Background

On March 18, 2024, the Securities and Exchange Commission announced settled charges against two SEC registered investment advisers for making false and misleading statements about their purported use of artificial intelligence (“AI”). The firms agreed to settle the SEC’s charges and pay $400,000 in total civil penalties.

Cause of Action

One firm’s charges arose from four years of using misleading statements pertaining to its use of AI in its SEC filings, press releases, and website. They claimed to have used AI to generate an advantage in their investment process, but they did not have such resources. Additionally, these statements were also deemed a violation of the marketing rule. The second firm was also found to have violated the marketing rule and its AI misconducts were born from using the term “expert AI driven forecasts.”

What’s Next

These settlements come on the heels of the SEC proposed rules in July 2023 regarding investment advisers use of AI. The July rules would prohibit investment advisers from using AI in a manner that creates a conflict of interest between a firm and its client. Specifically, investment advisers would need to adopt policies and procedures regarding their use of AI. Advisers would also need to comply with recordkeeping requirements consisting of times the technology was implemented or materially changed.