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SEC Issues Robo Guidance on Disclosures, Suitability, and Compliance


The SEC’s Division of Investment Management has issued regulatory guidance for robo-advisers to meet their disclosure, suitability, and compliance obligations.  The IM staff recommends robust disclosures about the algorithm (functions, limitations, risks), overrides, third parties, fees, and client information.   The staff also urges robo-advisers to adequately disclose limits on the models and to ensure that all disclosures are sufficiently clear and prominent.  The staff stresses that robo-advisers must satisfy their suitability obligations by ensuring adequate and clear questionnaires, which would include a process to reconcile inconsistent responses.  The Guidance requires robo-advisers to enhance their compliance programs to include policies and procedures to test the algorithm, analyze the questionnaires, oversee third parties, ensure proper disclosures, monitor social media, and protect against cyber-threats.  The IM Staff warns that it “will monitor these innovations and implement safeguards, as necessary, to help facilitate such developments and protect investors.”

OUR TAKE: The SEC has been taking a hard look at robo-advisers and whether the digital advice model is consistent with securities laws.  This Guidance will force many fintechs to increase compliance and operations spending to satisfy all the requirements described in this Guidance Notice.


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