Misleading AI Marketing Statements | $523k SEC Charge
SEC RELEASES
Introduction
On October 10th, the SEC announced charges against a Firm and its controlling members for their use of AI in advertising, and other actions by their controlling officer.
As artificial intelligence (“AI”) continues to garner significant attention from the public, it will be tempting for Firms to take advantage of this via their marketing materials.
The SEC has made it clear that messaging to investors cannot be misleading.
Regulatory actions are very similar to the investigations involving the use of ESG in Fund names, marketing materials, etc.
We have covered the key takeaways below from this latest SEC Charge tied to AI.
What Happened?
According to the SEC:
- The Firm marketed its use of automated trading strategies that utilized AI.
- No trading application existed.
- Stocks or crypto assets were not managed.
- Approximately $3.725 million was raised from 45 investors, the proceeds of which were to be used for engineering, compliance, development, sales and marketing.
- AUM was significantly less than the amount being suggested by the controlling officer.
- Technological capabilities were advertised that were of a different Firm not owned or managed by Firm leadership.
- Representations were made that the Firm managed a Hedge Fund, despite their only clients at the time being SMAs.
- Performance metrics were used in pitch decks from another Firm, without any disclosure indicating this relationship.
- Certain returns were calculated as gross of fees, but were claimed to be net of fees in promotional materials.
- Some of the proceeds raised from investments were used for personal purposes by the controlling officer.
- Penalties to the individuals totaled just over $523,000 for misleading practices.
Vigilant’s Conclusion
Marketing materials cannot exaggerate statements about the use of technology, such as AI, in their investment process.
When ESG created significant attention in the investment industry, the SEC investigated and charged Firms that used misleading ESG statements in marketing materials and investment products.
In a similar fashion, the SEC has asserted that it will investigate the use of technology in marketing materials.
It is vital that Firms have proper policies and procedures in place to avoid misleading marketing statements, and to monitor Firm leadership for improper actions.