Misleading AI Statements | SEC Charges Two Firms
SEC Releases
Introduction
On March 18th, the SEC announced charges against two Investment Advisers. Both Firms were found to have made false and misleading statements about their use of Artificial Intelligence (“AI”).
With AI being a major topic of conversation in both industry and society, it is important for Firms to accurately describe its use in advertisements and filings to avoid misleading investors. The penalties against the Firms totaled $400,000.
What Happened?
According to the SEC:
- Firm A provided false and misleading statements in regulatory filings, advertisements, and social media postings from at least August 2019 to August 2023.
- They represented in its Form ADV Part 2A, a press release, and on its website that AI and machine learning analyzed client spending and social media data to support investment advice, but this did not occur.
- A press release claimed that they were the first Investment Adviser to use this technology in such a way.
- These statements were found to be significant, as their investing algorithms were advertised as a key differentiating characteristic compared to their competitors.
- After agreeing to correct the issues in 2021, the Firm continued to make false and misleading statements through August 2023.
- The Firm also failed to implement proper policies and procedures to prevent violations of the Advisers Act.
- There was no clear Advertising Review process that established roles and ensured proper evaluation occurred.
- Firm B provided:
- False and misleading claims about AI use.
- The Firm claimed to be the first regulated AI Financial Adviser publicly through emails, their website, and social media.
- Form ADV brochure made claims about services provided through AI that did not occur.
- Advertisements included language suggesting “expert AI driven forecasts” were used.
- Advertised Performance claims that it could not substantiate.
- Tax-loss harvesting services were advertised to save “thousands of dollars” despite no services being provided.
- Its public website and press releases suggested an AUM of $6 billion despite no regulatory filings of any AUM.
- Improper Hypothetical Performance in Public Advertisements:
- Hypothetical Performance was advertised on its public website in a demonstrative graphic, but the hypothetical performance was not based on client data and provided no disclosure.
- Advertisements indicated that models would outperform benchmarks without any disclosure on how the analysis was performed, definitions of which major benchmarks were being used, and what metric was being outperformed.
- Hypothetical Performance was advertised to a mass audience via its website and YouTube instead of an intended audience.
- Testimonials that contained conflicts of interest.
- Public Testimonials included people who had outside business and personal relationships with the CEO.
- An advisory contract containing terms that violated its fiduciary duty.
- False and misleading claims about AI use.
Vigilant’s Conclusion
This most recent enforcement highlights the importance of having an established Marketing Review process. Compliance with the Marketing Rule is a priority for the SEC in 2024, and majority of the Firms that have had enforcement action against them had allegedly failed to implement a reasonably designed program.
It is vital that all public marketing materials are evaluated for misleading, unsubstantiated, and hypothetical claims. Conflicts of interest and other material information must be disclosed.
Vigilant offers an efficient and responsive Marketing Review process to Firms that can help limit your regulatory risk and allow your employees to focus their attention on different business matters.
If there are any questions or if we can be of any assistance, please reach out to us for any questions you may have.