AI-Washing Enforcement Crackdown Set to Survive Trump Rollbacks

Federal regulators anticipating drastic change under the second Trump administration are nonetheless poised to continue pursuing enforcement against companies making false and misleading statements about artificial intelligence, known as AI washing.

Policing misrepresentations about AI under the aegis of fraud enforcement is a strategy that will remain viable, even with the expected deregulatory emphasis in the new administration, according to securities lawyers and compliance consultants.

The Securities and Exchange Commission, Federal Trade Commission, and state securities regulators have each taken steps to crack down on AI washing through enforcement. Meanwhile, rulemaking specifically targeting the practice has been less of a priority and is unlikely to move forward in Donald Trump’s second term.

“A lot of the AI-washing enforcement has been through relatively traditional, existing, and established mechanisms of enforcement,” said David Rhinesmith, a partner at Orrick, Herrington & Sutcliffe LLP who has represented clients in federal securities probes.

“Especially if they’re already pursuing an SEC case, a fraud claim that looks like someone misrepresenting to their investors about AI—it wouldn’t be surprising to see those cases continue,” he said.

The SEC has acknowledged the unlikely overlap between the cutting-edge issue of AI washing with the types of misleading disclosures the agency has sought to curtail since its inception.

Gurbir Grewal, the former director of the SEC’s enforcement division who left the agency last month, described one such AI-washing scheme as “old school fraud using new school buzzwords,” cautioning investors in a June press release to be wary of companies “exploiting the fanfare” around AI when raising funds.

“We’ve been quite active in that area,” Mike Atleson, an FTC attorney within the Bureau of Consumer Protection’s Division of Advertising Practices, told Bloomberg Law. “It falls really in a bread and butter area for the agency, which is to hold companies accountable for deceptive claims.”

‘Low-Hanging Fruit’

Widespread interest in capitalizing on AI has led many companies to tout the potential of automation or generative software in disclosures to investors and customers, even if those technologies play a minimal role in their business operations or product offerings.

More than 40% of S&P 500 companies mentioned AI in annual reports filed with the SEC in 2023, part of an upward trend in recent years, a previous review by Bloomberg Law found. The SEC this year launched its first enforcement actions against companies for overhyping their use of the technology, and its examinations unit signaled it will ramp up scrutiny of financial firms’ AI practices in 2025.

“The AI-washing cases that we’ve seen so far are low-hanging fruit,” said Amy Jane Longo, a partner at Ropes & Gray LLP and former SEC enforcement attorney. “They’re fairly straightforward cases that essentially say you can’t misrepresent how you’re using AI, whether that’s in the context of registered investment advisers or offering fraud.”

SEC Chair Gary Gensler and FTC Chair Lina Kahn, both on deck to be replaced by Trump-nominated successors, have been outspoken on the steps their agencies could take to curb AI-related deceptive practices. Gensler last week said he plans to step down on Jan. 20.

“Gensler seems to have the same concern with AI that he had with ESG and the cases that were brought against firms for greenwashing,” said Amy Lynch, founder and president of FrontLine Compliance and a former SEC examiner. “The structure of the examination program itself has already been determined, so no matter who comes in as the new chair, if that happens, the plan is already being put in place for 2025.”

The SEC didn’t respond to a request for comment.

The FTC announced its crackdown, Operation AI Comply, with a raft of enforcement actions in September aimed at protecting consumers. Its sweep of cases showcased how companies have used AI tools to “turbocharge deception,” while exploiting hype around the technology to lure consumers into bogus schemes, according to an agency press release announcing the actions.

“Using AI tools to trick, mislead, or defraud people is illegal,” Khan said then. “The FTC’s enforcement actions make clear that there is no AI exemption from the laws on the books.”

Rulemaking Roadblocks

Rulemaking attempts will be challenging or nonexistent even as enforcement proceeds.

The SEC, for instance, unveiled a proposal last year that would require broker-dealers and investment advisers to assess whether their use of predictive data analytics poses conflicts of interest, and to eliminate any conflicts. The agency is unlikely to finalize that rule or propose any new AI policies in Trump’s second term.

“I think it’s reasonable to expect we aren’t going to be confronting new rules under which cases like AI washing will be brought, but rather that we would see cases like those continuing to be brought under existing laws and rules, shaping them to apply to the technology of the day,” Longo said.

Trump has said he plans to rescind President Joe Biden’s 2023 executive order on AI, which laid out a framework for mitigating risks posed by the technology. Combined with critiques of Gensler and Khan as regulators, Trump’s second administration may be characterized by efforts to block AI-related rulemaking going forward.

But even under new leadership, federal agencies with longstanding compliance agendas may be slow to change course, especially on the enforcement side.

“It naturally takes a fair amount of time for changes in priorities to percolate through the SEC bureaucracy, there are cases in the pipeline that are already authorized or pending, so I don’t think we are likely to see an immediate dramatic effect.” Longo said. “Regardless of what we see out of this next administration, it may be that different regulators also continue to pursue these kinds of actions.”