Recently, US Securities and Exchange Commission (SEC) Chair Gary Gensler has spoken out against the deceptive practice known as “AI washing” within the financial sector. Gensler condemned the abuse of artificial intelligence and highlighted that such activities could potentially violate securities laws. This warning comes in response to lawsuits and regulatory actions taken by the SEC against individuals and companies engaging in AI washing.
Gensler specifically called out investment advisers and broker-dealers who falsely claim to utilize AI to achieve higher returns on investments. He also mentioned that executives at publicly traded companies may attempt to boost stock prices by exaggerating their use of AI technologies. Emphasizing the importance of accuracy, Gensler stated that all claims made in relation to AI must be truthful and transparent.
Gensler recognized the significant transformative potential of AI technology, comparing it to the impact of the internet. He noted that AI is already being leveraged to enhance inclusion, efficiency, and user experience within the financial system. Despite its promising applications, Gensler cautioned against the misuse of AI for deceptive purposes.
In recent enforcement actions, the SEC charged and settled with Delphia (USA) Inc. and Global Predictions Inc., two investment advisers that made false and misleading statements regarding their use of AI. Delphia claimed to utilize AI in conjunction with data analysis to predict promising investment opportunities, while Global Predictions misrepresented itself as the “first regulated AI advisor” offering expert AI-driven forecasts.
SEC Enforcement Director Gurbir Grewal highlighted the detrimental impact of AI washing on investors, stating that both Delphia and Global Predictions lacked the AI capabilities they purported to possess. As a result, investors were misled by these false claims, leading to financial losses and reputational damage for the companies involved. In the settlement, Delphia and Global Predictions agreed to pay civil penalties of $225,000 and $175,000, respectively.
The SEC’s enforcement actions were based on violations of the existing Marketing Rule of the Advisers Act and other securities regulations. While the SEC had proposed rules to regulate the use of AI in financial markets in 2023, progress on the implementation of these rules has been slow due to opposition in the Senate. This lack of regulatory framework leaves room for continued abuse of AI in the financial sector if left unchecked.
The prevalence of AI washing poses significant risks to investors and undermines the integrity of the financial system. As advancements in AI technology continue to reshape the industry, regulatory authorities must remain vigilant in combating deceptive practices and holding accountable those who seek to exploit AI for personal gain. By promoting transparency and accountability, regulators can mitigate the dangers of AI washing and uphold the trust and confidence of investors.
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