March 19, 2024
What happened?
The Securities and Exchange Commission (SEC) announced on Monday that it settled charges against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false and misleading statements about their purported use of artificial intelligence (AI), according to a SEC press release. This is the first time the SEC has fined investment advisers for false and misleading statements about their use of AI.
“We find that Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not,” 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. Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”
According to the SEC’s order against Delphia, a Toronto-based firm, false and misleading statements were made in its SEC filings, in a press release, and on its website from 2019 to 2023 regarding its purported use of AI and machine learning that incorporated client data in its investment process. For example, Delphia claimed that it “put[s] collective data to work to make [its] artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else.” The order found that these statements were false and misleading because Delphia did not have the AI and machine learning capabilities that it claimed.
With regards to Global Predictions, the SEC found that the San Franciso-based firm made false and misleading claims on its website and on social media in 2023 about its purported use of AI. It falsely claimed to be the “first regulated AI financial advisor” with a platform that provided “[e]xpert AI-driven forecasts”.
Both firms also violated the Marketing Rule, which prohibits a registered investment adviser from disseminating any advertisement that includes any untrue statement of material fact.
The SEC’s Office of Investor Education and Advocacy issued an Investor Alert in January that addressed artificial intelligence and investment fraud.
What does this mean for me?
To some degree, this is nothing new. Advisers have long been prohibited from using false and misleading statements. However, given the fact that the statements were concerning AI—another top priority for the SEC—there is likely heightened risk..
Firms that use AI and note such usage in their marketing should ensure they can provide adequate documentation to support the claims to the SEC if requested. Additionally, although the predictive data analytics rule is not yet finalized, firms should familiarize themselves with the requirements in the proposed rule given the SEC’s focus on AI usage. Despite the proposal not being finalized, we are still seeing AI-related exam requests (sample SEC requests related to AI available here).
Advisers can review our webinar, An Adviser’s Guide to AI: What it is, the SEC’s Proposed Predictive Analytics Rules, and How to use it, available here, which covers the basics of AI, regulatory considerations, AI washing, and tips for how advisers can take advantage of AI.
Firms should also be proactive to ensure they remain up to date with regulatory expectations and best practices. If you have any questions about AI or related issues, let us know, and one of our regulatory experts will contact you soon.
