Beware of AI Washing
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Beware of AI Washing

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The Securities and Exchange Commission (SEC) has fined two investment firms for making fraudulent claims about their use of artificial intelligence (AI). 

Dear Investors, in today’s investment world, there’s a misleading trend known as ‘AI washing.’ This occurs when companies exaggerate their use of AI to make their products seem more advanced than they truly are. Watch out for these inflated claims as they can mislead investors like you.

Recent actions taken by the Securities and Exchange Commission (SEC) shed light on this issue. For example, two investment advisors were fined $400,000 for falsely claiming to use artificial intelligence (AI) in their operations. These events show the dangers of misleading practices in investing, stressing the importance for investors to be cautious of false claims, particularly in today’s changing market environment.

What is AI Washing? 

AI washing can be defined as the exaggeration or misrepresentation of the use of artificial intelligence. This practice can mislead investors, who may be drawn in by false claims about a company’s product or service. By exploiting the hype around AI technology, fraudsters can deceive prospects and customers into believing that a product is more sophisticated than it actually is.

The term “AI washing” borrows from the popular use of the coined term “greenwashing.” Greenwashing describes companies making dubious claims that they offer environmental benefits. Both practices have been used to mislead investors into thinking an investment has properties that do not actually exist.  

Who Did the SEC Fine for AI Washing? 

Delphia USA and Global Predictions, both investment advisors, were fined $225,000 and $175,000 respectively.   

According to the SEC’s press release, from 2019 to 2023, Delphia made false and misleading statements in its SEC filings. Delphia marketed itself as utilizing AI and machine learning that incorporated client data in its investment process. The SEC’s order revealed that its marketing contained false and misleading statements because Delphia did not possess the AI and machine learning capabilities it had claimed. 

In the SEC’s order against Global Predictions, the SEC found that the firm made false and misleading claims on its website and social media in 2023 about its supposed use of AI. This included advertising where the advisor claimed to be the “first regulated AI financial advisor”. 

In addition to the fines, the firms agreed to “cease and desist” from further violations. 

How Investors Can Practice Caution 

As the “public company watchdog,” the SEC recommends that investors carefully review the disclosures made by companies promoting AI products or services. The agency further recommends that investors should be wary of companies that appear more focused on attracting investors through promotions, rather than developing tools used in their businesses.

It’s recommended to also use databases such as Edgar filings. Investors can also enhance their awareness by seeking input from top-ranked analysts. TipRanks provides the views, expectations, and ratings from top stock analysts that provide insight to help with investment decisions.    


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