19 March 2024

The SEC's "AI-washing" crackdown: Key points

The SEC has “AI-washing” in its crosshairs following two important settlements this week.

The regulator charged investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false and misleading statements about their use of AI.

Both firms have agreed to settle the charges, paying a combined $400,000 in civil penalties.

The cases show the SEC’s interest in policing statements around AI use and highlight key points for professionals in governance, risk, and compliance.

Delphia’s Unfulfilled AI Promises

According to the SEC’s order, Delphia, a Toronto-based firm, claimed from 2019 to 2023 that it used AI and machine learning to analyze client data, such as social media and spending habits, to inform investment decisions. But the SEC found these statements false and misleading, as Delphia had not developed or implemented its touted AI and machine learning capabilities.

The order reveals that Delphia misrepresented these in its SEC filings, press releases, and website. For example, the firm claimed it could “predict which companies and trends are about to make it big” using client data and AI. Delphia never used client data in its investment process despite collecting it intermittently over the years.

Global Predictions’ AI Washing

Similarly, the SEC’s order against San Francisco-based Global Predictions found that the firm made false and misleading claims about its use of AI in 2023. The firm inaccurately claimed to be the “first regulated AI financial advisor” and misrepresented that its platform provided “[e]xpert AI-driven forecasts.”

In addition to the AI-related misrepresentations, Global Predictions was charged with violating the Marketing Rule by falsely claiming it offered tax-loss harvesting services. The firm also included an impermissible liability hedge clause in its advisory contract, among other securities law violations.

The Consequences of AI Washing

The SEC’s enforcement actions against Delphia and Global Predictions send a clear message to the investment industry: making false claims about the use of AI will not be tolerated. As SEC Chair Gary Gensler stated, “AI washing hurts investors.”

Investment advisers must ensure that their representations about AI and other technologies are accurate and not misleading. The SEC has demonstrated its readiness to take action against firms that fail to live up to this standard, as evidenced by the censures and cease-and-desist orders imposed on Delphia and Global Predictions.

Looking Ahead

As AI continues to shape the future of investing, the SEC’s recent enforcement actions serve as a timely reminder of the importance of transparency and accuracy in disclosures. Investors should remain vigilant and thoroughly research any claims made by investment advisers regarding their use of AI or other emerging technologies.

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