SEC Enforcement Director Warns Against AI Washing

SEC Enforcement Director Warns Against AI Washing

Blog Keeping Current: Disclosure and Governance Developments

On April 15, 2024, Gurbir S. Grewal, Director of the SEC’s Division of Enforcement, spoke at a compliance and enforcement conference regarding the challenges and potential missteps associated with the increased use of artificial intelligence (AI).

Analogizing to the recent areas of fraud associated with cryptocurrencies, the SPAC boom, ESG initiatives and associated “green washing”, Director Grewal noted that heightened investor interest in an area often leads to heightened investor risk as companies are eager to appear ahead of investor demand. In the case of the cutting-edge technology of AI, this can be seen in “AI washing”, where companies make unfounded claims regarding, among other things, their AI use and capabilities and the impacts of AI on their business. In addition to other concerns, Director Grewal noted that AI washing has the potential to mislead investors, harm consumers and violate the federal securities laws.

Director Grewal’s remarks build upon previous statements about AI and AI washing by others at the SEC, including SEC Chair Gary Gensler and the Director of the Division of Corporation Finance, Erik Gerding. For example, in a recent speech, Chair Gensler emphasized that “the basics of good securities lawyering still apply” with respect to AI. Namely, Chair Gensler remarked that claims about AI prospects should have a reasonable basis, and companies should disclose particularized risks regarding AI rather than relying on boilerplate language. Similarly, Director Gerding has emphasized the need for specificity in AI disclosure, including the need to define what “AI” means to a particular company.

These statements make clear the SEC’s interest in AI and in ensuring that related disclosure is tailored, useful for investors and free from AI washing. As companies look to their future filings and other public statements, disclosure about AI should be reviewed carefully through this lens. In particular, companies should ensure that any aspirational statements about AI have a reasonable basis and are carefully drafted to make clear that they are aspirational rather than factual.  Otherwise, those aspirational statements might later be argued by the SEC or a private plaintiff to constitute false and misleading statements that result in liability under the federal securities laws.

For example, as described in our prior client alert, the SEC announced settled charges last month against two registered investment advisers for making false and misleading statements about their purported use of AI. According to the SEC’s orders, the statements included one adviser’s claim of being the “first regulated AI financial advisor” and the other’s claim that it “put[s] collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else.” The settled charges resulted in the advisers’ paying civil penalties of $225,000 and $175,000 and agreeing to cease and desist orders.

Regarding individual liability, Director Grewal noted that he intends to follow a similar approach to that used for individual liability surrounding cybersecurity disclosure failures. In doing so, the Division of Enforcement will look to whether an individual actually knew or should have known of the errors; what the individual actually did or did not do; and how that measures up to the SEC’s standards expressed in its statutes, rules, and regulations. Director Grewal reiterated that leaders who operate in good faith and take reasonable steps to avoid errors are unlikely to face personal liability. While this statement provides some reassurance, it remains to be seen how individual liability will manifest in real world enforcement scenarios based on specific facts. 



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