The SEC has settled with two investment advisers for AI washing, or falsely claiming to use AI in their investment strategies, a violation of marketing principles aimed at preventing deceptive acts
The U.S. Securities and Exchange Commission (SEC) has announced settlements with two investment advisers for making false and misleading statements about their purported use of artificial intelligence (AI). Global Predictions Inc. and Delphia (USA) Inc. “marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not,” said Gary Gensler, chair of the SEC.
In a recent video about the concept of AI washing, Gensler acknowledged AI as the “most transformative technology of our time, fully on par with the internet” and when these types of technology emerge, firms will often make false claims to lure clients with the use.
AI washing is used to describe claims made or marketed by companies or investment advisors about their use of AI that are untrue or misleading. When advertising, investment advisers are held to seven principles-based prohibitions intended to guide adviser-marketing and prevent fraudulent, deceptive, and manipulative acts. These prohibitions include that marketing material must not be misleading and an adviser must have the ability to substantiate material statements, among others. Therefore, Global Predictions and Delphia (USA) were found to have violated these prohibitions, among others, when marketing false AI statements.
‘Expert AI-driven forecasts’
Global Predictions, a San Francisco-based firm that offers investment advisory services through an interactive online platform and makes investment allocation recommendations to clients, disseminated material to more than one person on its public website and social media sites, as well as in emails to current and prospective clients, which constituted advertisements, and that contained false and misleading statements concerning the firm’s use of AI.
For example, the SEC found Global Predictions claimed on its public website that its technology incorporated “expert AI-driven forecasts,” when it did not, and inaccurately claimed to be the “first regulated AI financial advisor” on its public statements and marketing material, and in turn, was unable to produce documents to substantiate this claim.
AI washing is used to describe claims made or marketed by companies or investment advisors about their use of AI that are untrue or misleading.
According to the seven prohibitions of the new marketing rule, if an investment adviser cannot produce information to substantiate claims in an advertisement, the exam staff will presume that the adviser did not have a reasonable basis for their belief.
Additionally, the SEC stated that Global Predictions misrepresented its regulatory assets under management on its public website and was unable to substantiate performance claims. The firm also presented a hypothetical performance on its public website and YouTube without adopting and implementing policies and procedures reasonably designed to ensure that the hypothetical performance was relevant to the likely financial situation and investment objectives of the intended audience.
According to the new marketing rules adopting the release, the SEC stated that advisers would generally not be able to include hypothetical performance in mass audience or general circulation advertisements.
Finally, Global Predictions disseminated testimonials on its public website without describing material conflicts of interest on the part of certain persons giving the testimonials created by Global Predictions’ relationship with them. For example, one of the testimonials was given by an individual who had outside business relationships with Global Predictions’ chief executive officer.
The use of testimonials was a highly anticipated aspect of the new marketing rule but to be done in compliance with the rule, a firm must make prominent disclosure that includes a statement of any material conflict of interest, such as whether the person giving the testimonial is a client and whether compensation was provided for the testimonial.
False and misleading
Delphia was a robo-adviser and manager of five pooled investment vehicles. The firm developed algorithms to manage retail client portfolios based on different investment objectives and risk profiles for its clients. According to the SEC order, Delphia intended to use AI and machine learning to collect this data from its clients (such as from social media, banking, credit card, online purchases, etc.) as inputs into its algorithms.
It was found that Delphia collected certain client data intermittently between 2019 and 2023, but it never used that data with AI or machine learning or otherwise used that data in any way as inputs into its investing algorithms.
Delphia’s false and misleading statements were found in the firm’s Form ADV Part 2A brochures, press releases and website marketing. For example, Delphia’s website claimed that the firm “turns your data into an unfair investing advantage” and “put[s] collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else.” Many of the statements were material because Delphia had represented to current and prospective clients that its use of client data as inputs into its investing algorithms was a vital differentiating characteristic from other advisers.
If an investment adviser cannot produce information to substantiate claims in an advertisement, the exam staff will presume that the adviser did not have a reasonable basis for their belief.
In July 2021, the SEC audited Delphia which admitted it had not used any of its client’s data and had not created an algorithm to use client data. To try to remedy the findings, Delphia amended the firm’s marketing practices, including creating a compliance manager for its compliance team and the retention of two outside compliance consulting firms.
However, Delphia continued to make certain false and misleading statements in advertisements regarding the use of client data in various formats through August 2023, according to the SEC order. Delphia withdrew its SEC registration in January and moved its five pooled investment vehicles to a newly formed adviser.
Without admitting or denying the SEC’s findings, Delphia and Global Predictions consented to the entry of orders finding that they violated the Advisers Act and ordering them to be censured and to cease and desist from violating the charged provisions. Delphia agreed to pay a civil penalty of $225,000, and Global Predictions agreed to pay a civil penalty of $175,000.
