Investors should beware of 'AI washing' by companies amid Wall Street's craze for the technology, SEC chief Gary Gensler says

• SEC chief Gary Gensler said companies must be clear about how they’re using AI.
• Gensler highlighted the potential risks of AI to financial stability, warning of systemic risks from the tech.

Companies looking to cash in on the hype around artificial intelligence must avoid luring investors with grandiose or false claims about the impact of the nascent technology on their business, Securities and Exchange Commission chairman Gary Gensler said this week.

Gensler said corporations are obligated to disclose operational, legal, and competitive risks associated with AI, along with the relevance of the technology for their business.

“Companies should ask themselves some basic questions, such as: ‘If we are discussing AI in earnings calls or having extensive discussions with the board, is it potentially material?'” Gensler said in a speech at Yale Law School on Tuesday.

“We’ve seen time and again that when new technologies come along, they can create buzz from investors as well as false claims from the Professor Hills of the day,” Gensler went on to say, referencing the movie “The Music Man”, in which a grifter comes to town and swindles the public. “If a company is raising money from the public, though, it needs to be truthful about its use of AI and associated risk.”

Gensler said that investment advisers and broker-dealers should refrain from falsely claiming the use of AI models or misrepresenting their application, as such practices, known as “AI washing,” could potentially breach securities laws, whether it’s in the context of fundraising or investment advisory.

Gensler’s cautionary comments come amid Wall Street’s seemingly endless appetite for AI investments. Stocks in the Magnificent Seven — Apple, Meta Platforms, Nvidia, Amazon, Alphabet, Microsoft, and Tesla — have largely gained in recent quarters on bullish updates related to AI.

The hype across Wall Street has led many analysts to caution that the market may be witnessing a replay of the dot-com bubble.

Setting aside the market frenzy, Gensler also warned about the potential risks of AI to financial stability, emphasizing “systemic” risks in a future financial crisis. His rationale underscores the interconnected nature of financial markets, which can be further exacerbated by the widespread use of the same underlying AI models.

“Thousands of financial entities are looking to build downstream applications relying on what is likely to be but a handful of base models upstream.”

“Such network interconnectedness and monocultures are the classic problems that lead to systemic risk,” he said, adding that new thinking on system-wide or macro-prudential policy interventions should help tackle this problem.

Gensler has reiterated his concerns about AI risks on multiple occasions. At the New York Times’ DealBook conference last year, he warned of companies’ growing reliance on a few dominant AI models, and he echoed this sentiment again in a December interview with The Messenger.