SEC Makes First Charges against Investment Advisers For AI Washing

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Last week, the Securities and Exchange Commission (SEC) announced that it had settled charges with two investment advisers, for making false and misleading statements about their use of artificial intelligence (AI).  This was the first time the SEC charged companies with violating federal securities laws in connection with AI disclosures. 

Details About the Charges

The SEC recently charged that Delphia (USA) Inc., located in Toronto, and Global Predictions Inc., based in San Francisco, engaged in “AI Washing”, or inaccurately claiming to employ AI technologies in ways that were not supported by their actual capabilities. These misleading statements were found across these investment advisors’ various platforms, including SEC filings, press releases, and company websites.

In one example, the SEC discovered that Delphia advertised that it leveraged AI and machine learning which used collective data so it can predict which companies and trends are about to make it big and invest in them before everyone else.”  The SEC discovered that Delphia did not have the AI and machine learning capabilities they claimed to have.  Similarly, Global Predictions misrepresented itself as the “first regulated AI financial advisor,” among other unfounded claims regarding its AI-driven forecasts and services.

The SEC’s investigation found that both firms violated the Marketing Rule, which prohibits making false statements of material fact in advertisements. Global Predictions was also cited for falsely advertising tax-loss harvesting services, and including an impermissible liability hedge clause in its advisory contract.

Without admitting or denying the SEC’s findings, Delphia and Global Predictions consented to the entry of orders finding that they violated the Advisers Act and ordering them to be censured and agreed to cease and desist from violating 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.

Gurbir S. Grewal, Director of the SEC’s Division of Enforcement commented on the charges against the two investment advisors, saying “As more and more investors consider using AI tools in making their investment decisions or deciding to invest in companies claiming to harness its transformational power, we are committed to protecting them against those engaged in ‘AI washing’.  As 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. And public issuers making claims about their AI adoption must also remain vigilant about similar misstatements that may be material to individuals’ investing decisions.”

This enforcement action resulted from an investigation by the SEC Division of Enforcement’s Asset Management Unit, which is tasked with ensuring accurate and truthful representation of technology used by investment advisors.

Our Take

The SEC’s action against Delphia and Global Predictions is a clear directive to the investment advisory industry regarding making sure of the accuracy of AI-related claims. It shows the importance of substantiating public statements about technological capabilities, especially as investors consider these factors in their decision making processes.

This action reminds investors to conduct thorough due diligence when evaluating investment advisers’ and broker dealers’ claims about their technology use. It also emphasizes the necessity for investment advisors to maintain transparency and honesty in their communications about technological capabilities to avoid regulatory repercussions and maintain trust with clients and the broader market.

For the investment research industry, this case stresses the importance of adhering to ethical standards in marketing and communication, and ensuring that claims about AI related innovations in technology tools and investment strategies are accurate and verifiable.  

This action reflects the SEC’s ongoing scrutiny of investment advisors’ claims regarding technology usage, particularly AI, in their operations and investment strategies.  The charges against Delphia and Global Predictions reinforce the need for honesty in representing AI and other technological capabilities within the investment management industry. Maintaining high standards of integrity and transparency are essential for sustaining investor trust and compliance with regulatory expectations.

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About Author

Mike Mayhew is one of the leading experts on the investment research industry. In addition to founding Integrity Research, Mike is on the board of directors of Investorside Research Association, the non-profit trade association for the independent research industry, and a frequent speaker on research industry trends and developments. Mike has over thirty years of research industry experience. Email: Michael.Mayhew@integrity-research.com

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