As public companies increasingly discuss their artificial intelligence ("AI") capabilities, the U.S. Securities and Exchange Commission ("SEC") reminds us that it is closely watching these claims.
On December 5, SEC Chair Gary Gensler cautioned public companies against exaggerating or misstating how they are using AI in their businesses, which he referred to as "AI washing," in a nod to the well-known term "greenwashing" in the ESG context. Speaking at an AI-focused event, Chair Gensler emphasized that claims about AI capabilities, like other public statements companies make, are subject to the federal securities laws. Accordingly, such claims, in Chair Gensler's words, must be "full, fair and truthful" and must "fairly and accurately describe the material risks." Chair Gensler's remarks echo those of a senior SEC enforcement official in October that the SEC has started looking into claims by companies that their products or services incorporated AI in a particular way when in fact, they did not.
The SEC's focus on so-called "AI washing" is hardly surprising given recent data showing that both the number of public companies mentioning AI during earnings calls and the number of references to AI during those calls have increased sharply this year. As it did when ESG or Covid-19 preparation first became hot-button topics for investors, the SEC is likely to pursue investigations looking for material overstatements of AI capabilities or understatements of the risks AI pose to a company's business, with the goal of bringing high-profile "message" cases to deter others from engaging in such conduct. In parallel, public companies making AI-related disclosures should expect comments and questions regarding such disclosures in connection with the SEC staff's ongoing review of periodic disclosures under the Securities Exchange Act of 1934.
Developments in AI are unquestionably important to investors and companies should not shy away from disclosing the opportunities and risks that AI present for their businesses. But Chair Gensler's remarks provide a stark reminder that these disclosures must be fair, accurate, and complete and balanced with adequate risk disclosure, where appropriate. In anticipation of increased SEC scrutiny of such claims, companies may wish to review their disclosure controls and procedures to ensure that they include processes for validating AI claims with subject-matter experts and ensuring that critical information about how AI truly affects a company's business reaches those responsible for public reporting.
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