SEC Puts “AI Washing” in the Spotlight
Two firms agree to pay $400,000 in fines; users advised to be on the lookout; investment advisor encourages services firms to stick to honest claims about AI
By John P. Desmond, Editor, AI in Business
When the SEC announced a fine of two investment advisors AI making false statements about how their systems used AI—in a trend called “AI washing”--it set off a reaction that put false claims about use of AI in software and services in the spotlight.
In a press release, the SEC names Delphia (USA) Inc. and Global Predictions Inc for making “false and misleading statements about the purported use of AI.” The firms agreed to settle the charges and pay $400,000 in penalties.
“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,” stated 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.”
From 2018 to 2023, the SEC stated that Toronto-based Delphia made false statements in its SEC filing, in a press release and on its website about use of AI and machine learning that incorporated client data. For example, Dalphia claimed that it “put[s] 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.”
In fact, the SEC said the firm was not using the AI and ML capabilities that it claimed, which also violated the Marketing Rule, which prohibits a registered investment advisor from distributing any advertisement that includes untrue statements of material fact.
The SEC found that San Francisco-based Global Predictions in 2023 made false claims on its website and on social media about its use of AI. For example, the company claimed to be the “first regulated AI financial advisor” and misrepresented that its platform provided “expert AI-driven forecasts.” And the company also violated the Marketing Rule, the SEC stated.
SEC Rules Prohibit Misleading Marketing Statements
Investment advisors are held to seven prohibitions in their marketing to prevent fraud and deception, according to an account from Thomson Reuters. The rules state that marketing material must not be misleading, and an advisor must be able to substantiate material statements. Global Predictions and Delphia (USA) were found to have violated these provisions, the reporting indicated.
Another rule is that investment advisors are not able to include “hypothetical performance in mass audience or general circulation advertisements,” and that any material conflict of interest of any person giving a testimonial must be disclosed, such as whether the person giving the testimonial is a client or was paid for the testimonial.
Delphia’s website included a claim that the firm “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.” But a 2021 audit conducted by the SEC found that Delphia had not used any of its client data and had not created an algorithm to use clients data. Delphia amended its marketing practices after that, including hiring a compliance manager to watch over things, according to the Thomson report. “However, Delphia continued to make certain false and misleading statements in advertisements regarding the use of client data in various formats through August 2023,” the account stated.
Investment Advisor Urges Vendors to be Honest About AI
“As more and more investors consider using AI tools in making their investment decisions or deciding to invest in companies claiming to harness its transformational power, we are committed to protecting them against those engaged in ‘AI washing,” stated Gurbir Grewal, the SEC’s enforcement director, in an account reported in RIABiz, serving the investment advisor community.
The author of the account, Todd Cipperman, a financial services executive, sees that the SEC and other regulators are creating the new buzz phrase “AI washing” which he compared to the evolution of the term “greenwashing,” in which advisors market dubious claims about Environmental, Social and Governance (ESG) products.
“Suddenly, we may have a rash of enforcement cases and pronouncements against anything and anybody marketing artificial intelligence solutions,” Cipperman stated. “The SEC is now looking at any public company that uses the term in public disclosure. I hope regulators and the public do not treat AI as some have treated ESG. Many ESG products and strategies have had legitimate success in their stated goals.”
He urged those in the investment advisor community to be honest about how AI is used in their products. “Otherwise, the SEC, the media, and the investing public will tar the industry with the “AI washing” epithet and quash important innovation,” he stated.
Phrasee Exec Issues AI-washing Warning
AI is susceptible to less than honest marketing claims because it has no clear definition, suggests an executive with Phrasee, which uses generative AI to produce marketing messages.
Toby Coulthard, chief product officer of the company, stated in an email to AI in Business, “AI washing is pervasive in the marketplace.”
Statistics from FactSet Research, offering financial data and software, show that in the fourth quarter last year, 179 S&P 500 earnings calls cited the term “AI,” well above the five-year average of 73 and the 10-year average of 45.
One of the reasons, he said, is the “nebulous definition of AI,” as in “There isn’t a clear definition of AI – whether it’s the use of LLM, neural networks, machine learning, or just an application of data science. This gives businesses a lot of latitude when it comes to being able to associate themselves with AI.”
This “leads to a big gray area on what is appropriate or not,” stated Coulthard. To flush out AI pretenders, he suggested, “A good litmus test is to see which companies were talking about AI prior to ChatGPT’s release, and which talk about it after the fact.” He does not expect AI-washing to slow down any time soon.
Read the source articles and information In a press release from the SEC, from Thomson Reuters, in RIABiz, from the CPO of Phrasee and statistics from FactSet Research.