The Securities and Exchange Commission (SEC), the agency that oversees the stock market, has been actively creating new rules, with a particular focus on new technologies and cyber threats. This article explores how two investment firms faced a hefty penalty for their misleading claims about the use of Artificial Intelligence (AI).
1. The Rise of AI Washing
AI washing, similar to “greenwashing” where companies falsely claim to be environmentally friendly, occurs when a company exaggerates its use of AI to seem innovative and attract investors. However, their actual use of AI may be minimal or very basic, misleading people into thinking the company is more innovative than it truly is.
2. The Case of Delphia (USA) Inc.
Delphia (USA) Inc. promoted itself by claiming it used AI to analyze data to predict the next big companies and trends, and then invest in them early. However, the firm hadn’t actually used any data like they claimed, nor had they developed any special algorithm to do so.
3. The Case of Global Predictions Inc.
Global Predictions Inc. claimed on its website and social media that it was the first regulated AI financial advisor and that it provided expert AI-driven forecasts. This was also untrue.
4. The SEC’s Stance on AI Washing
The SEC made it clear that if a company says it’s using AI, it really needs to be using it as claimed. The SEC’s top enforcement official, Gurbir S. Grewal, emphasized that investment firms must be honest and not misleading about their use of AI in their investment strategies.
5. AI Not So High
In a speech given in February, SEC Chair Gary Gensler focused primarily on AI and its implications for regulation. He pointed out that “AI washing” involves not just making false claims about using AI but also making vague statements that don’t really inform investors.
6. The Importance of Proactive Compliance
Gurbir S. Grewal, the SEC’s Director of Enforcement, advised investment firms to think carefully before claiming to use AI to attract investors. He promoted proactive compliance, suggesting that firms educate themselves on AI issues, engage with internal stakeholders to understand how AI affects their business, and execute plans that accurately reflect their use of AI and the associated risks.
Disclaimer
The information provided in this article is for informational and educational purposes only and is not intended to serve as legal advice or as a substitute for legal counsel. Readers are strongly advised to consult with a qualified attorney for advice on legal issues or matters, as each individual case may require detailed and personalized legal analysis.
