Meta Faces Congressional Scrutiny, Regulatory Risks Mount Amid Strong Earnings

Meta Platforms Inc. (META) shares are trading lower as the company faces congressional scrutiny over an alleged internal AI rulebook that permitted chatbots to engage in conversations with children. This has escalated regulatory and reputational risks for the social media giant. The company is also experiencing internal instability and intense competition within its AI division, which is compounded by controversy surrounding its approach to AI bias. Despite strong fundamental performance, regulatory threats and strategic controversies are weighing on investor sentiment.

Meta Platforms Inc. (META) shares are trading lower today as the company faces intense congressional scrutiny over an alleged internal AI rulebook that permitted chatbots to engage in conversations with children. The revelation has escalated regulatory and reputational risks for the social media giant, which is already grappling with internal instability and intense competition within its AI division. Additionally, the company is under fire for its approach to AI bias, further weighing on investor sentiment despite strong fundamental performance.

The controversy began when Reuters reported that an internal Meta document allowed AI chatbots to engage in romantic or sensual conversations with children. U.S. Senators Josh Hawley (R-MO) and Marsha Blackburn (R-TN) have called for a congressional probe into Meta, citing concerns over online child safety and AI regulation [1]. The report sparked immediate backlash, with senators highlighting the need for reforms to better protect children online, specifically mentioning the Kids Online Safety Act (KOSA) [2].

Meta has since confirmed the authenticity of the document but stated that the controversial portions were removed following the Reuters inquiry. The company's policies prohibit content that sexualizes children and sexualized role-play between adults and minors [3]. However, the incident has reignited discussions about the regulation of AI and the responsibilities of tech companies.

The controversy has also highlighted Meta's troubled history regarding child safety on its platforms. Senator Blackburn stated, "When it comes to protecting precious children online, Meta has failed miserably by every possible measure. Even worse, the company has turned a blind eye to the devastating consequences of how its platforms are designed" [2].

Adding to Meta's woes, the company has sparked controversy by appointing Robby Starbuck, a conservative activist with anti-LGBTQ+ positions, as an AI bias advisor [4]. Starbuck previously sued Meta after its AI falsely associated him with the January 6 Capitol riot. While Meta emphasizes his role will help to ensure neutrality, opponents caution it could compromise inclusivity and ethical AI governance.

As the controversy unfolds, it is clear that Meta and other tech giants developing AI technologies will face increased scrutiny and potential regulatory action to ensure the safety of minors online. The lack of federal laws regulating AI has led to state legislation, including bans on using AI to make child sexual abuse material [2].

Despite the challenges, Meta has maintained strong fundamental performance. However, the regulatory threats and strategic controversies are weighing on investor sentiment. The company will need to address these issues promptly to regain investor confidence.

References:
[1] https://www.ainvest.com/news/senators-demand-congressional-probe-meta-ai-policy-concerns-2508/
[2] https://m.economictimes.com/news/international/us/shock-move-zuckerbergs-meta-picks-robby-starbuck-anti-lgbtq-voice-as-ai-bias-advisor-backlash-erupts/articleshow/123308774.cms
[3] https://www.bbc.co.uk/news/articles/c3dpmlvx1k2o
[4] https://www.theguardian.com/technology/2025/aug/15/meta-ai-chat-children