Big data

U.S. securities regulators charged a pair of investment advisory firms in cases of alleged “AI-washing” — misleading investors about their use of artificial intelligence.

The U.S. Securities and Exchange Commission (SEC) settled charges against Toronto-based Delphia (USA) Inc. and San Francisco-based Global Predictions Inc., which agreed to pay a combined US$400,000 in civil penalties to resolve the cases.

Without admitting or denying the SEC’s findings, both firms consented to orders finding that they violated the Advisers Act, ordering them to be censured and to cease and desist. Delphia agreed to pay a civil penalty of US$225,000 and Global Predictions agreed to pay a civil penalty of US$175,000.

According to the SEC’s order, when Delphia launched a robo-advisory business in 2019, it planned to use AI and machine learning to collect data from its clients to use as inputs for its investing algorithms.

However, the firm never accomplished this goal, the SEC alleged.

“While Delphia did collect certain client data intermittently between 2019 and 2023, it never used that data with artificial intelligence or machine learning or otherwise used that data in any way as inputs into its investing algorithms,” the regulator said.

Yet, the regulator alleged the firm claimed that it used AI and machine learning to analyze its clients’ spending and social media data to inform its investment advice starting in 2019.

Following a compliance exam by the SEC, the firm agreed to correct the false and misleading statements about its use of AI in 2021, and to prevent future misleading statements, the SEC said.

However, “while certain corrective efforts were made, additional false and misleading statements concerning the use of its retail clients’ data in the investment process continued to be made through August 2023,” the SEC alleged.

Similarly, the SEC alleged that Global Predictions made false and misleading claims about its purported use of AI on its website and on social media.

“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 in a release.

“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,” he added.

According to the SEC, Delphia was registered as an investment adviser from September 2019 through January of this year. As of September 2023, it had approximately US$187 million in assets under management — including US$180 million in five pooled investment vehicles and US$7 million in its robo-advisory platform for 29,000 retail investors.

The firm ceased providing advisory services as of Dec. 31, 2023, and moved the five pooled investment vehicles to a newly formed adviser, the regulator said.