SEC Crackdown: Taking Aim at Misleading ‘AI Washing’ Practices
The United States Securities and Exchange Commission (SEC) is ramping up efforts to combat the deceptive practice known as “AI washing,” where firms falsely claim to incorporate artificial intelligence into their operations or products. In a recent move, SEC Chairman Gary Gensler shared a video on the X platform, highlighting the agency’s focus on this issue. He pointed out that advisors might mislead clients by boasting AI-driven strategies for better investment returns, while companies might overstate their use of AI technology to inflate their stock market values.
Amidst rising concerns, the SEC made it clear through a statement by Gensler that it is determined to ensure the accuracy of such claims. On the same note, the commission has already taken action by reaching settlements with two advisory firms accused of making unfounded AI claims. Delphia, a “robo advisor” firm managing assets worth $187 million, was penalized for incorrectly asserting that it utilized machine learning to sift through data for smart investment decisions. This claim, originating from a December 2019 press release, remained unsubstantiated through to 2023.
Another firm, Global Predictions, faced repercussions for its baseless promotion of “expert AI-driven forecasts” and the claim of being the “first regulated AI financial advisor,” unable to back these claims with solid evidence when scrutinized by the SEC. These two firms collectively incurred fines amounting to $400,000, a figure that, while not enormous by SEC standards, serves as a stern warning against AI washing.
This crackdown comes at a time when the allure of artificial intelligence is undeniable, with over 353,928 .ai domain names registered as of January 18. AI’s definition itself spans a broad spectrum, from basic technology mimicking human cognitive functions to the advanced, sentient-like systems depicted in science fiction. The challenge lies in discerning genuine AI capabilities from exaggerated claims, a task the SEC is committed to, as demonstrated by its legal actions against misleading practices within the investment sector.
The case of Brian Sewell and Rockwell Capital Management LLC is another notable example. The SEC accused them of fraudulently raising $1.2 million by promising to use sophisticated algorithms, artificial intelligence, and a machine learning model for cryptocurrency trading. These claims were ultimately found to be baseless.
With AI being pegged as the frontier of technological advancement, it’s no surprise that it’s also a hotbed for opportunistic fraud. Investors, captivated by the potential of AI, are at risk of falling prey to such schemes. Through its vigilant enforcement actions, the SEC is sending a clear message to deter would-be fraudsters from exploiting this burgeoning interest in artificial intelligence.
