Introduction
The Securities and Exchange Commission (SEC) has intensified its scrutiny of corporate claims related to artificial intelligence (AI) [4], particularly focusing on “AI washing,” where companies exaggerate their AI capabilities [4]. This initiative underscores the SEC’s commitment to ensuring responsible AI deployment and compliance with existing laws, targeting organizations that misrepresent their AI functionalities to attract investors and customers.
Description
The Securities and Exchange Commission (SEC) has intensified its scrutiny of corporate claims related to artificial intelligence (AI) [4], particularly focusing on the phenomenon known as “AI washing,” where publicly traded companies and brokerage firms exaggerate their use or the capabilities of AI technologies. This initiative underscores the SEC’s commitment to ensuring that AI technologies are deployed responsibly and in compliance with existing laws and regulations [3], targeting organizations that misrepresent their AI functionalities to attract investors and customers. Accurate disclosures are emphasized to mitigate significant implications in securities litigation.
Recent settlements highlight the SEC’s dedication to this issue, with companies like Delphia Inc and Global Predictions Inc facing substantial financial penalties—$400,000 each—for misleading representations about their AI usage. Ongoing investigations [1], including a notable case involving Nate Inc, reveal systemic risks associated with fraudulent claims, which have led to over $42 million in solicitations [1]. In April 2025 [2], the former CEO of Nate Inc was charged with securities and wire fraud for allegedly misleading investors about the company’s proprietary AI technology [2], prompting the SEC to file a civil complaint seeking penalties and other remedies [2].
To bolster its regulatory efforts, the SEC established the Cybersecurity and Emerging Technologies Unit (CETU) in February 2025 [1] [3], composed of fraud specialists and attorneys dedicated to investigating AI-related misconduct [1]. This unit scrutinizes how both public companies and startups present their AI capabilities [1], emphasizing the need for transparency and accuracy in claims regarding machine learning versus traditional automation.
As the SEC continues to address AI washing, organizations are urged to implement comprehensive internal controls to manage the unique risks associated with AI disclosures [1]. Traditional disclosure practices may no longer suffice; companies must maintain detailed documentation of their AI systems’ technical architecture, data sources [1], and operational limitations [1]. Regular testing of AI systems is essential to ensure that performance claims remain accurate over time [1], and systematic approaches to validate AI capabilities are necessary [1].
A robust governance framework that addresses AI-related risks requires collaboration among various business functions [1], including legal [1], compliance [1] [3], and cybersecurity [1]. Enhanced review processes for investor-facing materials are critical [1], especially when they involve complex AI functionalities [1]. Compliance teams must audit AI-related communications to ensure that public statements accurately reflect the technology’s current state [1], clearly distinguishing between AI-powered features and traditional systems [1].
The SEC’s focus on AI washing is prompting companies to adopt a more cautious approach to AI-related disclosures [1]. Major firms, such as Electronic Arts and Take-Two Interactive [1], have begun adapting their SEC filings to address AI risks [1], reflecting a broader recognition of the need for transparency regarding AI capabilities and associated risks [1]. Additionally, cybersecurity leaders are advised to scrutinize third-party vendors’ AI claims [1], as organizations may be held accountable for misleading statements made by partners [1], necessitating thorough due diligence and technical validation of vendor capabilities [1].
While regulatory expectations are clear [1], organizations [1], particularly smaller firms [1], face challenges in developing effective compliance programs against AI washing due to limited resources. Integrating AI governance into existing systems requires coordination between technical and compliance teams [1], which can be complex [1]. The SEC’s enforcement approach necessitates a careful balance between providing accurate information about AI capabilities and protecting proprietary technology [1]. Companies must communicate their AI systems’ functionalities without disclosing sensitive technical details [1], requiring precise language to maintain transparency while safeguarding competitive advantages [1].
The current regulatory landscape may inadvertently stifle innovation [1], as overly stringent enforcement could deter organizations from pursuing AI advancements [1]. Smaller companies may bear disproportionate compliance burdens [1], potentially limiting their competitive edge [1]. The focus on AI washing might also lead to unnecessary compliance efforts for organizations with minimal AI exposure [1], diverting resources from other critical risk management activities [1].
Overall, the intersection of AI washing and SEC enforcement presents a complex challenge that requires both technical expertise and regulatory compliance capabilities [1]. Organizations that effectively manage these risks while fostering innovation will be better positioned for success in an increasingly regulated AI environment [1].
Conclusion
The SEC’s focus on AI washing has significant implications for corporate governance and compliance. Companies must navigate the challenges of accurate AI disclosures while fostering innovation. The regulatory landscape demands a balance between transparency and protecting proprietary technology, with potential impacts on innovation and competitive dynamics, particularly for smaller firms [1]. Organizations that successfully manage these challenges will be better positioned in the evolving AI regulatory environment.
References
[1] https://www.linkedin.com/pulse/sec-ai-enforcement-washing-risks-grc-teams-kayne-mcgladrey-l1i1c
[2] https://www.altolit.com/blog/2025/ai-washing-revisited-trying-to-predict-the-future
[3] https://www.porterhedges.com/anti-corruption-and-compliance-blog/2025/06
[4] https://www.blbglaw.com/news/publications/2025-06-04-jonathan-uslaner-and-alec-coquin-examine-the-surge-in-ai-related-legal-claims-in-reuters
