Artificial intelligence (AI) has opened up new avenues for professionals
to advance their business operations or run afoul of federal laws. Two recent
orders by the Securities and Exchange Commission (SEC) describe an example of
the latter – “AI washing.”
Accused of making false and misleading statements about their
use of AI, two firms recently paid $400,000 in civil money penalties to the SEC.
Delphia (USA) Inc. and Global Predictions Inc., both investment advisers,
claimed to have AI and machine learning capabilities they did not actually possess.
“We find that Delphia and Global Predictions marketed to
their clients and prospective clients that they were using AI in certain ways
when, in fact, they were not,” SEC Chair Gary Gensler said in a press release.
“We’ve seen time and again that when new technologies come along, they can
create buzz from investors as well as false claims by those purporting to use
those new technologies. Investment advisers should not mislead the public by
saying they are using an AI model when they are not. Such AI washing hurts
investors.”
From 2019 to 2023, Delphia misrepresented its ability to
incorporate AI/ML (machine learning) technology into its investment process. The
SEC’s consent order cited one example in which the Toronto-based firm said it
“put[s] collective data to work to make our artificial intelligence smarter so
it can predict which companies and trends are about to make it big and invest
in them before everyone else.”
The firm also faced charges of violating the SEC’s Marketing
Rule, which prohibits a registered investment adviser from distributing
advertisements that include any untrue statement of material fact, among other stipulations.
“As more and more investors consider using AI tools in
making their investment decisions or deciding to invest in companies claiming
to harness its transformational power, we are committed to protecting them
against those engaged in ‘AI washing,’” SEC Enforcement Director Gurbir Grewal
said in the release. “As today’s enforcement actions make clear to the
investment industry – if you claim to use AI in your investment processes, you
need to ensure that your representations are not false or misleading. And public
issuers making claims about their AI adoption must also remain vigilant about
similar misstatements that may be material to individuals’ investing
decisions.”
In the SEC’s order against Global Predictions, the agency
found the San Francisco-based company had made false and misleading claims in
2023 on its website and via social media about its purported use of AI. The SEC
accused the firm of falsely claiming to be the “first regulated AI financial
advisor” and claimed its platform provided “[e]xpert AI-driven forecasts.”
Global Predictions also violated the SEC’s Marketing Rule by falsely claiming
that it offered tax-loss harvesting services and included an impermissible
liability hedge clause in its advisory contract, as well as other securities
law violations.
Without admitting or denying the SEC’s findings, Delphia and
Global Predictions consented to the entry of orders finding that they violated
the SEC’s Advisers Act. In doing so, they agreed to be censured. Delphia agreed
to pay a civil penalty of $225,000, and Global Predictions agreed to pay a
civil penalty of $175,000.