What: The SEC announced that it settled charges against two investment advisers for making false and misleading statements about their purported use of artificial intelligence (AI). The firms agreed to settle the SEC’s charges and pay $400,000 in total civil penalties.
Who: Delphia (USA) Inc. and Global Predictions Inc.
When: March 18, 2024
Why: The SEC’s concerns stem from firms selling AI solutions that they cannot deliver on or where the use or benefits of AI are overstated as part of an investment advisory service. Gary Gensler notes “[w]e’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.”
How: In the case of Delphia, the SEC found that the firm made false and misleading statements in its SEC filings, in a press release, and on its website regarding its purported use of AI and machine learning that incorporated client data in its investment process. The SEC determined that the statements were false and misleading because Delphia did not in fact have the AI and machine learning capabilities that it claimed. Similarly, the SEC found that Global Predictions made false and misleading claims in 2023 on its website and on social media about its purported use of AI. The charges against both firms included violations of the SEC’s Marketing Rule.
Why it matters: At CRC, we have seen an influx of AI-driven investment advisory business. This uptick has been seen across both internet-based advisers and traditionally registered advisers incorporating AI and technology into their recommendation generation and delivery. While these settlements were IA-specific, the regulatory signaling is widely applicable. There is a continued focus on ethical marketing, and heightened scrutiny on the use of AI is going to leach into other areas of regulatory focus.
CRC keeps its thumb on the pulse of the evolving regulatory landscape. Keep an eye out for additional information, including updated guidance, risk alerts, and CRC’s thoughts on how to ensure successful compliance with evolving regulatory expectations within your firm’s existing regulatory compliance program.
Contact Mitch Avnet for further details: (646)346-2468 | mavnet@compliance-risk.com
