SEC Talks AI Enforcement Risk

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.