The US Securities and Exchange Commission (SEC) Chair, Gary Gensler, recently raised concerns about the rising trend of ‘AI washing’, which refers to the misleading use of artificial intelligence (AI) in the financial sector. Gensler emphasized that such practices may violate securities laws, and the SEC is taking regulatory actions to address this issue.
Gensler warned that investment advisers and broker-dealers are claiming to use AI to deliver higher investment returns, while executives of publicly traded companies are using AI as a tool to boost stock prices. This misleading information can have significant implications for investors and the overall integrity of the financial markets.
Unprecedented Potential of AI
According to Gensler, AI technology has the potential to bring about transformative changes in the financial system, much like the impact of the internet. He highlighted that AI is already being utilized to enhance inclusion, efficiency, and user experience within financial services. However, the misuse of AI through ‘AI washing’ undermines these positive advancements.
In response to these concerns, the SEC has initiated lawsuits and settlements against firms engaged in AI washing. Delphia (USA) Inc. and Global Predictions Inc. are two such firms that were charged and settled with the SEC for making false claims about their use of AI. Delphia falsely claimed to use AI to predict successful companies, while Global Predictions misrepresented itself as the ‘first regulated AI advisor’ offering expert AI-driven forecasts.
SEC’s Enforcement Director, Gurbir Grewal, stated that neither of the firms had the AI capabilities they claimed, labeling it as AI washing that ultimately harms investors. As part of the settlement, Delphia and Global Predictions paid civil penalties of $225,000 and $175,000, respectively. These penalties were imposed for violating the Marketing Rule of the Advisers Act and other securities regulations.
While the SEC proposed rules to regulate AI usage in financial markets back in 2023, the progress on implementing these regulations has been slow. The proposal faced opposition in the Senate, delaying its enforcement. Nonetheless, the SEC remains committed to addressing the misuse of AI and ensuring transparency and accountability in the financial sector.
The rise of ‘AI washing’ poses significant challenges to the integrity of securities laws and investor protection. As AI continues to play a crucial role in shaping the financial landscape, it is essential for regulators, market participants, and investors to remain vigilant against deceptive practices that undermine trust and credibility in the industry.