Two RIAs made misleading artificial intelligence marketing claims; that's not good, but neither was the SEC's decision to tar them for 'AI-washing'

Federal regulators recently penalized two robo-advisers -- Delphia and Global Predictions -- $400,000, collectively, for false marketing claims about their use of artificial intelligence.  See: Two 'RIAs' that allegedly falsely advertised using 'artificial intelligence' to aid investment decisions cough up real SEC settlements and censure

Securities and Exchange Commission (SEC) Chairman Gary Gensler did not appreciate the misleading AI marketing, and used a term that I expect we’ll hear more frequently -- “AI washing.”  

Gurbir Grewal, the SEC’s Enforcement Director, warned more clearly: “As more and more investors consider using AI tools in making their investment decisions or deciding to invest in companies claiming to harness its transformational power, we are committed to protecting them against those engaged in ‘AI washing.’”  

Perhaps more ominously, Grewal went beyond just investment advisers: “[P]ublic issuers making claims about their AI adoption must also remain vigilant about similar misstatements that may be material to individuals’ investing decisions.”  

Uh. Oh.

My take

I hate it when bad facts don’t just make bad law but give rise to an ugly slur such as “AI washing.”  

As alleged, Delphi and Global Predictions blatantly lied about their use of AI.  They used AI as a buzz word to attract retail clients.  

Delphia said it used AI and machine learning to analyze and synthesize client online spending habits and social media data to inform its “predictive algorithmic model."

 Delphia boasted that this predictive model would give the client an “unfair advantage” in predicting the market.

Global Predictions claimed to be the world’s first regulated AI financial adviser. 

 Using a chatbot to collect data, the firm said it used AI to build models that outperform IMF forecasts by 34%. 

The firm was also accused of violating nearly every other adviser marketing prohibition, including hypothetical performance, testimonials and hedge clauses.

That’s not good.  

AI bulls eye

The bigger problem is that the SEC (and other regulators and legislators) are using these types of cases to create this new buzz word: “AI washing.”  

Sounds like “greenwashing,” where advisers market dubious claims about Environmental, Social, and Governance (ESG) products.  

Suddenly, we may have a rash of enforcement cases and pronouncements against anything and anybody marketing artificial intelligence solutions.  As described above, the SEC is now looking at any public company that uses the term in public disclosure.

I hope regulators and the public do not treat AI as some have treated ESG. Many ESG products and strategies have had legitimate success in their stated goals.  

As investors become more aware of the environmental and social impacts of their investments, they are seeking out investment products that align with their values, according to Forbes. 

Yet too many excited marketing professionals over-used the term and made it a punch line and punching bag.  

Artificial intelligence and machine learning are different.  

They’re tools, not just marketing strategies. They are based on legitimate technologies and science.  I have no clue how AI will affect our lives, but I am sure it will.  

Transition responsibilities 

The investment management industry will need to figure out how to use AI to improve the front, middle and back office, including client service and investment recommendations. 

 I am confident that AI will ultimately lead to better investment decisions and lower costs for investors.  

During this period of transition (which could last years), the investment management industry needs to be responsible in how it uses and, more importantly, markets its AI uses.  

Let’s avoid statements about how we can predict and beat the market.  Let’s not equate data regression with machine learning.  

Let’s not overstate our computer-based acumen. 

 Instead, let’s be honest about what AI does (and can’t do).  Otherwise, the SEC, the media, and the investing public will tar the industry with the “AI washing” epithet and quash important innovation. 

Todd Cipperman is an experienced financial services executive, lawyer, and compliance professional.  He founded and grew Cipperman Compliance Services into the largest provider of outsourced chief compliance services in the investment management industry until its sale in 2022.  Before founding CCS, Cipperman served as General Counsel of a public fund and technology firm and spent several years in private legal practice on Wall Street, representing both buy and sell side clients in investment management and capital markets transactions. He is a graduate of the University of Pennsylvania Law School and Cornell University.