On Monday, March 18, the Securities and Exchange Commission (“SEC”) announced it had settled actions with two investment advisers, Delphia (USA) Inc. and Global Predictions Inc., over false and misleading statements those firms made about their use of artificial intelligence (“AI”), in particular their alleged use of AI to inform investment advice. Below we provide background on both matters, as well as takeaways for in-house counsel and others dealing with legal issues around AI and securities disclosures. 

I. Background

Delphia

According to the SEC order, Delphia, a Toronto-based investment adviser, began its “robo-adviser” business in 2019. It intended to use AI and machine learning to collect data from its clients—through social media, banking, credit card, online purchases, etc.—as inputs into algorithms that would generate custom investment advice for its clients. Delphia’s plan to use AI in this way never materialized. Nevertheless, starting in 2019, it made statements that it had such capabilities on its website, Form ADV Part 2A brochures, press releases and social media posts. The SEC investigated the veracity of Delphia’s AI claims in July 2021. After indicating it would take action to correct its marketing materials and regulatory filings in addition to other remedial measures, Delphia continued to make representations about its use of AI in social media posts. The SEC found the firm had willfully misled current and prospective clients under Section 206(2) of the Advisers Act, and fined Delphia $225,000. 

Global Predictions

According to the SEC order, San Francisco-based Global Predictions claimed to be the “first regulated AI financial adviser.” According to regulatory filings, the firm claimed to offer advisory services through an interactive online platform—a chatbot—which would offer clients investment allocation recommendations. The chatbot did not generate any recommendations. Despite this, Global Predications claimed it was capable of providing clients with AI-driven forecasts on its public website, on various social media sites, and in emails to current and prospective clients. The SEC found that Global Predictions had also misled current and prospective clients under Section 206(2), and charged the firm with $175,000 in civil penalties.

II. Takeaways 

• These actions highlight the SEC Enforcement Division’s attention to representations advisers and other companies make concerning their use of AI, in particular around so-called “AI-washing,” i.e., alleged misrepresentations about how a company uses AI in its business.
  
  
• While these actions involved investment advisers who had fiduciary duties to their clients, it would also be prudent for securities issuers to pay close attention to their own AI-related statements given the SEC’s focus in this area.
  
  
• Further, these actions again illustrate the principle that, while, absent a duty to disclose, there is generally no obligation for a company to speak on an issue (such as their use of AI), if the company does choose to speak on that issue, its statements cannot be misleading.
  
  
• And these actions again show that, as had been the case with ESG-related actions over the last several years, the SEC will use its pre-existing tools (in this case the 84-year old Investment Advisers Act) to bring enforcement actions related to hot-button issues.

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