March 19, 2024

Two settlement orders involving claims by investment advisers regarding their use of artificial intelligence (AI), both announced on the same day, underscore the continued focus on advisers' use of AI by the U.S. Securities and Exchange Commission's (SEC) examinations and enforcement divisions. The SEC alleged, among other things, that each investment adviser made statements in marketing and regulatory filings about its purported use of AI, but neither could back up its statements when examined. The SEC alleged the advisers violated the antifraud provisions of the Investment Advisers Act of 1940.

The orders may also presage the adoption of proposed rules regarding conflicts of interest in the use of “predictive data” such as AI by investment advisers and broker-dealers. The SEC has historically initiated enforcement actions in advance of adopting rules that it is considering, as it investigates activities it seeks to regulate.

Investment advisers in the AI space should expect more to come. SEC Chair Gary Gensler recently cautioned investment advisers and broker-dealers against "AI washing," or overstating their AI capabilities or the role of AI in their businesses, a message he has sent before and was reiterated in the press release discussing the settled charges.

For more information, please contact any member of Wilson Sonsini's fintech and financial services practice.