The SEC fined two investment advisory firms for making misleading statements about their artificial intelligence capabilities, which SEC Chair Gary Gensler deemed a form of “AI washing.”
“We’ve seen time and time again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting 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.”
The Toronto-based Delphia and the San Francisco-based firm Global Predictions agreed to pay $400,000 in combined fines to settle charges without admitting or denying the accusations.
Global Predictions registered with the commission last July, purportedly offering advisory services through its online platform PortfolioPilot. However, the SEC noted 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 allegedly claimed its tech used “expert AI-driven forecasts” when it did not. According to the settlement, the firm also touted itself as the "first regulated AI financial advisor” on its website and on social media, even though it could not support the claim with any documentation.
The firm also claimed to offer tax-loss harvesting services when it did not, boasted having $6 billion in regulated managed assets (it didn’t claim any managed assets to the SEC) and used hypothetical performance in its ads without disclosing so.
Additionally, the firm highlighted several testimonials from individuals who had outside business relationships with Global Prediction’s CEO (the firm previously hired one of them as a third-party consultant). Another person offering a testimonial was “a close family member” of the CEO, among other alleged infractions of the ad rule.
“Global Predictions cooperated fully with the inquiry and is pleased to put this behind us. Additionally, we have clarified across our marketing how exactly we use AI,” a spokesperson for the firm said, adding the firm released a blog posting on its site detailing its use of AI. The firm paid a $175,000 fine.
The SEC found that Delphia, a firm with $187 million in assets, also falsely touted 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.
It paid a $225,000 fine. Representatives from Delphia did not respond to a request for comment prior to publication.
According to the commission, Global Predictions removed ads violating the marketing rule from its website and social media, hired a third-party compliance consultant to review its marketing and ran compliance training for employees, among other remedial steps. The firm also took Delphia’s “cooperation” into account.
The term “AI washing” is reminiscent of the oft-used term “greenwashing,” referring to when firms claim certain services or products are environmentally friendly or ESG in practice when they are not. The industry is waiting for a final rule governing how advisors should eliminate conflicts when using AI or other predictive data analytics tools.