Marking what could be the first such case of “AI washing”, the US Securities and Exchange Commission (SEC) pulled up two investment advisers this week, Delphia and Global Predictions, over allegedly false and misleading statements on the firms’ purported use of artificial intelligence (AI).
Issuing $400,000 in total civil penalties, the US regulator alleged that Toronto-based Delphia made false claims in its SEC filings, in a media release, and on its website regarding its purported use of AI and machine learning that incorporated client data in its investment process.
Similarly, San Francisco-based Global Predictions was pulled up over allegations of false and misleading claims in 2023, on its website and on social media, about its purported use of AI, falsely claiming to be the “first regulated AI financial adviser” and misrepresenting that its platform provided “[e]xpert AI-driven forecasts”.
“We find that Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not,” said SEC chair Gary Gensler on the charges.
“We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies. Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”
While the SEC is attempting to create a distinction between real AI use and misleading statements about AI capabilities, the European Union declared last week that unacceptable AI practices will be banned in Europe and the rights of workers and citizens will be protected with the adoption of a landmark law.
Ultimately, both are promoting the responsible use of the new technology.
Namely, according to communication from the European Commission, the European AI Strategy “aims at making the EU a world-class hub for AI and ensuring that AI is human-centric and trustworthy”.
Commenting on these global events, RMIT associate professor and finance researcher Angel Zhong said that scrutiny around the use of AI will only heighten.
“With the increasing integration of AI into various industries, it’s likely that we’ll see more instances of AI washing in the future as companies seek to capitalise on the hype surrounding AI,” she told InvestorDaily.
“As for the need for regulation, the EU’s move to adopt AI regulation sets a precedent for other regions to follow suit. Australia, like many other countries, should consider enacting its own set of rules to govern the use of AI. Such regulations are essential to ensure the ethical and responsible development and deployment of AI technologies.”
Zhong noted there is “growing awareness” for the need for AI regulation in Australia, especially considering the potential impact on privacy, employment, and societal norms.
She added: “Urgently enacting AI regulations will not only provide clarity for businesses operating in Australia but also ensure the protection of individual rights and interests in the rapidly evolving AI landscape.”
A new regulatory trend in Australia?
The Australian Securities and Investments Commission (ASIC) has identified its growing focus on AI on a number of occasions, including in its 2023–27 Corporate Plan.
There it underlined that existing laws regarding financial services and consumer protection, including misleading and deceptive conduct provisions, are “technology agnostic and apply equally to AI and non-AI systems and processes”.
Responding to InvestorDaily’s request for comment on Thursday regarding particularly the idea of AI washing, an ASIC spokesperson highlighted the regulator’s previous public statements which suggested that AI remains a priority for the regulator and that it “won’t hesitate to act where the organisation sees egregious misconduct.”
On the same day, ASIC chair Joe Longo pinpointed AI as one of the “new challenges emerging” for directors during his address at the Australian Institute of Company Directors Governance Summit in Melbourne.
“New topics pile onto the board agenda almost by the day. We’ve also seen a massive increase in the expectations of the board to engage on strategy, investments and M&A, performance management, risk, talent, and the organisation,” Longo stated this week.
“That’s every bit as true here in Australia. Directors have to be across developments in the use of AI and other technology in their companies.”
Challenge to regulate
Piers Bolger, chief investment officer of Infinity Capital Solutions at Viridian Financial Group, admitted that the regulation of AI can be “challenging” given its wide scope and adoption across various levels.
“It’s hard to regulate emerging technology. ‘Artificial intelligence’ is open to debate in terms of what is AI and individual or firm-wide perceptions of it, and how it gets embedded into the way people go about their business,” he explained.
“From a fund perspective, there’s multiple definitions of what AI is. If you’re generally wanting to look at AI, you can have it in terms of generative AI – and that’s how a lot of people arguably look at it. We would argue that’s probably the most appropriate measure to consider AI, in the context of making our lives simpler…
“The context of it, how you think about where it can fit, how it fits, where it doesn’t fit, is going to vary again based on an individual’s views on the role AI can play on a corporate-level, individual-level, and asset-management level.”
For Bolger, regulatory guidance would require agencies like ASIC to form a solid view on the technology.
“Until you form a view on it, until you’ve got a fair view on what role it can play and the path forward of AI … then you can form a view on what regulatory guidance or framework you want to put around it,” he told InvestorDaily.
“From an ASIC point of view, it comes down to – what are you trying to regulate? Are you trying to regulate life being more productive, businesses being more efficient, cheaper outcomes to consumers or investors? Are you trying to regulate against a company saying the word ‘AI’ or that they’re the next Nvidia when they’re clearly not?”
The CIO highlighted that some of the popular names in the AI space today, including Nvidia, did not start that way, with the chipmaker originally operating as a graphic cards provider for PlayStation, Xbox, and other gaming technology.
For other firms adopting the technology, he noted the important distinction between the adoption of AI and the pursuit of business efficiency.
“If a business says, ‘We’re using AI’, and it’s really around business efficiency because they’ve reduced processes or have a more efficient way that they’re using a technology footprint – that’s not AI [in this context],” he said.
“People say they’re using AI, but really, they’re just using technology in a more efficient manner, as more businesses should look to do.”
Recent discussions have seen “AI washing” being touted as the next big regulatory trend, following buzzwords like “greenwashing” and the lesser-used “bluewashing”.
Bolger observed: “[AI washing] is a nice buzzword that the industry is wrapping its head around at the moment, a little like ESG was 12–18 months ago in the context of how to talk about it.”
