2 Advisers Fined for ‘AI Washing’ Marketing Violations

The Securities and Exchange Commission fined two advisers on Monday for using misleading marketing materials related to their use of artificial intelligence.

SEC Chairman Gary Gensler has emphasized in recent statements the importance of taking enforcement action against “AI washing,” the practice of falsely claiming to use AI for specific investment functions.

Delphia Inc., an adviser based in Toronto, was fined $225,000 for misleading statements made from August 2019 through August 2023. According to the SEC, Delphia made misleading statements in its SEC filings, press releases and on its website that the firm used AI and machine learning in its investment recommendations.

The SEC found that Delphia did not have the technological capabilities to provide the services it claimed to provide. Though the firm started data collection in 2019, it never applied the data to an artificial intelligence technology. The SEC’s Division of Exams identified this issue in 2021, according to the SEC, but Delphia did not adequately update its disclosures until 2023.

Global Predictions Inc., a San Francisco-based adviser, was fined $175,000 for making false statements about its use of AI, multiple marketing rule violations unrelated to AI and an unlawful liability hedge clause in its advisory contracts.

According to the SEC, Global Predictions falsely claimed it was the “first regulated AI financial adviser” and that it used a chatbot that generated AI-driven asset allocation recommendations.

Additionally, Global Predictions was unable to substantiate specific performance claims, such as claiming that the firm had outperformed IMF forecasts by 34% without disclosing the IMF forecast in question. The advisory firm also used hypothetical performance on its YouTube page, where it reaches a general audience, when the SEC’s marketing rules require hypothetical performance to be delivered to a specific and relevant audience only.

The SEC’s announcement of the fines was framed as pertaining to AI-specific violations, though the violations would be unlawful under the marketing rule if another technology were being mispresented. Jay Gould, a special counsel with Baker Botts, says the SEC is “reminding registrants that false promotional efforts claiming use of AI needs to be correct.”

Gould adds that, “I think it is framed this way so that the SEC puts everyone on notice that they are up to date on AI and all things tech. This really is something that the SEC should be signaling to the industry.”