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Mitigating AI Risk In Light of Increasing Regulatory and Shareholder Scrutiny
Driven by promises of increased efficiency and innovation, companies spanning a wide variety of industries are rapidly adopting and investing in artificial intelligence (AI). Public companies have now started to include AI-specific risk disclosures in their routine Securities & Exchange Commission (SEC) filings, and many have issued other public statements about how they utilize AI. The explosion of interest in AI has also spurred the attention of the SEC and private shareholder plaintiffs. In the past year alone, the SEC brought several enforcement actions and shareholder plaintiffs filed numerous securities class actions focusing on AI-related statements and disclosures.
Companies should continue to closely consider their public statements related to AI and implement appropriate precautions when discussing their AI initiatives.
Recent SEC Statements and Enforcement Actions
In the last year, the SEC filed eight enforcement actions focused on combating “AI washing” — the practice of making false or aggrandized representations about a company’s use of AI or what specific AI technologies can do. Each action targeted a company that claimed to incorporate AI technologies into its business and made optimistic, sometimes sweeping, public statements about its use of AI, but in reality failed to utilize the technology as described. (Four of these actions were resolved through consent orders, with penalties ranging from $50,000 to $310,000. Three actions remain in active litigation and one action has concluded with a judgment against the defendants. Two individual defendants also face associated criminal charges.) While the SEC’s priorities may shift under the incoming administration, if the SEC remains focused on new and emerging technologies as it has to date, these cases may be only the tip of the iceberg for the SEC actions concerning AI.
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