TheCorporateCounsel.net

Earlier this week, I highlighted Chair Gensler’s YouTube video describing the SEC’s concerns with “AI washing.” As this Morrison & Foerster alert notes, the SEC recently took action against two investor advisers for their alleged AI washing activities. The alert states:

On March 18, 2024, the SEC announced—in videos posted on YouTube and Twitter—regulatory actions against two investment advisers for “AI washing,” a practice defined by the SEC as “making false artificial intelligence-related claims.” Coming on the heels of the SEC proposing new rules in 2023 for investment advisers and broker-dealers using “predictive data analytics,” and the SEC’s joint alert with the Financial Industry Regulatory Authority (FINRA) and the North American Securities Administrators Association (NASAA) flagging concerns about increasing investment frauds involving the use of artificial intelligence, it is clear that the SEC will be focused on artificial intelligence in the months ahead.

Indeed, SEC Enforcement Director Gurbir Grewal confirmed as much in remarks made at the annual gathering of securities practitioners hosted by the Securities Industry and Financial Markets Association (SIFMA), where he called attention to the AI washing cases on the very day they were announced. Given widespread reports in 2023 that the SEC launched a sweep of investment advisers to gather information regarding their use of artificial intelligence, we expect additional AI-related cases to follow. Just as the SEC announced its focus on the ESG space by bringing “greenwashing” cases based on precedent established in other contexts, the Commission has now applied similar precedent to remind regulated entities that representations about the use of AI will face scrutiny.

While these recent actions were focused on SEC-regulated entities, it would not be surprising if the SEC announces actions against public companies in the near future, given the SEC’s professed focus on this area amidst all of the AI hype. I wonder if AI can be instructed to craft disclosure that does not involve AI washing? That is perhaps an existential question for us all.

– Dave Lynn