In the first enforcement action of its kind, the Securities and Exchange Commission today announced that it fined two investment advisory firms $400,000 for making false statements about their artificial intelligence-powered investing prowess and capabilities.

Delphia (USA) Inc. and Global Predictions Inc. both consented to the penalties, with Delphia agreeing to pay a civil penalty of $225,000 and Global Predictions agreeing to pay $175,000, the SEC said. As is the norm with such consent agreements, the companies were allowed to settle without admitting to or denying the allegations. The firms were also censured.

Toronto-based Delphia claimed that it “put collective data to work to make our artificial intelligence smarter so it can predict which companies and trends are about to make it big and invest in them before everyone else,” according to the agency The SEC found the statements were false and misleading because Delphia did not in fact have the AI and machine learning capabilities that it claimed.

“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,” SEC Chair Gary Gensler said in a statement.

From 2019 to 2023, Delphia “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,” the regulator charged.

Delphia was also charged with violating the SEC’s marketing rule because the RIA distributed an advertisement “that included an untrue statement of material fact,” the SEC said.

“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,” said Gensler, who also spoke extensively about the issue of AI washing on X today.

In 2023, San Francisco-based Global Predictions made false and misleading claims on its website and on social media that it was “the first regulated AI financial advisor” and misrepresented that is platform provided “expert AI-driven forecasts,” according to the SEC order. The SEC found that neither claim was true.

In addition, Global Predictions was charged with violating the agency's marketing rule by falsely claiming that it offered AI-powered tax-loss harvesting services, and included an impermissible liability hedge clause in its advisory contract, among other securities law violations, the SEC said.

“As more and more investors consider using AI tools in making their investment decisions or deciding to invest in companies claiming to harness its transformational power, we are committed to protecting them against those engaged in ‘AI washing,’” Gurbir S. Grewal, director of the SEC’s Division of Enforcement, said in a prepared statement.

“As today’s enforcement actions make clear to the investment industry—if you claim to use AI in your investment processes, you need to ensure that your representations are not false or misleading," he said. "And public issuers making claims about their AI adoption must also remain vigilant about similar misstatements that may be material to individuals’ investing decisions.”

The SEC’s Office of Investor Education and Advocacy jointly issued an investor alert with the North American Securities Administrators Association (NASAA) and the Financial Industry Regulatory Authority (Finra) that warned investors about the increased likelihood of fraud involving claims about AI and other emerging technologies.

“AI-generated information might rely on data that is inaccurate, incomplete, or misleading. For example, it could be based on false or outdated information about financial, political, or other news events. Or it could draw from false or misleading information that was disseminated to try to manipulate a stock’s price (either positively or negatively). Even when based on accurate input, information resulting from AI can be faulty, or even completely made up,” the alert warned.