In a groundbreaking move, the US Securities and Exchange Commission (SEC) has taken action against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false and misleading statements about their use of artificial intelligence (AI). This practice, referred to by the SEC as “AI washing,” has brought significant attention to the regulatory landscape surrounding AI in financial services. SEC Chair Gary Gensler has drawn parallels between AI washing and greenwashing, emphasizing the importance of honesty in AI disclosures.
The SEC’s Stand on AI Washing
On March 18, the SEC announced settled actions against Delphia and Global Predictions. These actions mark the first AI-related enforcement cases by the SEC. Without admitting or denying the charges, Delphia agreed to pay a $225,000 civil penalty, while Global Predictions agreed to a $175,000 penalty. These settlements highlight the SEC’s commitment to preventing misleading claims about AI, ensuring that the benefits of AI are not overshadowed by deceptive practices.
As SEC Chair Gary Gensler stated, “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.” The SEC’s focus on AI is expected to intensify, with more AI washing cases likely to emerge.
Delphia’s Misleading Claims
From 2019 to 2023, Delphia allegedly made several false statements about its use of AI and machine learning to analyze retail clients’ spending and social media data for investment advice. Despite claiming to use AI to collect and analyze data, the SEC found that Delphia never actually implemented these technologies in its investment algorithms.
False and Misleading Statements:
- Delphia’s Form ADV Part 2A brochures, press releases, website content, and client communications contained multiple misleading claims.
- In a 2022 press release, Delphia claimed its “proprietary algorithms . . . make predictions across thousands of publicly traded companies up to two years into the future.”
- The company’s website asserted that it uses collective data to enhance its AI, predicting successful companies and trends ahead of competitors.
The SEC determined that these statements were false and misleading because Delphia had not developed the represented capabilities. These misrepresentations were deemed material as they portrayed Delphia’s use of client data as a key differentiator from other advisers.
Regulatory Actions Against Delphia
The SEC charged Delphia with violating Section 206(2) of the Advisers Act, a crucial antifraud provision for investment advisers. Additionally, Delphia was charged with violating Section 206(4) of the Advisers Act and Rules 206(4)-1 and 206(4)-7, related to the Marketing Rule and Compliance Rule. Delphia’s lack of a clear social media policy and a cohesive advertising review process contributed to these violations.
Global Predictions’ False Claims
Global Predictions faced similar charges for making false and misleading statements about its AI capabilities and services. The company claimed on its website that its technology incorporated “[e]xpert AI-driven forecasts,” a statement the SEC found unsubstantiated.
Misleading Statements:
- The adviser’s website, social media sites, and client communications described Global Predictions as the “first regulated AI financial advisor.”
- Global Predictions could not produce documents to support this claim.
While many of Global Predictions’ misleading statements and other misconduct, such as an improper hedge clause, were not directly related to AI, the SEC bundled these actions under the “AI washing” label to underscore its focus on AI-related issues.
Key Takeaways from the SEC’s Actions
The SEC’s actions against Delphia and Global Predictions underline the agency’s commitment to regulating AI use in financial services. Here are the key takeaways:
- AI Priority: The SEC has made AI a clear priority, as highlighted by the Division of Examinations in its 2024 priorities report and the SEC’s Office of Investor Education and Advocacy’s January 2024 investor alert regarding AI-related frauds.
- Rulemaking and Enforcement: While the SEC has proposed new rules regarding predictive data analytics and AI, enforcement actions can be taken under existing rules, such as the Marketing Rule and general fiduciary duty principles.
- Review and Reassess: Investment advisers, broker-dealers, and public companies should review and reassess their policies, procedures, marketing materials, and public-facing statements about their use of AI to avoid SEC scrutiny.
- Consistency Across Platforms: Entities must ensure that their statements about AI are consistent across all platforms, including social media, to avoid misleading claims.
Conclusion
The SEC’s enforcement actions against Delphia and Global Predictions send a strong message to the financial industry about the importance of transparency and honesty in AI use. As AI continues to evolve and integrate into various sectors, regulators like the SEC are poised to ensure that the technology is used ethically and accurately represented. Companies must navigate this landscape carefully, balancing innovation with regulatory compliance to maintain trust and avoid legal repercussions.
