Federal Agencies Crack Down on AI Misrepresentation: SEC, DOJ, and FTC Warn Against 'AI Washing'

Federal agencies such as the Securities and Exchange Commission (SEC), Department of Justice (DOJ), and Federal Trade Commission (FTC) are intensifying their scrutiny on firms regarding their use and representation of artificial intelligence (AI), warning that violations could lead to severe consequences.

"The defendants lured consumers into investing millions in online stores supposedly powered by artificial intelligence and made empty promises that they could coach consumers into achieving success and profitability," said Samuel Levine, director of the FTC’s Bureau of Consumer Protection.

Deputy Attorney General Lisa Monaco signaled the DOJ's intent to seek harsher penalties in cases involving AI misuse, indicating a growing regulatory focus on the matter.

SEC Chair Gary Gensler emphasized the seriousness of the issue, stating, "Fraud is fraud, and bad actors have a new tool, AI, to exploit the public."

The SEC has already taken action, with its examinations division requesting details from investment advisers about their use of predictive analytics, AI-related compliance training, marketing materials, and other pertinent information.

The FTC recently settled a case against Automators AI and its owners, with AI washing central to the allegations. FTC Director Samuel Levine highlighted how the defendants misled consumers into investing in online stores supposedly powered by AI.

Legal experts from Ballard Spahr stressed the significance of this regulatory interest, cautioning businesses about impending increased regulation.

Gensler outlined guidelines for firms to avoid allegations of AI washing, emphasizing the importance of transparency and truthful disclosure about the nature and risks associated with their AI systems.

"If a company isn’t using an AI system and says it is, that’s misleading and a violation of securities laws," he said.

Carolyn Welshhans, an SEC associate director, emphasized the necessity of disclosing material information about AI use to both the SEC and the public.

SEC enforcement director Gurbir Grewal cited AI washing as a factor in a recent case against Rockwell Capital Management, highlighting the SEC's commitment to holding accountable those who misrepresent the use of cutting-edge technologies to defraud investors.

"We have seen evidence of a growing number of enforcement investigations around the use of AI where companies have made claims in their filing and other public statements, and we expect that will result in litigation or other regulatory actions," said Amy Caiazza, a partner at law firm Wilson Sonsini Goodrich & Rosati.

Legal experts anticipate a surge in SEC enforcement actions related to AI misrepresentations, stressing the importance of robust compliance programs to mitigate litigation risks.

In summary, federal agencies are ramping up efforts to curb AI washing practices, signaling a shift towards stricter enforcement and regulatory oversight in this burgeoning field.

By fLEXI tEAM