SEC’s Increased Focus on “AI Washing:” Charges Announced Against Two Investment Advisers for Violations of the Marketing Rule
By: Matthew Rogers and Annabelle North
Following up on its previously-issued Investor Alert warning investors on the use of so-called “AI washing” by advisers in their marketing materials, the Securities and Exchange Commission (SEC) announced on 18 March 2024 the settlements of charges against two investment advisers for “making false and misleading statements about their purported use of artificial intelligence (AI).”
According to the SEC, the investment advisers, Delphia (USA) Inc. (Delphia) and Global Predictions Inc. (Global Predictions) exaggerated their use of AI and/or machine learning in their advisory services, violating Section 206(4) of the Investment Advisers Act of 1940, as amended, and Rule 206(4)-1 thereunder (the Marketing Rule). The Marketing Rule prohibits the dissemination of any advertisement containing untrue or misleading information. Among other things, the SEC objected to Delphia’s false representations in its Form ADV brochures that it used machine learning algorithms to tailor client portfolios and make predictions about “which companies and trends are about to make it big” (Delphia order), as well as Global Prediction’s dissemination of marketing materials containing unsubstantiated claims that its technology incorporated “[e]xpert AI-driven forecasts” (Global Predictions order).
In its press release on the settlements, SEC Chair Gary Gensler reaffirmed the SEC’s commitment to take action against any advisers engaged in AI washing, stating “[I]f 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.”
The enforcement actions are consistent with the SEC’s recent increased focus on AI, machine learning, and similar technologies, including its recently-proposed Predictive Analytics Rule. More information on the SEC’s proposed Predictive Analytics Rule can be found here.