AI Is the New Focus of SEC Enforcement

The SEC has settled allegations that two investment advising firms made false, misleading, or exaggerated claims concerning their use of artificial intelligence, a practice known as “AI-Washing.” According to an article by the Fried Frank firm, the settlements are the first to charge violations of federal securities law in connection with AI-related statements.

On March 18, Delphia Inc. agreed to pay a $225,000 civil penalty, and Global Predictions Inc. agreed to pay $175,000.

According to the SEC, Delphia misled the public with respect to its use of AI and machine learning in its investment strategy in SEC filings, public statements, and on its website.

Global Predictions ran afoul of the SEC by claiming that its platform used “expert AI-driven forecasts” and promoting itself as the “first regulated AI financial advisor.”

The settlements are indicative of a decision to increase scrutiny of all AI-related statements by publicly traded companies. The policy targets novel risks posed by machine learning, which include conflicts of interest, market manipulation, and deception.

Fried Frank says the recent enforcement actions probably originated from a December 2023 probe of investment advisers and their AI-based tools. The settlements reflect federal agencies’ willingness to pursue potential deceptive representations about AI and “underscores the need for public companies and investment firms to scrutinize their AI disclosures, policies, and procedures.”

In announcing the settlements, SEC Enforcement Director Gurbir Grewal said companies that claim to use AI in their investment processes must be vigilant about misstatements that may be material to individuals’ investing decisions. His announcement echoes an FTC warning in 2023 “not to over-promise what your algorithm or AI-based tool can deliver. Whatever it can or can’t do, AI is important, and so are the claims you make about it.”