Tag: AI Washing

SEC Brings AI Washing Cases

Back in December, Chair Gensler gave a speech to an AI Summit and warned about companies overstating their use artificial intelligence tools. From there, you can see the SEC approaching the concerns as part of fundraising fraud and marketing fraud. Chair Gensler probably knew that the Securities and Exchange Commission was actively working on two enforcement cases that got announced this week.

  • “the first investment adviser to convert personal data into a renewable source of investable capital”
  • “uses machine learning to analyze the collective data shared by its members to make intelligent investment decisions”
  • “turns your data into an unfair investing advantage”
  • “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”
  • “expert AI driven forecasts”
  • “first regulated AI financial advisor”
  • “the models are outperforming IMF forecasts by 34%, and the platform keeps improving”

These are quotes from the marketing materials for Delphia (USA) Inc. or Global Predictions Inc.

Section (a)(2) of the Marketing Rule says that an advertisement may not:

(2) Include a material statement of fact that the adviser does not have a reasonable basis for believing it will be able to substantiate upon demand by the Commission;

When asked by SEC examiners to substantiate those claims.

They could not. These appear to be the first cases by the SEC against investment advisers for AI-washing. And two of the few cases under the Marketing Rule.

Sources:

    The SEC Grapples with Artificial Intelligence

    The Securities and Exchange Commission looks to have opened at least two fronts in the adoption of artificial intelligence in financial services. The Division of Examinations has apparently started a sweep, sending out information requests on AI-related topics. SEC Chair Gary Gensler has expressed skepticism about the technology.

    The first issue is a marketing-related issue for firms. Chair Gensler was reported to have made speech last week that warned against “AI Washing.” As there have been cases against firms purporting to based investment decisions using ESG factor, but not actually doing so (greenwashing). Chair Gensler warned about firms marketing themselves as AI enable, but not actually using AI.

    You can’t oversell your AI capabilities.

    The other issue is watching the risks with actually using AI for investment decision. As an example, there is concern that there is only a few underlying AI platforms, a whole lot of investment decisions could go rampaging in the wrong direction together, off a cliff. We’ve seen isolated cases of this at firms with trading algorithms that stop working. They unplug. If you’ve got a robot, you’ve got to make sure you can shut down the robot if (when?) the robot goes bad.

    Earlier this year, the SEC released a proposed rule on Conflicts of Interest Associated With the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers that calls for investment advisers and broker dealers to:

    “Eliminate, or neutralize the effect of, certain conflicts of interest associated with broker-dealers’ or investment advisers’ interactions with investors through these firms’ use of technologies that optimize for, predict, guide, forecast, or direct investment-related behaviors or outcomes.” – Release Nos. 34-97990 / IA-6353

    It reads like a rule that is very skeptical of AI. It’s so broad and meandering that I’m not sure where it will end up. The intent is clear. Don’t let your AI do bad things.

    Sources: