, aviation, or national defense. This heightened level of documentation aims to cultivate a sense of trust and responsibility among developers and users alike.
Regulating Advanced AI Models: SB 1047
Senate Bill 1047 (SB 1047), championed by Senator Scott Wiener, addresses the evolving complexities of advanced AI models. Dubbed the “Safe and Secure Innovation for Frontier Artificial Intelligence Models Act,” this bill outlines strict safety and security protocols for developers. Moving forward, developers of advanced AI will need to implement robust cybersecurity measures before initiating the training of AI models.
Third-party Audits and Compliance
Developers will face an obligation to engage in annual third-party audits starting January 1, 2026. Documented proof of compliance with these security requirements must be maintained and, upon request, developers are mandated to provide the attorney general with access to unredacted copies of their safety and security protocols as well as the audit results. Furthermore, incidents relating to AI safety must be reported to the attorney general, fostering a culture of accountability and vigilance.
Establishing Regulatory Oversight: The Board of Frontier Models
As an extension of SB 1047, the establishment of the Board of Frontier Models aims to oversee the creation and enforcement of regulations by January 1, 2027. Additionally, the Government Operations Agency is tasked with creating a public cloud computing cluster named “CalCompute” by January 1, 2026. This initiative intends to foster safe, ethical, and equitable AI research, ultimately benefiting society as a whole.
AI in Commercial Finance: Opportunities and Challenges
The implications of these new regulations stretch into the alternative commercial finance sector, representing a unique opportunity to expand access and improve underwriting practices through AI. The integration of machine learning and alternative data in decision-making can enhance due diligence and fraud prevention strategies. However, the potential consequences of overly restrictive regulations cannot be overlooked.
Maintaining Innovation Amidst Regulation
Industry enthusiasts recognize that poorly designed regulations can inadvertently stifle innovation, hinder competition, and restrict progress. As businesses adapt to these new legal landscapes, understanding the full effects of California’s recent legislation on the commercial finance industry becomes imperative—both for developers and consumers.
Spotlighting AI Innovations at LEND360
On a related note, Chris Friedman from Husch Blackwell will be moderating an insightful panel at the 10th Annual LEND360 conference. Titled “Leveraging New Technologies to Expand Access in SMB Lending,” the panel will engage thought leaders and lenders in discussions about the transformative potential of AI within the business lending framework, as well as the hurdles presented by regulatory bodies.
Heightened Scrutiny in Fintech
The increased attention on regulatory requirements resonates across fintech and emerging industries, prompting experts to consider the ramifications of heightened scrutiny. A recent article from PYMTS highlights the potentially overwhelming nature of new regulations for fintech companies, indicating a need for compliance preparation that anticipates and mitigates potential disasters.
Market Trends in Commercial Finance
In the context of commercial finance, a recent article from Small Business Finance Insights emphasizes that the industry is currently valued at an impressive $3.6 trillion, with expectations of growing by an additional $1.6 trillion over the next four years. Factors driving this growth include technology advancements, supply chain financing, and an increasing focus on small and medium-sized enterprises.
CFPB’s Beta Platform for Data Reporting
In a further regulatory development, the Consumer Financial Protection Bureau (CFPB) has launched a beta platform to facilitate the collection of small business lending data in accordance with Section 1071 of the Dodd-Frank Act. Financial institutions are encouraged to test this platform, which allows them to upload sample data files without exposing actual customer data. Participants will need to adhere closely to compliance requirements while providing feedback to help refine the platform.
Stay Informed: Essential Updates in Financial Services
As these developments unfold, staying informed and proactive is essential. For those interested in maintaining awareness of trends and updates in the financial services industry, subscriptions to resources like Husch Blackwell’s consumer financial services insights are highly recommended.
Conclusion: A Call for Responsible AI Governance
California’s latest legislative efforts signify important steps towards enhancing transparency, security, and accountability in the AI landscape. As these regulations take effect, they will inevitably influence broader trends within the technology and finance sectors. While the road ahead may present challenges and uncertainties, fostering responsible AI development and governance can lead to greater benefits for businesses and consumers alike. The conversation around AI regulation is just beginning, and the world will be watching closely as California navigates this complex legal terrain.
