Office Hours with Gary Gensler: AI Washing

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What might a 1957 Tony Award winning musical, The Music Man, have to do with artificial intelligence and the Securities and Exchange Commission?

Well, if you guessed it was that the musical came out the same year that I was born, that's not it. It's something else.

The Music Man is a story about a Professor Harold Hill, a traveling salesman who cons the town of River City, Iowa into purchasing musical instruments for their children.

Unfortunately, we've seen time and again a similar story in the financial markets.

When new technologies come along they can create buzz. And that buzz is used, possibly, to make false claims to investors, similar to Professor Hill. Yet, embedded in our securities laws is a basic bargain based on truthfulness. Investors get to decide in what they invest as long as there is full, fair, and truthful disclosure.

Well, as we've seen an increase in the disclosures around artificial intelligence by SEC registrants, public companies as you know them, it's important that companies making these disclosures remember that the basics of the securities laws still apply.

You see, any claims about prospects should have a reasonable basis and investors should be told that basis. And when disclosing material risk about artificial intelligence and a company may face multiple risks, including operational, legal, competitive, investors benefit from disclosures that are particular to the company, not just boilerplate language.

Companies should ask themselves some basic questions, such as if we're discussing artificial intelligence in our earnings calls or having extensive discussions with our board of directors, maybe this information is potentially material to our business and to investors. If so, disclosure may be required under the securities laws.

Further, companies may be required to define for investors what they mean when referring to AI. How and where is it being used at the company? Is it being developed by the company or supplied by others?

Investment advisers, broker dealers also should not mislead the public by saying they're using AI when they're not, nor say that they're using it in a particular way and not do so.

Such AI washing, whether it's by companies raising money or by financial intermediaries like investment advisers and broker dealers, may violate the securities laws.

So if you are AI washing, as Professor Hill sang, "Ya Got Trouble."

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