Earlier this year, the SEC, NASAA, and FINRA issued an Investor Alert cautioning investors about the rise of investment fraud involving artificial intelligence (AI) and other emerging technologies. The overarching concern: bad actors are exploiting the popularity and complexity of AI to deceive victims, enticing them into fraudulent schemes. [1]

Making good on their mission to protect investors in this uncharted AI landscape, the SEC brought charges against two investment advisers regarding claims about their use of artificial intelligence (AI). The SEC asserted that both firms marketed their services by claiming to use AI in their investment processes when they did not actually possess such capabilities.[2]

Without admitting or denying the SEC's findings, both firms agreed to settle the charges to the tune of $225,000 and $175,000, respectively, and were found in violation of the Advisers Act, censured, and required to comply with cease and desist orders.

The SEC emphasized its commitment to protecting investors against entities engaged in "AI washing" and highlighted the importance of ensuring that representations about AI use are accurate and not misleading.

In a recent video, SEC chair Gary Gensler spoke candidly about “AI Washing,” when entities falsely claim to use AI or falsely market their enhanced capabilities using AI in order to attract investors or enhance stock prices. In his remarks, he made clear that while AI presents promising opportunities, it's crucial for financial intermediaries and public companies to uphold honesty and integrity in their communications with investors regarding their use of AI. Misleading claims could potentially violate securities laws. [3]