On March 18, 2024, the SEC announced that it had settled charges against two investment advisers for allegedly making false and misleading statements about their use of artificial intelligence (AI) in providing advisory services, so-called “AI washing.”
According to the first order, between 2019 and 2023, the adviser represented in public disclosures that it used AI and machine learning to collect and analyze its retail clients’ spending and social media data to inform the investment algorithms utilized by its robo-adviser business to provide investment advice, when in fact no such data was being used in its investment process. During the relevant period, such statements regarding the adviser’s AI and machine-learning capabilities and use of client data were included in various public disclosures, including in its Form ADV, in press releases and on its website. In a 2021 SEC examination, the adviser acknowledged that it had not developed the advertised AI and machine-learning capabilities or utilized client data as described. Despite undertaking certain remedial actions following the examination, the adviser allegedly continued to make similar false and misleading statements in advertisements through August 2023.
In the second order, the SEC alleged that the adviser made false and misleading claims on its website, in emails to current and prospective clients, and on social media regarding its use of AI in its interactive online platform, which makes investment allocation recommendations to clients. For example, the adviser claimed to be the “first regulated AI financial advisor” and that its technology incorporated “[e]xpert AI-driven-forecasts,” claims that the SEC states the adviser was unable to substantiate. The order also cited a number of other alleged false and misleading statements and violations unrelated to the adviser’s purported use of AI.
The SEC found that the advisers willfully violated Section 206(2) of the Investment Advisers Act of 1940, which makes it unlawful for any adviser to engage in a transaction, practice or course of business that operates as a fraud or deceit upon a current or prospective client; Section 206(4) of the Advisers Act and Rule 206(4)-1 thereunder which prohibit any registered investment adviser from disseminating any advertisement that includes any untrue statement of material fact or omits to state a material fact necessary in order to make the statement made not misleading or includes information that would reasonably be likely to cause an untrue or misleading implication or inference to be drawn concerning a material fact relating to the investment adviser; and Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder which require registered investment advisers to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder. Without admitting or denying the SEC’s findings, the advisers each consented to cease and desist from future violations and to censure. The advisers agreed to pay respective civil penalties of $225,000 and $175,000 and in each case, the SEC considered the cooperation afforded to the SEC staff.
The SEC’s orders are available here and here. A related press release is available here.
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