AI Washing Enforcement by the SEC: Cases Every Investment Adviser Must Study

Investment advisers using artificial intelligence in portfolio management, client communications, or marketing face a compliance obligation that has moved well beyond theoretical: the SEC has demonstrated, through a series of settled enforcement actions since 2024, that it will pursue AI-washing charges — the making of false or misleading statements about AI use — under existing anti-fraud authority. The penalties imposed so far are modest by securities enforcement standards. The precedent they set is not.

This post analyzes each of the major AI-washing enforcement actions targeting investment advisers, extracts the specific legal violations the SEC found, and translates those findings into concrete compliance obligations for any registered investment adviser using AI in its business.

Why Investment Advisers Face Heightened Exposure

Investment advisers occupy a distinct legal position relative to other participants in the securities markets. Under the Investment Advisers Act of 1940, registered investment advisers owe a fiduciary duty to their clients. That duty has two components: a duty of loyalty (to act in the client’s best interest and avoid conflicts) and a duty of care (to provide advice that is in the client’s best interest, based on a reasonable investigation).

When an investment adviser uses AI in portfolio management, these fiduciary obligations apply to the AI process itself. An adviser cannot satisfy its duty of care by pointing to an algorithm — it must understand what the algorithm does, its limitations, and whether its outputs are in fact aligned with client interests. An adviser cannot satisfy its duty of loyalty by claiming that AI is neutral — AI systems can embed conflicts of interest, and the adviser remains responsible for identifying and disclosing them.

This is the compliance backdrop against which the SEC’s AI-washing enforcement actions must be understood. The cases are not just about marketing fraud. They are also about whether advisers are delivering on the obligations they assume when they represent to clients and regulators that they use AI in investment management.

The Enforcement Cases in Depth

Case 1: Delphia (USA) Inc. — Settled March 2024

The firm. Delphia was a Toronto-based registered investment adviser that offered algorithmic investing services to retail clients. The firm positioned itself as a data-driven, AI-powered alternative to traditional investment management.

The claims. Delphia made a series of representations about its AI and machine learning capabilities across multiple channels from 2019 to 2023:

• In a 2019 press release, Delphia claimed it was “the first investment adviser to convert personal data into a renewable source of investable capital.”
• On its website, Delphia stated it “put[s] 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.”
• In Form ADV filings with the SEC, Delphia described an AI-driven investment process that incorporated personal data from clients.

The reality. Delphia had not built the AI and machine learning system it described. The firm had not used client data in the investment process. The algorithm it claimed to have created did not exist in the form represented.

The charges. The SEC charged Delphia with violations of Section 206(2) and 206(4) of the Investment Advisers Act, the Marketing Rule (Rule 206(4)-1), and the Compliance Rule (Rule 206(4)-7).

The penalty. Delphia paid a $225,000 civil monetary penalty and consented to a cease-and-desist order.

Lesson for advisers. Form ADV disclosures describing AI investment processes must accurately reflect the firm’s actual capabilities. Aspirational descriptions of technology the firm is building — but has not built — are not permissible. The SEC will treat a gap between Form ADV representations and operational reality as a violation even if the firm intended eventually to deliver on its claims.

Case 2: Global Predictions, Inc. — Settled March 2024

The firm. Global Predictions was a registered investment adviser offering AI-driven financial forecasting and investment recommendations to retail and institutional clients.

The claims. Global Predictions made multiple representations about its AI capabilities, including claiming to be the “first regulated AI financial advisor” and representing the use of specific AI methodologies and predictive capabilities in ways the firm could not substantiate.

The reality. The firm was unable to substantiate its performance claims when the SEC demanded supporting documentation. The specific AI capabilities described in marketing materials were either not deployed as described or could not be verified.

The charges. The SEC charged Global Predictions with Section 206(2) negligent fraud, Section 206(4) violations, Marketing Rule violations, and Compliance Rule violations. The SEC also found that Global Predictions failed to disclose material conflicts of interest in its marketing materials.

The penalty. Global Predictions paid a $175,000 civil monetary penalty and consented to a cease-and-desist order.

Lesson for advisers. Performance claims in AI-related marketing materials carry the same substantiation obligations as any other performance claim. Superlatives like “first” or “most advanced” invite scrutiny and require accurate factual foundation.

The Combined Signal From Both Cases

The SEC’s simultaneous announcement of both actions on March 18, 2024 sent a deliberate message. The combined penalties were $400,000, which is modest relative to other enforcement actions. But the message was institutional, not financial.

SEC Chair Gary Gensler stated directly: “Investment advisers should not mislead the public by saying they are using an AI model when they are not.” The clarity of that statement was intentional. The SEC was establishing a standard, not calibrating a penalty.

The cases also established that the Compliance Rule is an independent basis for liability. Both Delphia and Global Predictions were charged with failing to implement policies and procedures that would have caught and corrected the misleading AI claims. This means that an investment adviser’s compliance program must affirmatively address the accuracy of AI-related representations — it is not enough to have a general compliance framework that does not specifically address AI claims.

What the 2026 SEC Examination Priorities Add

The SEC’s Division of Examinations publishes annual examination priorities that signal where examination resources will be focused in the coming year. The 2026 priorities explicitly address AI in the investment adviser context across multiple dimensions:

AI-washing scrutiny. Examiners will specifically look for misleading claims about AI capabilities in marketing materials, Form ADV disclosures, and client communications. The Division will evaluate whether a firm’s actual AI usage matches its representations.

Portfolio management. Firms claiming to use AI in portfolio management will be examined on whether AI tools genuinely influence investment decisions or serve only as supplemental, non-determinative research.

Compliance programs. Examiners will assess whether firms have written policies under Rule 206(4)-7 that specifically address AI use — including accuracy, bias, recordkeeping, and supervision of AI outputs. General compliance programs that do not address AI are insufficient in 2026.

Conflicts of interest. The 2026 priorities flag AI-related conflicts explicitly. When AI systems recommend securities in which the adviser or its affiliates have interests, or when AI vendors are related parties, those conflicts must be disclosed.

The Five Compliance Obligations Established by the Cases

1. Form ADV Accuracy

Form ADV Part 2A must accurately describe the firm’s use of AI. The description must reflect current operational reality, not aspirational capabilities. Updating Form ADV when AI capabilities change is an ongoing obligation.

2. Marketing Material Substantiation

Every claim about AI in marketing materials, pitch books, RFP responses, and client presentations must be supported by documentation. The Marketing Rule’s five-year document retention requirement applies to AI-based performance representations.

3. Written AI Policies and Procedures

The Compliance Rule requires investment advisers to adopt written policies and procedures reasonably designed to prevent violations of the Advisers Act. AI-specific compliance policies should cover review and approval of AI-related marketing claims, documentation requirements for AI systems, supervision of AI outputs, protocols for identifying conflicts of interest related to AI use, and recordkeeping for AI-generated content.

4. Fiduciary Oversight of AI Systems

The fiduciary duty cannot be delegated to an algorithm. Investment advisers using AI in portfolio management must understand what the AI system does, monitor its outputs, identify and disclose any conflicts embedded in its recommendations, and exercise independent judgment when AI outputs may not serve the client’s best interest.

5. Conflict of Interest Analysis and Disclosure

AI systems can generate conflicts of interest in ways that are less obvious than traditional adviser conflicts. An AI system that preferentially recommends securities issued by the adviser’s affiliates, or that uses training data reflecting the adviser’s proprietary positions, creates conflicts that must be identified and disclosed in Form ADV.

Practical Compliance Steps

For investment advisers who have already deployed AI in their business, here is a prioritized compliance review:

Step 1: Audit all AI-related representations. Collect every public statement about AI from Form ADV, the firm’s website, marketing materials, pitch decks, RFP responses, and social media. Compare each statement to the operational reality of what the AI system does.

Step 2: Close the gap. Where representations do not match operational reality, the firm has a choice: update the representations or build the capability. Continuing to represent AI capabilities the firm does not have is not an option.

Step 3: Update Form ADV. If the review reveals discrepancies between Form ADV descriptions and actual AI use, file an amended Form ADV promptly. Prompt correction is a mitigating factor in any subsequent enforcement inquiry.

Step 4: Review and update compliance policies. Ensure written policies specifically address AI. This is not optional — the Compliance Rule makes it a standalone basis for enforcement.

Step 5: Train staff. Personnel responsible for client communications, marketing, and Form ADV preparation need to understand what the firm’s AI systems actually do and the compliance significance of representations about those systems.

Step 6: Establish ongoing review. AI systems change through vendor updates, retraining, and deployment modifications. Compliance review of AI-related representations should be a recurring process, not a one-time audit.

The Forward View

The SEC’s AI-washing enforcement actions against investment advisers are the opening chapter of what is likely to be a much longer enforcement story. The cases to date have involved relatively clear-cut situations: firms that claimed AI capabilities they did not have, or could not document having used. The harder enforcement cases — firms that used AI in sophisticated ways but disclosed those uses inadequately or in misleading terms — are still ahead.

For investment advisers committed to compliant AI deployment, the message from the cases is straightforward: represent accurately what your AI does, document it thoroughly, and build a compliance program that systematically reviews the accuracy of every AI-related claim you make to clients and regulators. The cost of getting this right is compliance overhead. The cost of getting it wrong is an enforcement record that is public and permanent.

This post is for general informational purposes only and does not constitute legal advice. Reading this post does not create an attorney-client relationship. If you have questions about your specific situation, consult a qualified attorney.