The “AI Washing” Fines Begin: Tone Down the AI Hype or Face SEC’s Wrath

It is a rare company that has not hopped on the artificial intelligence (AI) hype train, and the reasons are understandable: nothing grabs public attention now more than AI.

It is reminiscent of the Dotcom bubble of the late 1990s when any company with a URL and a potential business plan was greeted with over-valuation and speculative investing.

So it’s no surprise that we are flooded with ads from brands hyping one AI product or another — words like “AI-enabled, AI-assisted, AI-powered” are now hitting adverts across the world. Welcome to the new cliché.

The situation wouldn’t be a problem — if it didn’t have some misleading tendencies.

That’s why the US Securities and Exchange Commission (SEC), having had enough, is beginning to clamp down on organizations that hype AI solutions beyond their capabilities or claim to use AI models to power their business when they’re not.

In a show of their seriousness, the SEC has fined two investment advisory companies, Delphia and Global Predictions, for “AI washing,” with the companies accused of marketing to their clients that they were using AI to power their businesses when the SEC found otherwise.

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The two companies have now agreed to settle the SEC’s charges and pay a combined $400,000 in civil penalties.

The message is clear — if you want to put AI in your advertising, you better be able to back it up.

Key Takeaways

  • Companies are engaging in “AI washing” – making misleading claims about their AI capabilities.
  • The SEC is cracking down on companies that exaggerate their use of AI, with a disconnect between corporate AI hype and actual implementation across businesses.
  • Experts recommend scepticism and thorough evaluation of AI product claims.
  • However, a lack of consensus on what truly qualifies as AI makes it difficult to regulate against fraudulent AI marketing claims, according to some experts.
  • Rigorous validation, not hype, will build confidence in AI products.

What is AI Washing & Why is It Pervasive?

Earlier in the year, the SEC, in a press release issued a stern warning to investment and marketing platforms against false AI marketing that may influence investment decisions.

It may have fallen on deaf ears, and now two companies have fallen foul of the SEC.

As SEC chairperson Gary Gensler said:

“We find that Delphia and Global Predictions marketed to their clients and prospective clients that they were using AI in certain ways when, in fact, they were not.

 

“We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims by those purporting to use those new technologies.

 

“Investment advisers should not mislead the public by saying they are using an AI model when they are not. Such AI washing hurts investors.”

According to the SEC’s order against Delphia, from 2019 to 2023, the Toronto-based firm made false and misleading statements in its SEC filings, in a press release, and on its website regarding its purported use of AI and machine learning that incorporated client data in its investment process.

In the SEC’s order against Global Predictions, the SEC found that the San Francisco-based firm made false and misleading claims in 2023 on its website and on social media about its purported use of AI. For example, the firm falsely claimed to be the “first regulated AI financial advisor” and misrepresented that its platform provided “expert AI-driven forecasts”.

Without admitting or denying the SEC’s findings, both companies consented to the entry of orders finding that they violated the Advisers Act and ordering them to be censured and to cease and desist from violating the charged provisions. Delphia agreed to pay a civil penalty of $225,000, and Global Predictions agreed to pay a civil penalty of $175,000.

The term “AI washing” refers to the deceptive tactic employed by some companies or advertisers where they make claims about their use or development of artificial intelligence technologies that are false, misleading, or greatly exaggerated. It’s about using AI to sugarcoat products and services such that it can mislead the public about their actual capabilities.

While the SEC sanctionary landed an axe this time on investment brokers, companies of all kinds offering products and services might be as culpable.

The lure for companies might be obvious: using the term “artificial intelligence” in product press releases, product demos, and service update announcements is an instant and sexy hook — and might leave the public with the impression that any business not powering its products with AI is way off the mark.

It is an impression that might be misleading — with a recent report finding that there is a disconnect between the heightened corporate enthusiasm around AI and the actual use of AI technologies across American businesses.

According to the NBC News report, an examination of earnings calls found that nearly half of the companies listed on the S&P 500 index have discussed AI since May of last year — but few are implementing it in a way that benefits customers.

The report suggests that tangible adoption and implementation remain limited across the broader business landscape for now. But you wouldn’t know that from the sales pitches.

Experts Call AI Hype into Question

While AI is having a radical impact on the world, the AI buzz gripping the tech industry has drawn scepticism from some experts who view it as more hype than substance.

Vaclav Vincalek, founder of 555vCTO, likened the AI craze to the previously hyped concept of the Metaverse. He told Techopedia that AI is:

“A vague term with no exact definition and with mystical properties — replacing humanity is a dream for every marketer,”

He accused companies of “obfuscating mediocre products with new buzzwords” in order to make their offerings seem more innovative and disruptive than they truly are.

“They’re trying to out-buzzword the competition,” Vincalek said of the aggressive AI marketing by investment brokers and tech firms.

Speaking to Techopedia on the matter, Bob Rogers, CEO at Oii.ai, said:

“AI washing is now pervasive because AI itself isn’t very well defined, so anyone can integrate an algorithm into their products and simply call it AI-powered.

“We see companies touting their ability to tell a user their total inventory based on a voice or text request like “What is my inventory?”

“That is not a value add when the AI is simply pulling a value off of a dashboard they already have access to. The value comes from more extended analytical capability that can answer questions like ‘Where is my inventory too high, and how can I adjust my supply chain to fix it?’”

For Dane Sherrets, Solutions Architect at HackerOne, this trend is not unique to AI but follows any new technology.

“X-washing is not at all unique to AI. As new technology or trends emerge, companies are incentivized to use the loosest possible definitions of the terms to portray themselves as being on the leading edge,” he told Techopedia.

Evaluating AI Promises: Insights from Experts

Measuring and validating the true capabilities of AI products to ensure they live up to their claims is important for any business that wishes to adopt AI. Techopedia spoke with some experts to find out how businesses can determine if an AI product does what it claims before investing.

Sherrets calls for users to take any claims of AI innovation with a pinch of salt, suggesting:

“I think a bit of general scepticism is healthy, and the awareness of how the AI of today works will help navigate through the hype.

“Specifically, it is important to keep in mind that AI, currently, is excellent at dealing with “bounded” problems, but when it comes to “unbounded problems” – AI struggles a bit more as the goals are less defined.”

Beyond casting a bit of doubt, Sherrets added:

“I think that potential buyers of a given AI solution should ask themselves, ‘Does an AI solution really solve the problem, or is this a case of someone with a hammer seeing everything as a nail?’”

Shawn Loveland, Chief Operating Officer at Resecurity, emphasizes the importance of a comprehensive evaluation process for AI products. He outlines several key steps, stating: “To evaluate an AI product, organizations should understand AI basics, request real-world ad hoc live demonstrations and documented case studies, consult technical experts, inquire about training data (for the timeliness, completeness, accuracy, and any license incumbrance), transparency, ensure regulatory and legal compliance, and monitor post-implementation performance.”

While acknowledging the problem of companies falsely claiming AI capabilities, Tony Fernandes, CEO and founder of UEGroup, highlighted a larger issue – the lack of consensus on what qualifies as AI.

“There is no doubt that there are fraudsters claiming that they do AI when they do not, but does a government have the knowledge to make that determination? Generally, no.”

The Bottom Line

It’s important that companies back up their AI claims with rigorous validation and transparency to avoid potential regulatory scrutiny from the SEC and others for misleading marketing practices, or “AI washing.”

This can involve independent third-party audits, opening up data, publishing benchmarked results, real-world use case testing across diverse environments, and systematic human evaluation by experts. Only through such robust processes can the true capabilities and limitations of AI systems be established.

Until then, the AI hype cycle runs rampant, but as the technology goes mainstream, companies must now ensure their products live up to the promise.

Those who persist with empty AI marketing may find themselves in the SEC’s crosshairs for deceptive claims and investor protection violations.

Substantive validation – not hype – will breed market confidence.

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Franklin Okeke
Technology Journalist

Franklin is an author and tech journalist with over seven years of IT experience. Coming from a software development background, his expertise lies in all things cybersecurity, AI, cloud computing, and IoT. Apart from Techopedia, Franklin’s work has been featured in many tech publications such as TechRepublic, The Register, TechInformed, and Moonlock.  In addition to pursuing a Master's degree in Cybersecurity & Human Factors from Bournemouth University, he has two published books and four academic papers to his name.  When he is not reading or writing, Franklin either trains at a boxing gym or plays the piano.