SEC Announces Settled Charges Against Two Investment Advisers Regarding Their AI Claims

On March 18, 2024, the U.S. Securities and Exchange Commission (“SEC”) announced that it settled charges against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false and misleading claims about their use of artificial intelligence (“AI”).  According to Bloomberg Law, the charges mark “the beginning of a fresh crackdown” on bogus AI claims.  

Specifically, the SEC alleged, inter alia, that Delphia made false and misleading statements about how it was using AI and machine learning that incorporated client data in its investment process from 2019 to 2023.  In reality, however, Delphia did not have the AI and machine learning capability it claimed.  The SEC alleged that Global Predictions made false and misleading claims in 2023 that it was the “first regulated AI financial advisor” and misrepresented that its platform provided “[e]xpert AI-driven forecasts.”  The firms neither admit nor deny the SEC’s allegations in settling their cases for $225,000 and $175,000, respectively.  

In the press release announcing the settlements, SEC Chair Gary Gensler stated, “[w]e 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[.]  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.”   The press release also quoted Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, as stating, “[a]s today’s enforcement actions make clear to the investment industry – if 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 settlements come on the heels of Gensler’s February speech at Yale Law School, during which he discussed AI washing and the risks AI models pose, such as hallucinating “an unsuitable or conflicted investment recommendation,” or taking the AI platform’s interest into consideration when making investment decisions, leading to conflicts of interest.   In his concluding remarks, Gensler stated, “our role at the SEC is both allowing for issuers and investors to benefit from the great potential of AI while also ensuring that we guard against the inherent risks[.]”