TheCorporateCounsel.net

The extraordinary developments with generative AI over the past year and a half have created challenges for all types of companies, as they seek to have their public disclosures keep up with the pace of change and avoid regulatory scrutiny. This recent Alston & Bird alert does a nice job of surveying those disclosure challenges and describing the SEC filing, SEC Enforcement and shareholder litigation trends. The alert notes:

While the SEC’s focus on AI disclosures will likely encourage an increasing number of companies to disclose AI-related risks, issuers have already started incorporating relevant risk disclosures into their annual Form 10-K filings, with over 40% of S&P 500 companies including such disclosures in their 2023 Forms 10-K and mentions of AI during earnings calls rising by 77% (subscription req’d) in the fourth quarter of 2023.

Additionally, our qualitative analysis of AI-related risk disclosures in fiscal year 2023 Forms 10-K issued by Fortune 100 companies reveals several notable emerging trends. For example, we found that 46% of Fortune 100 companies included AI-related risk disclosures in their Forms 10-K and that such disclosures fall broadly into five buckets: (1) cybersecurity risk; (2) regulatory risk; (3) ethical and reputational risk; (4) operational risk; and (5) competition risk. These risk disclosures were not limited to a certain industry or sector, with a broad range of public companies making risk disclosures that fall into one or more of these buckets.

The SEC’s two recent enforcement actions involving AI are summarized, and the alert notes that, in recent years, private securities litigation has targeted issuers with AI-related claims. The alert ends with these key takeaways for public companies:

Although AI-related disclosures have become a new target in securities enforcement and litigation, companies and their counsel can take proactive steps to protect against future liability.

– Companies should ensure that disclosure counsel understands how the business uses and plans to use AI, and that the business understands the importance of consulting with legal counsel before making public representations about the company’s use of AI.

– Companies should also be aware that even general “puffery” remarks about the company’s use of AI may be scrutinized by the SEC or private plaintiffs, particularly in the context of “AI washing.”

– Public companies should remain aware of continuing SEC guidance, even in the form of SEC remarks, about crafting AI-related disclosures and should consider those remarks when determining how to approach such disclosures.

– Companies should consider whether and how to educate their boards of directors regarding the company’s use of AI (as well as AI use by competitors, significant vendors, and large customers, as applicable) and the related risks and benefits of such use, including with respect to the company’s disclosure obligations.

– Companies should take a broad and deep view of the potential risks posed by AI technologies and consider whether and how to best disclose such risks.

– Financial firms in particular should ensure that their policies and procedures and record-keeping requirements comply with the latest SEC guidance.

As the SEC Staff noted earlier this year, this topic will continue to be a focus at the SEC, and companies should continue to monitor their disclosure obligations in this rapidly changing space.

– Dave Lynn