Colorado AI Act: Imposing Heavy Compliance Requirements

The Colorado AI Act, formally known as “Senate Bill 24-205: Concerning Consumer Protections in Interactions with Artificial Intelligence Systems,” represents a significant legislative step towards regulating the use of artificial intelligence (AI) in consumer interactions. Signed into law on May 17, 2024, and set to become effective on February 1, 2026, this Act introduces robust measures to ensure transparency, accountability, and fairness in the deployment of AI technologies, and will have a significant impact on both in-state and out-of-state deployers of AI systems interacting with Colorado residents.

This analysis will cover the key aspects of the Act and discuss the implications for AI developers and deployers.

Key Provisions of the Act

1. Definitions and Scope
   • AI Systems: The Act broadly defines AI systems to include any software or hardware systems that can perform tasks that would normally require human intelligence.
   • High-Risk AI Systems: These are defined as AI systems that make or substantially influence consequential decisions, which are decisions with significant legal or similar effects on consumers, such as employment, loan approvals, or housing.
2. Transparency Requirements
   • Developers and deployers must ensure that consumers are informed when interacting with AI systems. This includes clear disclosure that a consumer is engaging with an AI system.
   • For high-risk AI systems, additional disclosures about the AI’s purpose, the nature of the consequential decision, and how the AI operates must be provided to consumers.
3. Impact Assessments
   • Annual impact assessments are required for high-risk AI systems. These assessments must evaluate potential risks of algorithmic discrimination and document steps taken to mitigate such risks. They should also include details on data inputs, performance metrics, and transparency measures.
4. Algorithmic Discrimination
   • The Act addresses “algorithmic discrimination,” defined as any differential treatment or impact on individuals based on protected characteristics (e.g., race, gender, age) that results from the use of AI systems.
   • Developers and deployers are required to use reasonable care to avoid known or foreseeable risks of algorithmic discrimination.
5. Compliance and Enforcement
   • The Colorado Attorney General has rule-making authority to enforce the Act. Compliance with recognized risk management frameworks (such as the NIST AI Risk Management Framework) can provide a rebuttable presumption of reasonable care.
   • Developers and deployers must notify the Attorney General within 90 days if they discover that an AI system has caused algorithmic discrimination.
6. Consumer Protections
   • Consumers must be given opportunities to correct incorrect data and appeal adverse decisions made by AI systems. There must be a mechanism for human review of such decisions if technically feasible.
7. Dates of Enactment and Effectiveness

• • Date Enacted: The Colorado AI Act was signed into law on May 17, 2024​.
  • Effective Date: The law will become effective on February 1, 2026​.

Implications for Developers and Deployers

1. Increased Compliance Burden
   • Developers and deployers of AI systems in Colorado will face significant new compliance requirements. This includes conducting annual impact assessments and maintaining comprehensive documentation of AI system operations and decision-making processes.
2. Risk Management
   • Entities using AI must implement robust risk management programs. These programs need to be iterative, regularly reviewed, and updated in accordance with both state and recognized international standards.
3. Transparency and Consumer Rights
   • The Act mandates extensive transparency measures, which could require substantial changes to how AI systems are developed and deployed. This includes clear consumer notifications and providing means for consumers to appeal decisions and correct data.
4. Legal and Financial Risks
   • Failure to comply with the Act’s provisions could lead to legal actions and financial penalties. Developers and deployers must be vigilant in their adherence to the Act to avoid potential liabilities.
5. Innovation and Operational Costs
   • While the Act aims to protect consumers, it could also impact innovation. Smaller developers, in particular, might find the compliance costs burdensome, potentially stifling innovation in the AI sector within Colorado.
6. Market Differentiation
   • On the positive side, adherence to the Act could serve as a market differentiator, signaling to consumers and business partners that a company is committed to ethical AI practices and consumer protection.

Conclusion

The Colorado AI Act sets a precedent in AI regulation, focusing on consumer protection and ethical use of AI systems. While it introduces significant compliance challenges, it also promotes responsible AI development and deployment. Developers and deployers will need to adapt to these new requirements, balancing innovation with the imperative to protect consumers from potential harms associated with AI systems.