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The SEC has taken action against two investment advisory firms, Delphia and Global Predictions, for false and misleading marketing statements around their use of AI. The action underscores a growing concern by regulators over the authenticity of claims regarding the capability of technology, particularly in the realm of AI.
Delphia, a Toronto-based entity, and Global Predictions, have been found to have misrepresented their AI and machine learning applications in their investment processes. Delphia’s misleading statements spanned from 2019 to 2023, suggesting their AI utilized client data to anticipate market trends—a claim proven to be without merit. Similarly, Global Predictions made unfounded claims in 2023 about being the “first regulated AI financial advisor,” amongst other deceptive statements. These actions not only breached the SEC’s Marketing Rule, which prohibits untrue statements in advertisements, but also raised questions about the ethical implications of ‘AI washing’—a practice where firms falsely claim to use or exaggerate their use of AI technology.
The settlements involved civil penalties amounting to $400,000, with both firms consenting to cease-and-desist orders without admitting or denying the findings. This outcome marks a clear message from the SEC regarding the necessity for transparency and honesty in representations made by investment advisers concerning AI.
The action brings into focus the importance of robust internal controls and governance structures, especially concerning the AI and other emerging technologies. While investment firms are increasingly integrating AI into their businesses to operate and compete in the market more effectively, investors cannot be misled about the technology they are using, or the extent of its capabilities.
Have you reviewed your internal controls?
Firms should take this opportunity to implement or review controls to ensure the accuracy of claims regarding technology usage. These controls should include oversight mechanisms that verify the authenticity of the technology being used, testing to confirm its efficacy, and transparent reporting to stakeholders about the capabilities and limitations of the technology.
The governance framework should also facilitate ongoing monitoring and evaluation of AI systems to adapt to new risks and technological advancements. A dynamic approach ensures that firms not only comply with current regulations but are also prepared for future developments in the space.
As AI continues to shape the financial services industry, the establishment of rigorous internal controls and robust governance frameworks will be vital. With ‘AI washing’ unlikely to go away any time soon, and the SEC making a clear stance on protecting investors from misleading claims, the path forward for investment advisers is clear. Embrace transparency, make accurate claims, and uphold the highest standards of ethical conduct in the deployment of AI.
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Based on our experience dealing with the regulator and supporting investment advisers across the country, we can help you evaluate your internal controls, strengthen processes and ensure your activities remain compliant with the Marketing Rule.
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