In the fast-evolving world of finance and technology, the recent settlement between the U.S. Securities and Exchange Commission (SEC) and two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., serve as a stark reminder for businesses. This settlement and the accompanying civil monetary penalties highlight the importance of transparency, accuracy, and ethical communication when it comes to artificial intelligence (AI) claims. There are several key lessons that businesses can learn from this legal saga.
1. Beware of "AI Washing"
The allure of AI is undeniable. It promises efficiency, predictive power, and competitive advantage. Many consumers within various industries are beginning to expect companies will use AI to maintain efficiencies and bring costs down. However, the SEC has warned that businesses must resist the temptation to engage in "AI washing." This term refers to the practice of exaggerating or outright fabricating AI capabilities to attract investors or clients. Delphia and Global Predictions marketed their services as AI-driven, but the SEC found that their claims were false. As part of settling with the SEC, Delphia and Global Predictions consented to the entry of orders finding that they willfully violated the Advisers Act by making untrue statements of material fact and failing to implement written policies and procedures designed to prevent violations of the federal securities laws. Delphia and Global Predictions further consented to a censure order and to cease and desist from violating the identified provisions. Delphia agreed to pay a civil penalty of $225,000, and Global Predictions agreed to pay a civil penalty of $175,000.
Given the potential for these civil penalties, businesses should be cautious not to mislead the public by overstating their AI prowess.
2. Scrutinize Your Representations
When making statements about AI adoption, businesses must ensure accuracy. Delphia's case exemplifies this. The Toronto-based firm claimed to use AI and machine learning to predict investment trends. From 2019 to 2023, Delphia allegedly made false and misleading statements in its SEC filings, in a press release, and on its website regarding its purported use of AI and machine learning that incorporated client data in its investment process. Delphia claimed that it "put[s] collective data to work to make [Delphia's] 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, the SEC discovered that these capabilities were nonexistent. The lesson here is clear: Representations about AI must align with reality. Whether in SEC filings, press releases, or websites, businesses should rigorously scrutinize the claims they make publicly. Investment advisers, in particular, need to adopt and implement written policies and procedures reasonably designed to prevent violations of the federal securities laws. Violating the Marketing Rule, which prohibits untrue statements of material fact, can have serious consequences.
3. Compliance Is Non-Negotiable
Global Predictions, a San Francisco-based firm, falsely touted itself as the "first regulated AI financial advisor." The SEC swiftly debunked this claim. Businesses must recognize that compliance isn't optional. Regulatory bodies like the SEC closely monitor AI-related assertions. If you claim to use AI in your investment processes, ensure that your representations are accurate. Public issuers, too, must remain vigilant. Misstatements about AI adoption can impact investors' decisions and harm their interests.
4. Protecting Investors Matters
Gurbir Grewal, director of the SEC's Division of Enforcement, emphasizes the SEC's commitment to protecting investors against "AI washing." As more investors explore AI tools, businesses must prioritize transparency. In a video featuring Grewal, he advises investors that they should be careful when investment advisors – and other businesses – claim to use AI technology. This warning to investors should alert all businesses, regardless of industry, that they should be fully transparent and honest when making claims about the use of AI.
5. The Road Ahead
This settlement, and other public statements by the SEC on this topic, signals that AI-related risks are an area of heightened focus for federal regulators. Businesses must proactively address AI-related claims. Here's a roadmap:
Due Diligence: Before making AI assertions, conduct thorough due diligence. Understand the technology you're using and its limitations. Ensure that your statements about the technology are truthful and accurate.
Internal Controls: Implement robust internal controls. Regularly assess AI systems to ensure they align with representations.
Education: Educate employees about responsible communication. Avoid hyperbole and focus on accuracy.
Legal Guidance: Seek legal advice. Compliance with regulations is a team effort.
In conclusion, businesses can learn from Delphia and Global Predictions' missteps. AI's transformative potential is immense, but integrity and honesty must guide its adoption. As the investment landscape evolves, businesses that navigate the AI terrain with transparency will thrive. Remember, in the age of AI, trust is the ultimate currency.
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