SEC Charges Investment Advisors for Overstating Use of AI

The two firms will pay $400,000 in total civil penalties for false marketing and the SEC is on the lookout for more offenders.

By Rethinking65

Two investment advisors charged by the SEC for making false and misleading statements about how they are using artificial intelligence have agreed to settle the SEC’s charges and pay $400,000 in total civil penalties. the SEC announced on March 18.

The firms are Toronto-based Delphia (USA) Inc. and San Francisco-based Global Predictions.

“We find that Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not,” SEC Chair Gary Gensler said in a press release.

“We’ve seen time and 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,” said Gensler. “Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”

Advisors Beware

The SEC is paying much attention to this issue, according to Gurbir S. Grewal, director of the SEC’s Division of Enforcement. “As more and more investors consider using AI tools in making their investment decisions or deciding to invest in companies claiming to harness its transformational power, we are committed to protecting them against those engaged in ‘AI washing,’” he said in the release.

“As today’s enforcement actions make clear to the investment industry — if you claim to use AI in your investment processes, you need to ensure that your representations are not false or misleading,” said Grewal. “And public issuers making claims about their AI adoption must also remain vigilant about similar misstatements that may be material to individuals’ investing decisions.”

What Happened Here

The SEC charged that Delphia made false and misleading statements between 2019 and 2023 in its SEC filings, in a press release and on its website about how it was using AI and machine learning to incorporate client data in its investment process.

For example, according to the order, Delphia claimed that it “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.” However, Delphia did not have these AI and machine-learning capabilities, said the SEC.

The SEC also charged Delphia with violating the Marketing Rule, which prohibits registered investment advisers from disseminating advertisements that includes “any untrue statement of material fact.”

Global Predictions made false and misleading claims in 2023 on its website and on social media about its purported use of AI, according to the SEC. For example, the firm falsely claimed to be the “first regulated AI financial advisor” and misrepresented that its platform provided “[e]xpert AI-driven forecasts,” the SEC charged.

Global Predictions also violated the Marketing Rule by “falsely claiming that it offered tax-loss harvesting services, and included an impermissible liability hedge clause in its advisory contract, among other securities law violations,” said the SEC.

Delphia agreed to pay a civil penalty of $225,000 and Global Predictions agreed to pay a civil penalty of $175,000.

Earlier this year, the SEC’s Office of Investor Education and Advocacy issued an investor alert about artificial intelligence and investment fraud.

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