Companies rushing to get on the artificial intelligence (AI) bandwagon in order to increase investor interest are now under increased scrutiny. The SEC has imposed fines where it has found companies making false or hyped-up claims about AI capabilities.
“AI-washing”, as it’s called, is when a firm overstates or misrepresents their use of artificial intelligence in order to be more attractive to investors. It’s similar to the recent “greenwashing” trend, where companies claimed they were more environmentally, or “green-friendly” than was true, in order to boost stock prices and attract eco-friendly investors.
The SEC is having none of either, and recently stepped up its enforcement of AI-washing, issuing multiple warnings and monetary penalties.
Two investment advisory firms recently got the message the hard way when the SEC fined them $400,000 “for making false and misleading statements about their purported use of artificial intelligence.”
According to the SEC’s order against Delphia, Inc., from 2019 to 2023, the Toronto-based firm made false and misleading statements in its SEC filings, in a press release, and on its website regarding its purported use of AI and machine learning that incorporated client data
in its investment process. The SEC said that Delphia did not have the AI and machine learning capabilities that it claimed, and their claims were false and misleading.
In the SEC’s order against Global Predictions, Inc., the regulator found that the San Francisco-based firm made false and misleading claims in 2023 on its website and on social media about its purported use of AI, with the firm falsely claiming to be the “first regulated AI financial advisor” and that its platform provided expert AI-driven forecasts.
Commenting on the two fines, SEC head of Enforcement Gurbir Grewal said “I hope these actions put the investment industry on notice. If you are rushing to make claims about using AI in your investment processes to capitalize on growing investor interest, stop. Take a step back, and ask yourselves: do these representations accurately reflect what we are doing or are they simply aspirational?”
“If it’s the latter, your actions may constitute the type of ‘AI-washing’ that violates the federal securities laws,” he warned.
The Federal Trade Commission (FTC) on April 23rd approved (by a 3 to 2 vote) a nationwide ban on non-compete clauses and other similar employment agreements that, they say, hinder employees from seeking work with competitors. The ban, set to become effective in August of this year, prohibits employers from requiring employees to sign a non-compete agreement as a condition of employment, and nullifies existing non-competes. The rule covers both public and private companies.
The FTC proposed this nationwide ban in January 2023, with the just adopted version containing one exception: Senior executives currently subject to a non-compete will remain subject to it. However, once the ban takes effect, subsequent new senior executive hires can no longer be compelled to agree to it.
The FTC’s 570-page ruling said that the definition of senior executive “should include both a compensation threshold and job duties test, similar to the DOL (Department of Labor) regulations that define and delimit the FLSA’s (Federal Labor Standards Act) exemption for executive employees.”
In addition, it states: “many executives in what is often called the ‘C-suite’ will likely be senior executives if they are making decisions that have a significant impact on the business, such as important policies that affect most or all of the business.”
One day after the FTC adopted its rule, the US Chamber of Commerce filed a lawsuit in a Texas court, seeking to strike down the rule, challenging the FTC’s authority to enact a nationwide ban.
This FTC rule is part of a national trend banning non-compete clauses in work agreements. In June 2023, New York banned most non-compete agreements.
The ban on non-compete agreements has been in existence in California for several years, and was strengthened again last year when Governor Gavin Newsom signed into law Senate Bill 699 which states that non-compete agreements are void and “unenforceable regardless of where and when the contract was signed.” The new California law took effect January 1, 2024.
To read the full scope of the FTC rule, please see:
Another Customer Identity Verification Rule Proposed
The SEC and the US Treasury’s Financial Crimes Enforcement Network (FinCEN) partnered this week to propose a new rule that would require SEC-registered investment advisors (RIAs) and exempt reporting advisors (ERAs) to develop and maintain customer identification programs (CIPs) that would require verification of client identity.
The effort is aimed at combating illicit financial activity, money laundering and financing terrorism, according to the SEC.
The rule, if adopted, would require RIAs and ERAs to implement a CIP that includes procedures for “verifying the identity of each customer to the extent reasonable and practicable and maintaining records of the information used to verify a customer’s identity.”
This is a complement to a rule proposed by FinCEN in February 2024 that would designate both RIAs and ERAs as “financial institutions” under the Bank Secrecy Act (BSA), which requires institutions to have reasonably designed risk-based programs to prevent money laundering and the financing of terrorism, and requires them to file suspicious activity reports.
The proposed rule is “designed to make it more difficult to use false identities to establish customer relationships with investment advisers,” said SEC Chair Gary Gensler. The SEC has opened a comment period on this latest proposed rule.
In recent years, both Treasury/FinCEN and the SEC have been stepping up efforts to capture information on individuals and investors for the stated purpose of identifying money laundering.
Beginning this year many companies, primarily privately-held, are required to report to Treasury/FinCEN information on who owns and controls them, as part of the Corporate Transparency Act of 2022.
An SEC rule that was approved in 2016 but not yet implemented is being challenged in court on constitutional grounds. The Consolidated Audit Trail (CAT) calls for capture of data on customers and orders for both over-the-counter and exchange-listed equities across US markets. Implementation has been delayed several times over issues including privacy concerns, the threat of cybercriminal hacks which would reveal personal financial information on millions of investors, and costs. Its future implementation awaits court decision.
For more information about the proposed FinCEN rule please see:
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