Artificial Intelligence & Machine Learning , Government , Industry Specific

US SEC Charges Two Investment Advisers With AI Washing

Federal Agencies Warn Against Exaggerating AI's Capabilities
US SEC Charges Two Investment Advisers With AI Washing
The U.S. Securities and Exchange Commission settled charges with two investment advisers for falsely marketing that they were using AI. (Image: Shutterstock)

In the post-ChatGPT era, nearly every technology company offers some version of artificial intelligence service. But in some companies, the only AI service available is lip service, according to recent Securities and Exchange Commission lawsuits.

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The U.S. federal regulator on Monday settled charges with two investment advisers for falsely marketing that they were using AI in their services. Akin to popular greenwashing, where companies make false representations about environmental sustainability, AI washing has emerged as a term for businesses that make unfounded promises about using AI in their services.

Toronto-based Delphia made false and misleading statements about its use of AI and machine learning to incorporate client data in the investment process on multiple occasions, including in SEC filings, in a press release and on its website, the SEC said. Delphia claimed that it puts "collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else," but the company did not have these capabilities, the agency said. It also charged the firm with violating the Marketing Rule that prohibits investment advisers from making false advertisements.

San Francisco-based Global Predictions in 2023 posted on social media falsely claiming to be the "first regulated AI financial advisor" and said that its platform provided "expert AI-driven forecasts." It too violated the Marketing Rule, the SEC said.

Delphia and Global Predictions will pay $400,000 in total civil penalties. Neither company admitted guilt, but both consented to the entry of orders finding that they violated the Advisers Act. Delphia agreed to pay a civil penalty of $225,000, and Global Predictions agreed to pay $175,000.

Neither company responded to a request for comment.

The use of AI has soared in the past few years, especially after the public introduction of ChatGPT. An increasing number of investors are considering using AI tools to make their investment decisions or deciding to invest in companies that claim to harness the technology's "transformational power," said SEC Chair Gary Gensler.

"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," he said.

Gensler discussed AI washing in a December 2023 panel discussion and warned firms not to misrepresent their AI capabilities: "One shouldn’t greenwash, and one shouldn’t AI-wash."

In addition to publishing an AI investor fraud alert in January, the SEC took steps such as proposing a rule to address AI-related developments in the securities industry.

Other federal agencies have also issued warnings on AI washing. The Federal Trade Commission advised advertisers to not overpromise on what an algorithm or an AI-based tool can deliver. The Consumer Financial Protection Bureau warned financial services firms that they run the risk of noncompliance with federal consumer financial laws when "chatbots ingest customer communications and provide responses [that] may not be accurate."


About the Author

Rashmi Ramesh

Rashmi Ramesh

Assistant Editor, Global News Desk, ISMG

Ramesh has seven years of experience writing and editing stories on finance, enterprise and consumer technology, and diversity and inclusion. She has previously worked at formerly News Corp-owned TechCircle, business daily The Economic Times and The New Indian Express.




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