SEC Takes Aim at ‘AI washing’

New SEC lawsuits are aiming to address the dangers that AI may pose to investors.

Image Credit: iStock, krblokhin

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Call it artificial misintelligence.

The Securities and Exchange Commission is now zeroing in on a new marketing tactic, called AI washing, that companies use to mislead customers about the benefits of the technology in their investment decisions. With the rise of artificial intelligence in recent years, the agency is warning advisors not to oversell their tech capabilities to draw in unsuspecting investors.

“Bad actors are finding new ways to exploit AI and deceive the public,” SEC Chair Gary Gensler said in a June speech. “Make no mistake: fraud is fraud.”

On June 11, the agency charged a now-shuttered artificial intelligence recruitment startup with defrauding investors of at least $21 million. The company allegedly ran an “old-school fraud using new school buzzwords like ‘artificial intelligence’ and ‘automation,’” according to a press release.

The SEC also settled charges against two advisors in March, Toronto-based Delphia and San Francisco-based Global Predictions, over AI washing. According to that order, the latter firm claimed it used predictive algorithms to make “AI-driven forecasts,” and even went so far as to market itself as the “first regulated AI financial advisor.” If you haven’t guessed, neither claim was deemed to be true.

Pushing the AI Envelope

The SEC is already moving to get a handle on the dangers artificial intelligence and predictive analytics pose to investors. New regulations proposed by the agency, aimed at addressing conflicts of interest, are already in the works.

One issue is that investors have more investing data at their fingertips than ever before, according to Gensler. Hundreds of financial influencers are posting on social media platforms, Reddit threads like Wall Street Bets, and on YouTube channels. While new voices usually benefit retail investors, they’re not always in their best interest.

“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,” Gensler said in a March release. “Investment advisers should not mislead the public by saying they are using an AI model when they are not.”

His agency is also trying to understand how the new rules could impact the advisory industry itself, and if they would make it harder and more expensive for advisors to offer AI tools to clients. Some industry advocates argue that it would add unnecessary cost and time constraints to financial advisors’ businesses. Two Senate Republicans introduced a bill in February that would  bar it completely, calling it a “war against technology.”

We Want Our AI

The SEC may be listening. After roughly a year in the works and comments from the public, Gensler said he has asked his staff to revisit the rules.

“We’ve received a lot of feedback from the public on this proposal,” Gensler said in the June speech. “As we have done from time to time with other rules, I’ve asked staff to consider whether it would be appropriate to seek further comment, possibly, on a modified proposal.”

While the commission has fired the first legal rounds over AI washing, there are ways to stay out of regulators’ crosshairs. Experts from the wealth management law firm consultancy group Crowell recommend educating yourself on AI programs and staying on top of any new guidelines:

  • Understand the risks associated with the use of AI as they relate to the company’s business. 
  • Review statements being made on websites, particularly in connection with the use of AI.
  • Ensure disclosures accurately represent and account for the capabilities and limitations of any AI technology.
  • Consider disclosure controls around AI and potential cybersecurity incidents, including an appropriate incident response plan.

Gensler said that investment advisers and broker dealers may want to tap into the excitement over AI by claiming the technology can help make more profitable investment decisions. While new technologies and AI tools may ultimately benefit clients and retail investors, advisors need to make sure they’re not pulling the wool over anyone’s eyes.

“Under the securities laws, firms should have a reasonable basis for those claims,” Gensler said.