The SEC Warns Against AI Washing in Financial Sector

The SEC Warns Against AI Washing in Financial Sector

The US Securities and Exchange Commission (SEC) chair, Gary Gensler, recently spoke out against the practice of “AI washing” in the financial sector. AI washing refers to the misuse of artificial intelligence technology, particularly when individuals or companies make false claims about the use of AI in their financial activities. Gensler emphasized that such activities could potentially violate securities laws and mislead investors.

Gensler highlighted that investment advisers and broker-dealers are at risk of engaging in AI washing by falsely claiming to use AI to generate higher returns on investment. Additionally, publicly traded company executives may exaggerate the impact of AI on stock prices in an effort to attract investors. Gensler stressed the importance of transparency and accuracy in all claims made by individuals and companies in the financial sector.

Gensler acknowledged the significant transformative potential of AI technology in financial markets, likening it to the impact of the internet. He noted that AI is already being leveraged to enhance inclusion, efficiency, and user experience within the financial system. Despite the benefits of AI, Gensler warned against the use of false or misleading claims to deceive investors.

In response to cases of AI washing, the SEC has taken legal action against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc. Both companies were found to have made false and misleading statements about their use of AI technology. Delphia claimed to use AI in combination with data to predict successful companies for early investment, while Global Predictions falsely portrayed itself as the “first regulated AI advisor” providing expert AI-driven forecasts.

SEC Enforcement Director Gurbir Grewal criticized the lack of AI capabilities in Delphia and Global Predictions, labeling their actions as AI washing. As part of the settlement, Delphia and Global Predictions paid civil penalties of $225,000 and $175,000, respectively. The SEC charged both companies with violating the Marketing Rule of the Advisers Act and other securities regulations. The enforcement actions underscore the SEC’s commitment to holding individuals and companies accountable for misleading claims related to AI use in financial activities.

While the SEC proposed rules to regulate AI use in financial markets in 2023, the progress has been hindered by opposition in the Senate. The delay in implementing regulations raises concerns about the continued prevalence of AI washing and the potential harm it can cause to investors. Despite the challenges, Gensler and the SEC remain vigilant in combating deceptive practices and ensuring transparency in the use of AI technology in the financial sector.


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