On March 18, 2024, the SEC announced two enforcement actions against investment advisers for so-called “AI-washing” and violations of the Marketing Rule.  Using the playbook from the Enforcement Division’s “green-washing” cases in the ESG space, the SEC found that the two investment advisers marketed that they were using AI in certain ways, when in fact, the advisers were not. 

In the Matter of Delphia (USA) Inc. – Delphia claimed that it was using personal data from consumers to make better investing decisions.  For example, in a December 2019 press release, Delphia claimed that it was the “first investment adviser to convert personal data into a renewable source of investable capital . . . that will allow consumers to invest in the stock market using their personal data.”  Delphia further stated that “Delphia uses machine learning to analyze the collective data shared by its members to make intelligent investment decisions.”  In fact, Delphia had not used any of its clients’ data and had not created an algorithm to use client data. 

• Delphia received a penalty of $225,000 and was charged with negligent fraud under Section 206(2) and Section 206(4), and Marketing Rule and compliance violations.

In the Matter of Global Predictions, Inc. – Global Predictions falsely stated on its website that its technology incorporated “[e]xpert AI driven forecasts,” and that it was the “first regulated AI financial advisor” without any documents to substantiate these claims.  Global Predictions also claimed that it had more than $6 billion in assets on its platform, without listing any AUM on its Form ADV, and claimed that its models outperformed IMF forecasts by 34% without any disclosure about how it calculated this figure or its analysis, and without documented substantiation.

• Global Predictions received a penalty of $175,000 and was charged with negligent fraud under Section 206(2) and Section 206(4), and Marketing Rule and compliance violations.

These cases are among the first “AI-washing” cases we have seen.  We expect the Enforcement Division to continue bringing cases weighing the veracity of claims and marketing materials against the adviser’s actual AI functionality and documentation supporting the claims, including in instances where the AI-related statements are not as obviously false as these were.  We also expect cases like these to be cited as part of the SEC’s justification if the SEC adopts its Proposed Rules on Predictive Data Analytics (see our client alert linked here on the topic) which applies to a broad array of models and technologies used by most businesses (including AI) and which sets a high bar for eliminating conflicts of interest which may be built into such models and technologies.  These cases also mark more cases coming out of the first exam sweep following the Marketing Rule’s effective date in November 2022.