October 11, 2024
What happened?
On October 10, 2024, The SEC announced charges against Rimar Capital USA, Inc. (Rimar USA), Rimar Capital, LLC (Rimar LLC), Itai Liptz, and Clifford Boro for making false and misleading statements about Rimar LLC’s purported use of artificial intelligence (AI). Misrepresentations included claims of automated trading for accounts, among other fabricated uses of AI. This AI washing helped raise nearly $4 million dollars for a falsely described AI-driven trading platform. Charges of misrepresenting assets under management and misappropriation of company funds were also cited for civil penalties that added up to $310,000 and an investment company prohibition with the right to reapply in five years.
The SEC has consistently warned advisers about AI washing and inaccurate descriptions using buzzwords that are not reflective of the underlying product. “As AI becomes more popular in the investing space, we will continue to be vigilant and pursue those who lie about their firms’ technological capabilities and engage in ‘AI washing’,” said Andrew Dean, Co-Chief of the SEC’s Asset Management Unit.
What does this mean for me?
The marketing rule will continue to put public statements under the magnifying glass. When ESG was the buzzword, the SEC enforced against green-washing. It is no surprise that AI washing is the latest focal point in these false and misleading statement cases. This pursuit of adviser transparency is also echoed in the Names Rule for registered investment companies, where names that imply a particular investment focus must be monitored to truly hold investments in that focus area. In the adopting release for the Names Rule, registered investment company names that suggested thematic investing were referenced by the SEC staff. Technology themes such as blockchain, digital assets, cybersecurity, and artificial intelligence were given as examples.
When it comes to marketing around technology, you must be able to substantiate your material claims about the use of that technology. Say what you do and do what you say. If your marketing diverges from actual practices, it will be noticed in your next exam.
