SEC’s Gensler warns against ‘AI-washing’ in business practices

SEC Chair Gensler warns corporate America about overhyped sales and marketing claims about AI capabilities with ‘Don’t do it’ message.

SEC Chair Gary Gensler has sent a warning to businesses on the topic of “AI-washing,” or making false artificial intelligence-related claims, likening it to the greenwashing phenomenon that has been the target of SEC enforcement activity.

At a conference on Tuesday hosted by news outlet The Messenger, Gensler said that securities laws bar phony claims and require companies to give “full, fair and truthful” disclosures.

“Don’t do it,” he said. “One shouldn’t greenwash and one shouldn’t AI wash.” Making unfounded AI claims to the public about one’s AI technology and capabilities can lead to an enforcement action, he said, and the attendant compliance remedial undertakings many such actions include.

“Don’t do it. One shouldn’t greenwash and one shouldn’t AI wash.”

Gary Gensler, Chair, SEC

He went on to say that any AI use cases that break the law will not be treated differently than other financial crimes.

“Fraud is fraud,” he added. “A human that is using a model that is defrauding the public, depending on the facts, is likely going to hear from us.”

Truly, AI washing can tarnish a company’s reputation, as one can wonder what else the company is exaggeratiing and how well its technology is functioning – never mind how well the business understands its own tools.

AI is cool

Over the last year, given the interest investors and consumers have expressed in the emerging technology, companies have dived in, too. Nearly 200 members of the S&P 500 cited AI during their second-quarter earnings calls, the highest total since at least 2010, according to data reported by FactSet.

But as Gensler pointed out on Tuesday, AI has been used in finance for years, with insurance companies using it for claims processing and financial institutions employing it to detect credit card fraud and ensure compliance rules to combat money laundering.

The undue attention to it is borne of several new developments in creating longer textual items and images and in processing and creating data more quickly than ever, with advancements being announced on an ongoing basis.

In April, four US agencies issued a pledge to enforce their laws and regulations to monitor AI and enforce the principles of fairness, equality and justice in the rollout and use of such products and services.

At the conference, Gensler made his remarks in response to an audience question and didn’t elaborate on the SEC’s areas of focus. An agency representative didn’t respond to a request for comment to the WSJ.

He mentioned the SEC will sort through the public comments it is receiving on the proposed rule regarding conflicts of interest in the use of predictive data analytics by broker-dealers and investment advisers.

FTC and other agencies

In February, the Federal Trade Commission (FTC) released a blog post advising companies to monitor their claims regarding their use of artificial intelligence (or AI).

According to the agency, companies relying (or purporting to rely) on AI can get themselves in trouble with the FTC by exaggerating the claims of their products, overpromising and underdelivering, and not properly accounting for reasonably foreseeable risks to consumers.

The FTC continued to issue public statements about AI claims and technology use, showcasing its watchful eye on developments with the use of this technology and saying it will not hesitate to use its enforcement authority to penalize conduct it views to be unfair or deceptive. 

In April, four US agencies issued a joint pledge to enforce their laws and regulations to monitor artificial intelligence (AI) and enforce the core principles of fairness, equality and justice in the rollout and use of such AI products and services.

The FTC, Civil Rights Division of the Justice Department, the Consumer Financial Protection Bureau, and the US Equal Employment Opportunity Commission outlined their commitment after noting how often automated systems present themselves in our daily lives, thereby affecting civil rights, fair competition, consumer protection, and equal opportunity.

GRIP Comment

A sound understanding of what AI is and, more importantly, what it is not, is essential here. According to Investopedia’s definition: “AI is the simulation of human intelligence processes by machines, especially computer systems”.

Some high-profile applications include basic web search engines (Google and Bing); the recommendation systems used by companies such as Amazon and YouTube; assistants like Alexa and Siri; self-driving cars; and generative tools like ChatGPT and AI Art. That’s a wide field and a broad definition.

Transparency in AI use is key when it comes to any representations about AI capabilities. Clearly disclosing to customers not only the use of AI but also how and why it’s used is crucial. Falsely claiming to use AI to enhance a product’s or service’s appeal is a short-sighted move that can jeopardize a company’s reputation, erode customer confidence and harm future sales.