SEC Charges Investment Advisors for ‘AI Washing’

By Jason Nelson

The U.S. Securities and Exchange Commission filed charges against two investment advisors over what the agency deemed misleading statements related to the firm's use of artificial intelligence, the SEC said on Monday.

The SEC charged the U.S. arm of Canadian company Delphia and U.S.-based Global Predictions with breaking regulatory marketing rules or “AI washing.” After the agency issued a cease-and-desist order, the two companies agreed to settle the charges and pay a total of $400,000 in civil penalties.

The SEC said that from 2019 to 2023, Toronto-based Delphia misled investors and regulators about its AI capabilities, falsely claiming its technology used client data for smart investments. In 2023, the SEC said, San Francisco-based Global Predictions made deceitful statements about being a regulated AI advisor and offering AI-driven forecasts.

“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 the announcement. “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,” he continued.

"Global Predictions cooperated fully with the inquiry and is pleased to put this behind us," Global Predictions co-founder and CEO Alexander Harmsen told Decrypt. "Additionally, we have clarified across our marketing how exactly we use AI," he said, highlighting a new Global Predictions blog post clarifying its use of AI.

Delphia did not immediately respond to Decrypt’s request for comment.

The SEC hasn't relented in its pursuit of what it sees as illegal securities dealings in the crypto space—earlier this month, defunct cryptocurrency exchange ShapeShift agreed to pay $275,000 in fines and abide by a cease and desist order for allowing users to trade cryptocurrencies without registering as a broker or exchange with the agency—but AI is rising in prominence among the regulator's actions.

As the hype around artificial intelligence skyrocketed in 2023, SEC chair Gary Gensler warned investors about falsely or misleadingly labeling products or services with artificial intelligence capabilities.

“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,” Gensler said in a video posted Monday. “So, everyone may be talking about AI, but when it comes to investment advisers, broker dealers, and public companies, they should make sure that what they say to investors is true.”

Like “greenwashing,” where a person or company promotes a project as more environmentally and socially responsible than it is, AI washing refers to claims that a company is more AI-driven or technologically advanced than reality.

Last month, Gensler highlighted the dangers of generative AI in both fact and fiction by referencing the 2013 film Her, M3GAN (2023), and The Matrix (1999).

“You don’t want your broker or adviser recommending investments they hallucinated while on mushrooms,” Gensler said. “So, when the broker or adviser uses an AI model, they must ensure that any recommendations or advice provided by the model is not based on a hallucination or inaccurate information.”

Edited by Ryan Ozawa.

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