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I learned a new term today, and that is “AI washing.” As for its definition and usage, think “greenwashing,” but instead in the context of artificial intelligence. In one of his recent YouTube videos that I can never seem to get used to, SEC Chair Gary Gensler tackles the problem of investment advisers, broker dealers and public companies improperly touting the benefits of AI for the purpose of misleading investors. In the video, he notes:

I get why so many people are talking about artificial intelligence. AI is the most transformative technology of our time, fully on par with the internet.

It’s already being used in finance, where it has the potential benefits of greater inclusion, efficiency, and user experience.

But let’s face it, when new technologies come along, we’ve also seen time and again false claims to investors by those purporting to use those new technologies.

Think about it. Investment advisers or broker dealers might want to tap into the excitement about AI by telling you that they’re using this new technology to help you get a better return. Public company execs, they might think that they will enhance their stock price by talking about their use of AI.

Well, here at the SEC, we want to make sure that these folks are telling the truth. In essence, they should say what they’re doing, and do what they’re saying. Investment advisers or broker dealers should not mislead the public by saying they are using an AI model when they’re not, nor say that they’re using an AI model in a particular way, but not do so.

Public companies should make sure they have a reasonable basis for the claims they make and yes, the particular risks they face about their AI use, and investors should be told that basis.

AI washing, whether it’s by financial intermediaries such as investment advisers and broker dealers, or by companies raising money from the public, that AI washing may violate the securities laws.

So, everyone may be talking about AI, but when it comes to investment advisers, broker dealers, and public companies, they should make sure that what they say to investors is true.

This is of course a problem that reliably repeats itself whenever significant innovation or some other business or market developments make a particular area the “hot” investing topic. I can distinctly recall this phenomenon back in the 1990s, when it seemed that every company wanted to claim some connection to the nascent Internet, and more recently we observed the frenzy when terms like “crypto” and “ESG” became the buzzwords du jour. As the old adage goes, “securities are sold, not bought,” so it is inevitable that the latest area of investor focus is worked into the sales pitch in some way, shape or form.

For public companies in particular, these days AI developments often need to be addressed in public disclosures, because AI is rapidly changing the landscape in many industries and is likely to continue to have an outsized impact going forward. I don’t see Chair Gensler’s statements as intended to discourage full and fair disclosure about AI developments, rather I think that companies need to be very balanced in describing both the benefits and risks arising from AI, and accurately convey the uncertainty associated with the evolving technology. When addressing AI developments, the relevant context is always important, so that it is clear that the company is not discussing AI just because it is the hot topic today. Further, once companies address AI in their disclosures, it is important keep that disclosure updated as this fast-moving technology evolves. And finally, if your company is in the business of manufacturing widgets, please do not change the name of the company to “AI Land, Inc.” or something like that, which seems like an inevitable outcome whenever these “fad” investment terms emerge.

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– Dave Lynn