SEC Talks AI Enforcement Risk
All Fintech
Compliance Operations
April 30, 2024
The Case
In a recent speech, the head of SEC’s Enforcement Division, Gurbir Grewal, warned companies to ensure that “representations regarding your use of AI are not materially false or misleading.” The warning comes only weeks after the SEC launched its first two enforcement actions over “AI-washing” — that is, companies making misleading statements to investors about their use of artificial intelligence.
On March 18, 2024, the SEC announced separate settlements with two investment advisors, Delphia (USA) Inc. (“Delphia”) and Global Predictions, Inc. (“Global Predictions”), for multiple violations of the Investment Advisers Act of 1940 (the “Advisers Act”) and associated rules arising from false and misleading statements regarding each firm’s use of AI. As part of these settlements, Delphia agreed to pay a $225,000 civil money penalty, while Global Predictions agreed to pay a $175,000 civil money penalty.
Why Does This Matter?
In light of the increased regulatory scrutiny around disclosures and representations regarding the use of AI, financial services firms are well advised to consider taking the following steps:
Understand the risks associated with the use of AI in relation with company business.
Conduct a risk assessment, including a survey of AI programs and services.
Ensure disclosures accurately represent and account for the capabilities and limitations of any AI technology the company uses to provide products and services to clients, including risks to customers, potential financial incentives created by AI, and how AI may impact firm activities.
InnReg's Experience
As part of its compliance outsourcing services, InnReg has assisted the world's most innovative fintech companies when they receive specific inquiries and face regulatory scrutiny of their AI algorithms.
Learn More About This Topic
For additional details, read how InnReg’s primer on AI compliance can help your fintech build best practices to meet evolving regulatory requirements. The guide covers all the key AI compliance topics, including:
Understanding regulatory compliance for AI-based fintech products;
Implications of machine learning in compliance;
Time and cost-saving lessons learned from responding to regulatory inquiries;
Legal regulations around AI, and
Practical application examples of AI compliance by InnReg client services.
RIAs
The SEC recently brought settled enforcement actions against two registered investment advisers for failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI), in violation of Section 204A of the Investment Advisers Act of 1940 (Advisers Act) and the Compliance Rule.
RIAs
On Sep. 4, 2024, FinCEN published a final rule (Final Rule) adding certain RIAs and ERAs (collectively, Covered Advisers) to the definition of “financial institution” under the regulations implementing the BSA, and imposing on Covered Advisers broad AML and CFT program requirements, as well as other BSA recordkeeping and reporting requirements.
Broker-Dealers
On November 22, the SEC announced (here) that broker-dealers Webull Financial LLC, Lightspeed Financial Services Group LLC, and Paulson Investment Company, LLC agreed to settle charges that they filed with law enforcement SARs that failed to include required information.
