- How does the SEC define “AI-Washing” in 2026?
Under the direction of Chairman Paul Atkins, the SEC has defined AI-washing as a materially false or misleading statement concerning a firm’s use of artificial intelligence to manage financial assets and/or to predict market trends. If a firm claims its returns are generated by a “proprietary neural network” but is, in fact, actually utilizing standard quantitative models or manual trading, it may be inviting an enforcement action under the antifraud provisions of the Advisers Act under the Federal Securities Laws.
- How is the SEC Enforcement Director Margaret Ryan changing the nature of AI investigations?
SEC Director Margaret Ryan has shifted the Enforcement Division away from prioritizing a “numbers-driven” volume approach to cases toward “high-impact” fraud, particularly as it impacts retail investors. In her February 2026 remarks, she stressed that firms using AI to engage in market manipulation or false or unsubstantiated performance projections will be prioritized. The SEC’s Enforcement Division, under her direction, is specifically on the look out for “hallucinated disclosures” where AI-generated marketing materials make unsubstantiated investment performance claims and representations.
- Does the SEC Marketing Rule (206(4)-1) apply to AI-generated content?
Yes. The SEC’s January 2026 FAQ update states that AI-generated testimonials, social media posts, and performance illustrations fall squarely under Rule 206(4)-1. Firms are required to have a “substantiation file” ready to substantiate any factual claim made by an AI bot. If your AI “influencer” or chatbot makes a recommendation, it must include clear and prominent disclosures regarding compensation and conflicts of interest.
- What should I do if I receive a Wells Notice for AI-washing?
Per the March 2026 SEC Enforcement Manual update, you now have four weeks (instead of two) to respond to a Wells Notice, although as a practical matter, deadlines are quite often extended in the course of ongoing discussions with the SEC Staff. It is highly recommended that you work with an experienced and seasoned SEC defense lawyer in order to provide a compelling response to attempt to persuade the staff to drop its enforcement recommendation. Quite often, however, the Wells Notice is typically the beginning of settlement discussions, where an attempt is made to drop the most serious charges, reduce financial penalties, and limit the time period for any associational suspension.
- Can a CEO or CCO be held personally liable for an AI’s “hallucination”?
Yes. The SEC is increasingly pursuing individual liability. If a CEO and/or CCO fail to implement “reasonable policies and procedures” to supervise and oversee AI-generated financial reports, disclosures or representations, they can be held liable for “reckless” oversight or a failure to reasonably supervise, even if they did not personally write the misleading content, i.e., commit the underlying vioaltion.
