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Robo-Adviser Charged with Multiple Compliance Breakdowns

 

 

The SEC censured and fined a robo-adviser for several compliance violations related to client account management and marketing.  The SEC alleges that software programming errors caused the respondent’s failure to execute tax loss harvesting without violating the wash sale rules, contrary to marketing materials.  The SEC also asserts that the firm retweeted client testimonials and other positive tweets made by those with an economic interest including employees, investors, and paid tweeters.  Additionally, the SEC maintains that the firm failed to provide the necessary disclosure to clients about payments to bloggers to refer the clients to the respondent.  The SEC charges the firm with failing to implement a reasonable compliance program in addition to violations of the antifraud rules and the recordkeeping rules.

 We think robo-advisers provide innovative services to under-served retail clients.  Regardless, as registered investment advisers, robos must conform to the heavily-regulated environment in which they operate.  Some of these alleged violations could have been easily avoided with an industry-standard compliance program.  We recommend reviewing the SEC’s previously issued regulatory compliance guidance to robo-advisers

Adviser Failed to Stop Radio Host from Giving Testimonials

 

The SEC censured and fined an investment adviser and its principal for allowing a radio station to air testimonials.  The adviser purchased radio spots that aired over a two-year period, during which one of the radio hosts became a client.  During both live and pre-recorded segments, the radio host noted his relationship with the firm, expressed his satisfaction, and praised his wealth manager by name.  The SEC faults the adviser for failing to take any action to monitor the spots (including by declining to accept transcripts offered by the radio station).  Separately, the SEC also accuses the adviser’s principal with failing to report personal securities accounts to the firm’s Chief Compliance Officer.

OUR TAKE: This failure to monitor media also applies to social media where firms have an obligation to squelch potential client testimonials on sites that the firm makes available (e.g. Web page, LinkedIn, Facebook).