US SEC Fines Two Investment Firms for 'AI Washing'

US SEC Fines Two Investment Firms for ‘AI Washing’

Time Stamp: March 19, 2024 3:50 AM
Source Node: 2519633

The U.S. Securities and Exchange Commission settled charges with two investment advisers over “false and misleading” statements about their use of AI, or what it called ‘AI washing.’

Toronto-based Delphia Inc and Global Predictions Inc, a company based in San Francisco, will pay a combined total of $400,000 fine to settle the civil charges, the SEC announced on Monday.

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What are the charges?

“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,” SEC Division of Enforcement director Gurbir S. Grewal said in a statement.

“And public issuers making claims about their AI adoption must also remain vigilant about similar mis-statements that may be material to individuals’ investing decisions,” Grewal added.

The SEC accuses Delphia and Global Predictions of what it called ‘AI washing’ – or lying about their use of artificial intelligence, often as a marketing gimmick designed to profit from the AI hype.

The term is similar to ‘greenwashing’ in environment circles, where firms exaggerate the climate benefits of their projects to gain public approval. AI washing could hoodwink ordinary people into making investments that are based on falsehoods, the financial regulator avers.

According to the SEC’s order,  between 2019 and 2023, Delphia made “false and misleading statements” in its regulatory filings, in a press release, and on its website. The statements related to the company’s supposed use of AI and machine learning.

For example, Delphia claimed it “put[s] collective data to work to make our AI smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else.”

The SEC says the company did not have the AI or machine learning capabilities it claimed. Delphia was also charged with breaking the so-called Marketing Rule, which prohibits investment firms from publishing ads that include “untrue statements of material fact.”

‘AI washing’: Firms deny wrongdoing

Against Global Predictions, the SEC found that sometime in 2023 the company allegedly made false claims on its website and on social media about its “purported” use of artificial intelligence.

It said the company claimed to be the “first regulated AI financial advisor” and lied that it provided “[e]xpert AI-driven forecasts.” Like Delphia, Global Predictions broke the Marketing Rule by claiming it offers “tax-loss harvesting services,” which it did not, the SEC alleges.

“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.

“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,” he stated,  adding:

“Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”

Delphia will pay a $225,000 penalty while Global Predictions will pay $175,000, but both companies did not admit or deny the regulator’s findings, the SEC said.

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