SEC fines Robo-Advisers

One of the trends in the investment advisory field is the use of “robo advice”, which basically is an automated, algorithm-driven service that requires little human supervision. The robo advice market is growing rapidly, helped in part by millennials who are more accepting of this type of technology. Given this trend, the recent settlements between the SEC and Wealthfront Advisers, and the SEC and Hedgeable, two of the leading robo advisers, are noteworthy given that these are the first SEC actions against robo-advisers, and therefore could signify that the SEC is concerned that robo-advisers are not as compliant as the traditional investment advisers.

A 15-page Guidance Update on robo-advisers was published by the SEC’s Division of Investment Management in February 2017. The Guidance noted that robo-advisers “should keep in mind certain unique consideration as they seek to meet their legal obligations under the Advisers Act.” The Guidance further focused on the following three distinct areas identified by the Staff:

  1. The substance and presentation of disclosures to client about robo-advisers and the investment advisory services it offers;
  2. The obligation to obtain information from clients to support the robo-adviser’s duty to provide suitable advice; and
  3. The adoption and implementation of effective compliance programs reasonably designed to address particular concerns relevant to providing automated advice.

So, where did Wealthfront Advisers (“Wealthfront”) and Hedgeable go wrong, accordingly to the SEC. For Wealthfront, according to the SEC order, there were the following alleged violations:

  • False disclosure regarding the adviser’s tax loss harvesting strategy;
  • Retweets that did not adhere to relevant advertising rules disclosure and related SEC requirements;
  • Paying bloggers for successful client solicitation, without adhering to the cash solicitation rule requirements; and
  • Failing to keep required books and records.

And for Hedgeable, the following are some of their alleged violations:

  • False performance disclosures, which were incorrectly calculated and misleading;
  • Failing to adopt adequate compliance procedures; and
  • Failing to keep required books and records.

Obviously, any robo-adviser, just like all investment advisers, needs to understand their obligations under the Advisers Act, and specifically understand the SEC Guidance that was published in February 2017.