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SEC Issues First AI-Related Civil Penalties and Warns Against “AI Washing”

Kelly Ruane Melchiondo
Conceptual Image depicting AI (Artificial Intelligence) Washing and SEC Issues First AI-Related Civil PenaltiesThe Securities and Exchange Commission on Monday, March 18, 2024, entered into settlements with Delphia (USA) and Global Predictions, which agreed to pay civil penalties totaling $225,000 and $175,000, for “AI Washing.”  AI Washing entails making false statements regarding the use of artificial intelligence technology. Monday’s enforcement actions against Delphia and Global Predictions are the first in which the SEC charged companies with violating federal securities laws in connection with AI disclosures. 

The SEC targeted Delphia for making misleading statements in SEC filings, press releases and on its website regarding how Delphia purportedly combined its client data with AI and machine learning to “predict which companies and trends are about to make it big and invest in them before everyone else.” According to the SEC, those statements were false because Delphia admitted to the SEC in July 2021 that it had neither used client data nor created an algorithm for such investment advice. Despite this admission, Delphia continued making these false statements through August 2023.

Global Predictions falsely touted itself as the “first regulated AI financial advisor,” and claimed on its website and in social media posts that its platform provided “expert-driven AI forecasts.” When the SEC questioned the statements, Global Predictions could not substantiate its performance claims.

Without admitting or denying the SEC’s allegations, Delphia and Global Predictions consented to entries of orders that found that they violated the Marketing and Compliance Rules under the Investment Advisers Act of 1940, and agreed to cease and desist from further engaging in prohibited conduct. 
In its press release announcing the settlements, the SEC warned companies: “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.” 

Public companies, investment advisers and broker-dealers that use AI must be prepared for enhanced SEC scrutiny, even in the absence of a specific SEC rule related to AI. The SEC is prepared to use existing regulations, such as the Marketing and Compliance Rules to enforce its objectives. These companies, advisers and broker-dealers must ensure that they understand the AI technology they use, and that they can disclose truthfully what their AI can, and cannot, do, both in their marketing materials and in their disclosures to the SEC. Companies should consult with their technical vendors and with counsel to ensure that statements are both unambiguous and accurate.
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