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Schultz Talks SEC Enforcement Actions Targeting Alleged “AI Washing”

May 22, 2024

Securities Enforcement & Litigation partner Christian Schultz was quoted in the Private Equity Law Report article, “SEC Enforcement Actions Targeting ‘AI Washing’ Follow Familiar ESG Playbook for Emerging Areas of Concern,” which discusses how the U.S. Securities and Exchange Commission’s (SEC) targeting of AI as a potential risk area for investors mirrors its experience with environmental, social, and governance (ESG). For instance, the SEC sought enforcement actions for “greenwashing” in instances where companies exaggerated or made misleading statements about their ESG activities or products. The article summarizes two settlement orders which targeted alleged “AI washing” involving two investment advisers — Delphia USA Inc. and Global Predictions Inc.

Schultz told Private Equity Law Report that fund managers are making considerable efforts to stand out in a crowded fundraising environment, with AI becoming a popular focus. As a result, the SEC is paying more attention to representations about AI and if they get “the slightest whiff that what’s being claimed is not accurate, they will pursue it zealously because it’s part of their mission to protect investors,” Schultz said. He added that although AI was a significant part of the two settlement orders, the order involving Global Predictions also dealt with the improper use of hypothetical performance under the SEC’s Marketing Rule, which is another focus area for the agency.

Schultz told the publication that because AI can potentially create nonobvious conflicts of interest between fund managers and their clients, fund managers should consider how existing rules impact the work they are doing. Firms should also be thoughtful and deliberate when making statements about AI, including via social media, interviews, marketing materials and a firm’s website, Schultz emphasized.

Read the full article.