The U.S. Securities and Exchange Commission this week said it settled charges against two investment advisers related to “AI washing,” or essentially making false claims about their use of artificial intelligence.

The firms, Delphia Inc. and Global Predictions Inc, will pay a total of $400,000 in civil penalties for making false and misleading statements about their use of artificial intelligence (AI).

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

Toronto-based Delphia made false and misleading statements in SEC filings and its website from 2019 to 2023, said the regulator. Delphia was also charged with violation of the Marketing Rule, which prohibits an investment adviser from using advertising that includes untrue statements. Delphia claimed that it used AI “so it can predict which companies and trends are about to make it big and invest in them before everyone else,” but it did not have the AI or machine learning capabilities it said it did, the SEC said.

San Francisco’s Global Predictions made false and misleading claims in 2023 on its website and on social media about its use of AI, including that it was the “first regulated AI financial advisor.” It too violated the Marketing Rule, the SEC said.

Delphia and Global Predictions consented to orders that they violated the rules without admitting guilt. Delphia agreed to pay $225,000; Global Predictions will pay $175,000.

“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,'” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement.

Neither of the investment firms that the SEC fined “had the AI capabilities they claimed they had. Simply put, that’s called AI washing,” Grewal said, in a video posted on the SEC website.

Late last year, SEC Chair Gensler first issued warnings about AI washing activities, drawing an analogy to the concept of greenwashing, or touting environmental friendly practices or investment strategies. (See, for example, the Wall Street Journal’s account of Gensler’s December 2023 speech in the article, “SEC Head Warns Against ‘AI Washing,’ the High-Tech Version of ‘Greenwashing’“)

During a January webinar, D&O expert Kevin LaCroix referenced the remarks, noting that AI washing could give rise to securities lawsuits and D&O insurance claims down the road. LaCroix, an attorney and executive vice president at RT ProExec, as well as author of the D&O Diary Blog, predicted that within a year, D&O insurers will be dealing with the first real examples of corporate and securities litigation related to disclosures about AI use and board oversight of AI programs.

Explaining a possible litigation scenario during the webinar about the Top D&O Stories for 2023, LaCroix said: “AI is a hot topic. A lot of companies are going to tout their use of AI. And just as companies trying to show their [environmental] sustainability credentials got ahead of themselves and were accused of greenwashing, they may fall into ‘AI-washing,'” he said. (LaCroix specifically discussed Gensler’s remarks in detail in a Dec. 6 blog item.)

While executives may want their companies to seem “trendy, progressive and ready to greet the new age,” with statements about AI successes, some may be “getting ahead of themselves because AI is not that transformative or its not doing much to change their operations,” LaCroix said. Adding to Gensler’s warnings, LaCroix himself sees another disclosure problem related to AI—rather than overstating their AI capabilities, companies may understate the risks that their companies may be disrupted by AI or fail to disclose that competitors are adopting AI tools more rapidly.

In conjunction with the fines levied this week, Gensler delivered a video message explaining how exaggerating AI capabilities or underplaying the risks of AI could get public companies in trouble with the SEC.

“Here at the SEC, we want to make sure that these folks are telling the truth. In essence, they should say what they’re doing, and do what they’re saying,” he said on the video. “Public companies should make sure they have a reasonable basis for the claims they make and…the particular risks they face about their AI use, and investors should be told that basis,” he said, noting that the AI washing may be a violation of securities laws whether it’s done by financial intermediaries like investment advisers or it’s done by companies raising money from the public.

A version of this article was previously published in Insurance Journal. Reporter Chad Hemenway is the National Editor of Insurance Journal.