News from Pohlmann & Company


When Greenwashing meets AI – SEC charges AI-Washing!

Stricter enforcement approach by the SEC to avoid both, green- and AI-washing

In a first-of-its-kind enforcement action, the Securities and Exchange Commission (SEC) has announced civil penalties against two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., for making false claims  and overstating their utilization of artificial intelligence (AI) in investment decision-making. This decisive move underscores the SEC’s vigilant stance on maintaining integrity and transparency within the expanding field of AI-driven investment strategies.

The firms collectively face $400,000 in agreed civil penalties following their admission to the SEC’s charges, which shed light on their deceptive marketing practices. According to the SEC’s decision,  their practices not only breached trust but also violated the foundational principles of the investment advisory industry by misleading clients about the sophistication and capabilities of their AI technologies. Delphia, operating out of Toronto, falsely promoted its AI and machine learning capability, claiming to leverage collective client data to predict emerging market trends and invest preemptively. Such statements were misleading, as the firm lacked the proclaimed AI capabilities. Similarly, Global Predictions, based in San Francisco, was found guilty of erroneously branding itself as the “first regulated AI financial advisor,” alongside other exaggerated claims about its AI-driven forecasting and tax-loss harvesting services. These actions misrepresented the firm’s actual services and misled investors regarding the nature and benefits of their investment strategies.

The SEC’s findings reveal a concerning “AI-Washing” trend within the investment advisory sector, where firms falsely claim to implement AI technologies to attract investors. SEC Chair Gary Gensler and Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, emphasized the critical importance of honesty in representations of AI use, highlighting the potential harm to investors and the market’s integrity from such misleading practices. In their settlement with the SEC, Delphia and Global Predictions agreed to corrective measures, including censures and orders to cease and desist from future violations, without admitting to the SEC’s findings. Delphia will pay a civil penalty of $225,000, while Global Predictions will pay $175,000.

SEC’s first-of-its-kind enforcement action signals a clear message: The SEC closely monitors claims about advanced technology use, particularly AI, and will take swift action against misinformation. In the constantly evolving technology landscape, the SEC’s actions highlight the ongoing challenge of balancing innovation with integrity. This case sets a precedent for future actions against misleading AI claims. It reinforces the critical need for transparency and honesty in the embrace of new technologies, first and foremost in the financial industry, but certainly also beyond that.

The two enforcement actions bear a striking resemblance to the SEC’s recent approach to enforcing the incorporation of ESG factors into investment recommendations. The SEC has established a Climate and ESG Task Force to develop initiatives to proactively identify ESG-related misconduct in line with increasing investor confidence in climate and ESG-related disclosures and investments. The aim is to avoid greenwashing and ensure that investors can trust that each company has gauged materiality on these complex issues with flawless precision and objectivity.

AI-Regulation – A Global Perspective

Just a few weeks back on March 13, 2024, the European Parliament passed the much-anticipated European AI Act, which is the first comprehensive attempt to regulate AI globally. This legislation aims to establish comprehensive rules for the development and use of AI across member states, emphasizing transparency, safety, and fundamental rights. The act signifies a global move towards more regulated AI applications, spotlighting the importance of aligning AI claims with actual capabilities and ethical standards. As the scrutiny of AI-washing and similar misuses of AI is expected to intensify in the realm of regulatory oversight and enforcement in the near and distant future, here are several key strategies and suggestions for immediate integration into companies’ compliance and disclosure protocols.

  • Transparency in AI Usage: Clearly disclose the extent and limitations of AI technology in your products and services. Ensure that all claims about AI capabilities are accurate, can be substantiated, and reflect the current state of your technology.
  • Communication of specific risks: In communicating significant risks associated with AI, such as operational, legal, and competitive challenges, opt for disclosures that are specific to the company and its application of AI, avoiding generic descriptions.
  • Regular Compliance Reviews: Conduct regular reviews of marketing materials, public statements, and disclosures to ensure they do not contain misleading information about your company’s AI capabilities. This should include a thorough audit of website content, social media posts, and any other investor communications.
  • Educate and Train Staff: Provide training for all employees, especially those involved in marketing and client communications, on the importance of accurate representations of AI technology. Ensure they understand the regulatory landscape and need for AI integrity as well as the potential legal consequences of misleading statements
  • Monitor Global Regulatory Developments: Given the global interest in regulating AI, such as the European AI Act, stay informed of international regulatory developments. Consider how global standards and regulations may impact your operations and disclosure practices.