SEC’s AI Stance Holds Steady Under New Leadership

Despite headlines about President Trump rescinding the Biden administration’s executive order on artificial intelligence, the SEC’s stance on AI-related disclosures hasn’t shifted much. If anything, its focus has sharpened.

The Biden-era Executive Order on Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence aimed to embed ethical guidelines into government use of AI. It emphasized public protection, data privacy and civil rights, while requiring federal agencies to designate Chief AI Officers and adhere to rigorous oversight processes. That order is now off the books, but the SEC remained firm in its enforcement approach to AI-related investor disclosures.

The agency’s interest in AI has only deepened—especially around the emerging issue of “AI washing,” a term that refers to companies exaggerating their use of AI in ways that could mislead investors. According to Madiha Zuberi, an enforcement attorney in the SEC’s cybersecurity and emerging technologies unit, the SEC is continuing to build on the prior administration’s efforts to oversee AI-related disclosures. In recent public remarks, Zuberi listed predictive analytics, trading strategies and AI-infused investment advice as some of the subjects that are commanding the agency’s attention.

“We’re looking at whether there’s transparency around the technology, whether it’s described accurately, whether there’s responsible communications to customers,” Zuberi said. “It’s easy to use a term like ‘AI,’ but is it automation of code or is it actually AI?”

In that sense, the SEC’s recent enforcement actions related to AI sound familiar. The commission filed a complaint last month charging the former chief executive of the shopping app Nate Inc. with perpetrating a $40 million fraud on investors tied to claims about its AI technology. A few weeks later, the founder of PGI Global was indicted for allegedly misleading investors about the company’s crypto-trading platform, which was purportedly developed using AI technology. (The SEC has been active on this front for a while—just look at the AI washing settlements it reached near the end of the previous administration.)

Citing “a significant increase in the number of companies that mention artificial intelligence in their annual reports,” Erik Gerding, the director of the SEC Division of Corporation Finance at the time, indicated last year the agency planned to take a more rigorous approach to assessing such disclosures. Gerding said SEC staff members would pay close attention to aspects like how companies defined AI and its positive impacts on their performance and outlook.

The SEC’s warnings about AI washing are showing early signs of having their desired effect in corporate filings. In its annual report, AI lending platform Upstart Holdings Inc., made note of the SEC’s aggressive enforcement actions regarding AI washing. Similarly, Monogram Technologies Inc. in the risk factors section of its latest annual report referred to the potential fallout that would result from failing “to clearly communicate the actual capabilities and limitations of our AI technologies.”

As Monogram suggested in its discussion, the reality that AI technology is still a relatively new technology could complicate companies’ efforts to avoid overselling what their AI can actually do. For now, it doesn’t look like the SEC is likely to show leniency for such mistakes, even when the hype is well-intentioned.