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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

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.