The SEC fined two investment advisory firms for misleading statements about their artificial intelligence capabilities, which SEC Chairman Gary Gensler deemed a form of “AI laundering.”
“We've seen time and time again that when new technologies emerge, they can create hype from investors as well as false claims from those who claim to use those new technologies,” Gensler said. “Investment advisors should not mislead the public by saying they are using an AI model when they are not.”
of Toronto-based Delphia AND San Francisco-based firm Global Predictions agreed to pay $400,000 in combined fines to settle the charges without admitting or denying the allegations.
Global Predictions registered with the commission last July, apparently offering advisory services through its online platform PortfolioPilot. However, the SEC noted that the firm registered after the compliance date for the amended Marketing Rule and accused it of making misleading statements on its website, social media accounts and in emails to existing and potential clients.
Global Predictions claimed its technology used “AI-driven expert predictions” when it did not. According to the settlement, the firm also touted itself as the “first regulated AI financial advisor” on its website and social media, even though it could not back up the claim with any documentation.
The firm also claimed to offer tax loss harvesting services when it did not, boasted $6 billion in regulated assets under management (it claimed no assets under management to the SEC), and used hypothetical performance in its advertising without disclosing it. this.
Additionally, the firm highlighted several testimonies from individuals who had outside business relationships with Global Prediction's CEO (the firm previously employed one of them as a third-party consultant). Another person offering a testimonial was “a close family member” of the CEO, among other alleged violations of the advertising rule.
“Global Predictions cooperated fully with the investigation and is pleased to put this behind us. Additionally, we have made it clear in all of our marketing exactly how we use AI,” said a spokesperson for the firm, adding that the firm published a blog post on its website detailing its use of AI. The firm paid a fine of $175,000.
The SEC found that Delphia, a firm with $187 million in assets, also falsely advertised the use of AI in its business operations. Commission examiners said Delphia claimed to put “collective data” to work to make its AI systems smarter to predict sound investments. But Delphia didn't have the AI capabilities it claimed, according to the order.
She paid a fine of $225,000. Representatives from Delphia did not respond to a request for comment before publication.
According to the commission, Global Predictions removed ads that violated the marketing rule from its website and social media, hired a third-party compliance consultant to review its marketing and conducted compliance training for employees, among other remedial steps. The firm also considered Delphia's “collaboration.”
The term “AI washing” is reminiscent of the often used term “greenwashing”, referring to when firms claim that certain services or products are environmentally or ESG friendly when in practice they are not. The industry is waiting for a final rule governing how advisers must eliminate conflicts when using AI or other predictive data analysis tools.