The Commission has long enforced its ethical rules as to the wide variety of professionals who appear and practice before it. While in years past the enforcement of those rules against professionals was controversial, today enforcing ethical rules as to the professionals that appear before the agency is an accepted part of its work. The most recent example of such an action is In the Matter of Ellen McCarthy, Esq., Adm. Proc. File No. 3-21897 (March 21, 2024).

Respondent McCarthy is an attorney admitted to practice in the state of New York in 1989. Her career centered on regulatory and compliance work. Early in her career she focused on regulatory and compliance work for self-regulatory organizations. Later she served as a compliance professional in the private sector. Recently she informed the staff that she is retired.

This matter focuses on an order entered by the Commission in May 2018 directing that Manhattan Transfer Register Company comply with certain undertakings. It directed that the firm retain an independent consultant to prepare a report identifying deficiencies and weaknesses in its policies, procedures and supervisory controls. This included the implementation of those policies and procedures. Manhattan hired an independent consultant or IC who in turn retained Ms. McCarthy.

IC and Ms. McCarthy submitted their independent consultant Report to the Commission on or about September 13, 2018. This completed their engagement. Under the terms of the engagement both IC and Ms. McCarthy were required to remain independent of Manhattan Transfer for two years following the completion of the Report.

By late September 2018, however, Ms. McCarthy disregarded her obligation. Specifically, she continued to perform work for the company. Respondent did request that the Commission permit her to accept the engagement in August 2018, prior to commencing work. She did not wait for a response before commencing work, however. By September 21, 2018, the staff informed Ms. McCarthy that she had to honor her commitment to remain independent. Ms. McCarthy continued with her engagement. She did take steps to conceal her activities after the staff denied her request.

The Division of Enforcement later opened an investigation into the matter. During her testimony Ms. McCarthy made false statements. The Order alleges violations of Rule 102(e)(1)(ii). The proceeding was resolved when the Commission accepted Ms. McCarthy’s settlement offer and entered an order denying her the privilege of appearing or practicing before the Commission.

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Artificial intelligence is a key topic of conversation these days. From a one-time little discussed idea, it is now being bantered around as if AI were about to take over the world at any moment. There s in fact little doubt that significant research and work is being done in the area and its uses are expanding.

None of this has not been lost on the Commission. Always looking for the new thing as it patrols the marketplace, the agency has discovered investment advisers who claim to have AI on their side – and why not? With a superfast computer and a touch of AI perhaps new and more profitable investments could be developed for investors. Perhaps. Consider a recent case filed by the agency centered on AI. In the Matter of Delphia (USA) Inc., Adm. Proc. File No. 3-21894 (March 14, 2024).

Delphia is a registered investment adviser based in Toronto, Canada. The firm managed about $7 million for 29,000 individual retail account using robo-advisory servces and about $180 million for five pooled investment vehicles. The firm has now ceased its investment activities.

In 2019, not long after registering with the Commission, the firm developed algorithms to manage retail client portfolios based on different investment objectives and risk profiles. Delphai intended to use artificial intelligence and machine learning to collect data from its clients as inputs into its algorithms. Over the last five year, however, the advisory did not collect the data.

Nevertheless, the firm claimed in a press release that it was “the first investment adviser to convert personal data into a renewable source of investment capital . . . that will allow consumers to invest in the stock market using their personal data.” This happed, according to the advisory, because it used “machine learning to analyze the collective data shared by its members to make intelligent investment decisions.”

By 2020 the firm expanded its claims, telling investors that it turned “your data into an unfair investment advantage.” The adviser supposedly did this by putting client data to work as inputs into its investing algorithms.

The claims were false, a fact that emerged while the Division of Examinations was conducting an exam. While Delphia admitted its wrongful conduct and promised to stop, it did not. The claims about AI continued. The company also failed to create and implement the appropriate compliance programs. It did cooperate with the Commission. The Order alleged violations of Exchange Act Sections 206(2) and 206(4) and the related Rules.

To resolve the matter, Delphia consented to the entry of a cease-and-desist order based on the Sections cited in the Order and a censure. In addition, the firm agreed to pay a penalty of $225,000. See also In the Matter of Global Predictions, Inc., Adm. Proc. File No. 3-21895 (March 18, 2024).(Similar action; resolved with a cease-and-desist order based on same Sections and a penalty of $175,000).

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