New York Securities Fraud Lawyers Blog
On March 18, 2024, the Securities and Exchange Commission (the SEC) announced that it had settled charges against two registered investment advisers (RIAs) related to false and misleading representations about each RIA’s alleged use of artificial intelligence (AI) in effecting financial services, conduct which the SEC coined as “AI Washing.” In total, the SEC collected $400,000 in civil penalties from the firms, with Delphia (USA) Inc. (Delphia) agreeing to pay $225,000 and Global Predictions Inc. (Global Predictions) agreeing to pay $175,000. As AI increasingly takes over the mainstream in the coming years, investors must remain attentive to the representations RIAs and broker-dealers make about utilizing AI in the financial services they offer to public investors.
Delphia is primarily in the business of offering robo-advisory services to retail investors. “Robo-advisors” are typically algorithm driven platforms that offer investors automated investment advice based on data provided to the platform by the investor with very little, if any, human interaction. In touting its robo-advisory services to the public, Delphia represented that investor data was actively utilized to “train” and “power” its proprietary algorithms that was capable of making investment predictions up to “two years into the future.” In reality, the SEC found that Delphia never successfully implemented its investor data-driven algorithms and misrepresented its AI capabilities to the public. Notably, Delphia was also investigated by the SEC for identical conduct in 2021. If you are being investigated by the SEC, you need skilled Regulatory Lawyers in New York, like Malecki Law, to get you through the investigation.
Global Predictions offers retail investors non-discretionary investment advice, namely portfolio allocation recommendations, through its proprietary investment application PortfolioPilot and the use of proprietary algorithms. Global Predictions represented to the public that it was the “first regulated AI financial advisor” and that it actively utilized AI capabilities in the services offered to investors. After its investigation, the SEC determined that Global Predictions made false and misleading representations on its Form ADV, press releases, website, social media accounts, and paid testimonials about the company’s AI capabilities which Global Predictions was unable to substantiate. The SEC also determined that Global Predictions violated the SEC’s Amended Marketing Rule and failed to implement policies and procedures related to achieve compliance with the same. If you have made investment decisions based on AI-related misrepresentations made to you by your investment adviser or stockbroker, you should consult an experienced, AI-Securities Fraud Attorney, like the ones at New York’s Malecki Law.
AI has experienced exponential growth in recent years and shows no signs of slowing down. Firms across nearly every business sector, including financial services firms like BlackRock, Fidelity, and JPMorgan Chase, are actively looking ways to incorporate AI into their business models, as well as the products and services they offer to consumers. As such, these actions taken by the SEC are likely just the first in a long line of AI Washing enforcement actions to come. In December 2023, the Wall Street Journal reported that the SEC was conducting a “sweep” into the use of AI capabilities by investment advisers, including AI used for marketing, portfolio management, and compliance, among other areas. Notably, SEC Chairman Gary Gensler has repeatedly noted in public comments that “AI could lead to a financial crisis,” further emphasizing the SEC’s attention to the implementation of AI in the financial services sector.
Considering the velocity with which AI has entered the mainstream, investors must remain hyper vigilant about the representations made by financial advisers and stockbrokers related to their use of AI. Investors should always carefully consider the veracity and authenticity of the information provided to them by financial professionals, irrespective of a connection to AI. Further, investors should carefully consider any decisions to utilize “robo-advisors” or other automated investment recommendation services. Securities laws presently impart duties on financial advisers and stockbrokers that require such individuals to act in the best interests of investors, however, it remains to be seen whether these duties will be placed upon AI-driven advisers and brokers. If you suffered investment losses due to AI-related misrepresentations made to you by your registered investment advisory firm or your brokerage firm, you should consult an experienced, AI-Securities Arbitration Lawyer in New York, like Malecki Law.