New Settlements Demonstrate the SEC’s Ongoing Efforts to Hold Companies Accountable for AI-Washing
5 min read
In the past few months, we have published several alerts concerning the increase in regulatory attention to "AI washing," or making unfounded claims regarding artificial intelligence ("AI") capabilities.1 Senior officials at the Securities and Exchange Commission ("SEC") and the Department of Justice ("DOJ") have repeatedly warned that the misrepresentation of AI capabilities and the misuse of AI will be scrutinized moving forward.
Early this week, the SEC announced settlements with two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., finding that both firms made false and misleading statements about their purported use of AI.2 "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," said SEC Chair Gary Gensler. SEC Enforcement Director Gurbir Grewal commented, "Simply put, that's called AI washing and it hurts investors."3
According to the SEC's order against Delphia, the Toronto-based firm falsely advertised that it used AI to analyze client data and "predict which companies and trends are about to make it big and invest in them before everyone else."4 After the SEC Division of Examinations discovered the allegedly misleading statements, and in response to questioning from SEC staff, Delphia admitted that it had not used any of its clients' data and had not created an algorithm to use client data. Delphia updated and corrected some of its statements, but the SEC order found that Delphia continued to make false and misleading statements implying AI capabilities in investor emails, social media posts, and press releases.
Similarly, in the order against Global Predictions, the SEC found that the San Francisco-based firm falsely claimed to be the "first regulated AI financial advisor" with a platform providing "[e]xpert AI-driven forecasts."5 The SEC alleges that Global Predictions also falsely represented, among other things, that it offered tax-loss harvesting services and had more than $6 billion in assets on its platform.
Following several recent enforcement actions alleging violations of the Marketing Rule (which was amended in 2020 with a compliance date of November 2022), the SEC also charged both firms with violating the Marketing Rule, which, among other things, prohibits a registered investment adviser from disseminating any advertisement that includes any untrue statement of material fact. They also settled to non-scienter based investment adviser fraud charges.
Without admitting or denying the SEC's findings, Delphia and Global Predictions consented to the entry of orders finding them in violation of the Investment Advisers Act of 1940, ordering them to be censured, and requiring them to cease and desist from committing further violations of the charged provisions. Delphia agreed to pay a civil penalty of $225,000 and Global Predictions agreed to pay a civil penalty of $175,000.
Signaling the significance of these settlements for the Commission, Chair Gensler and Director Grewal released statements regarding the settlements. "Investment advisers or broker dealers should not mislead the public by saying they are using an AI model when they're not, nor say that they're using an AI model in a particular way, but not do so," warned Chair Gensler. "Public companies should make sure they have a reasonable basis for the claims they make and … the particular risks they face about their AI use, and investors should be told that basis. AI washing, whether it's by financial intermediaries such as investment advisers and broker dealers, or by companies raising money from the public … may violate the securities laws."6
Director Grewal emphasized that forward-looking statements about AI capabilities are equally at risk of AI washing allegations: "History teaches us that as AI continues to develop, firms will rush to capitalize on investor interest by promoting their supposed use of AI. But some of these claims may come before the firms actually develop the technology or the strategy. Or maybe they'll fail altogether to follow through on implementing the technology or the strategy after announcing it. Today's enforcement actions should serve notice to the investment industry that if you claim to use AI in your investment processes, you must ensure that your representations aren't false and they aren't misleading."7
The Delphia and Global Predictions settlements mark the first enforcement actions against investment advisers for allegedly misleading AI-related statements, and the publicization of these settlements suggests heightened regulatory scrutiny of statements regarding AI capabilities. Companies should ensure that any statements—including forward-looking statements—regarding AI capabilities and the role of AI in their businesses are full, fair and truthful. White & Case's Global Technology Industry Group draws from various disciplines and a broad range of expertise to help clients address these issues. Should enforcement and regulatory queries arise, the Firm's White Collar/Investigations Practice has practical and current experience managing such inquiries on clients' uses of AI.
1 Navigating New Frontiers in Regulatory Enforcement: the SEC Increases Scrutiny of Artificial Intelligence | White & Case LLP (whitecase.com); Recent Regulatory Announcements Confirm Increased Scrutiny of "AI-Washing" | White & Case LLP (whitecase.com); DOJ Doubles Down on Warnings Against AI Misuse | White & Case LLP (whitecase.com)
2 SEC.gov | SEC Charges Two Investment Advisers with Making False and Misleading Statements About Their Use of Artificial Intelligence
3 U.S. Securities and Exchange Commission on X: "We announced settled charges against 2 investment advisers, Delphia (USA) Inc & Global Predictions Inc, for making false & misleading statements about their purported use of AI. Enforcement Director Gurbir Grewal talks more about the cases: https://t.co/T8NcPKfnM9 https://t.co/kuiX6JIZK0" / X (twitter.com)
4 SEC Order - Delphia
5 SEC Order - Global Predictions
6 Gary Gensler on X: "Gurbir is right, if you claim to use AI in your investment processes, you must ensure that your representations aren't false and they aren't misleading. My thoughts on AI washing https://t.co/ntmRuWHsI3" / X (twitter.com)
7 U.S. Securities and Exchange Commission on X: "We announced settled charges against 2 investment advisers, Delphia (USA) Inc & Global Predictions Inc, for making false & misleading statements about their purported use of AI. Enforcement Director Gurbir Grewal talks more about the cases: https://t.co/T8NcPKfnM9 https://t.co/kuiX6JIZK0" / X (twitter.com)
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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