February 15, 2024
Artificial Intelligence: SEC Chair Again Warns About “AI Washing”
According to a recent Bloomberg Law article, the percentage of S&P 500 companies including AI-related disclosure in their 10-Ks has increased from 28% in 2021 to 41% in 2023. That trend hasn’t escaped the SEC’s notice. As Dave noted in a recent blog, Corp Fin Director Erik Gerding recently observed that the Staff is focused on AI disclosures in SEC filings and cautioned that, among other things, companies need a basis for their claims.
That message was re-enforced by SEC Chair Gary Gensler in a speech delivered at Yale Law School earlier this week. Chair Gensler covered a wide range of AI-related topics in his remarks, and at one point zeroed in on the issue of “AI washing”:
As AI disclosures by SEC registrants increase, the basics of good securities lawyering still apply. Claims about prospects should have a reasonable basis, and investors should be told that basis. When disclosing material risks about AI—and a company may face multiple risks, including operational, legal, and competitive—investors benefit from disclosures particularized to the company, not from boilerplate language.
Companies should ask themselves some basic questions, such as: “If we are discussing AI in earnings calls or having extensive discussions with the board, is it potentially material?”
These disclosure considerations may require companies to define for investors what they mean when referring to AI. For instance, how and where is it being used in the company? Is it being developed by the issuer or supplied by others?
Gary Gensler’s message about avoiding “boilerplate” echoed another comment from Erik Gerding referenced in Dave’s blog. The Corp Fin director also observed that the Staff is seeing a lot of boilerplate in AI disclosures, particularly in the “Risk Factors” discussion. By the way, this is the second time in less than three months that the SEC Chair has flagged AI washing as a big area of concern for the SEC in public remarks. I guess public companies can’t say they haven’t been warned.
– John Jenkins