On April 15, 2024, Securities and Exchange Commission Division of Enforcement Director Gurbir Grewal delivered remarks during a Program on Corporate Compliance and Enforcement Spring Conference 2024. He addressed artificial intelligence (“AI”) and the concept of “AI-washing,” wherein public companies make overly positive, misleading or false claims in an effort to benefit from investor interest in AI-related technologies.
Inasmuch as registered investment advisers were the ones penalized by the SEC for AI-washing last month (see our insights here), Director Grewal reminded the investment industry (and particularly public companies) not to rush to make “claims about using AI in [their] investment processes to capitalize on growing investor interest,” but instead to evaluate if these representations are accurate or merely aspirational. Representations regarding AI usage should not be materially false or misleading. To prevent AI-washing and manage risks, he introduced the concept of “proactive compliance,” which requires:
- Education. Staying informed about emerging and heightened AI risks to one’s business and industry by reading AI-related enforcement actions and reviewing future actions. (See our earlier blogpost on Artificial Intelligence, the Movies and Hallucinations, here).
- Engagement. Collaborating with personnel across different business units to understand how AI intersects with their activities, strategies and financial incentives. Evaluate each AI-related public statement about the company and related risks (e.g., security risks, competitive risks, etc.) to assess their accuracy.
- Execution. Updating policies, procedures and internal controls to address AI risks, and avoid relying solely on generic tools (e.g., ChatGPT) to create AI policies. Effective execution is necessary for successful adoption.
The full text of Director Grewal’s remarks is available here.