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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 Charges Violations of Testimonial Rule

 The SEC settled five enforcement actions against two investment advisers, three investment adviser representatives, and the principal of a third party marketing firm for utilizing the internet to disseminate unlawful client testimonials.  Three of the actions involved a testimonial program sold by the third party marketing firm that solicited client testimonials for publication on social media websites.  Clients lauded the subject firms for service, returns, knowledge, and market access. One of the firms sought positive reviews on Yelp that it would endorse.  One of the firms posted client videos on YouTube.  The SEC charged the principal of the third party marketing firm with causing his client’s violations.  The testimonial rule (206(4)-1(a)(1)) prohibits advertisements that refer to any testimonial about advice, analysis, or services.

OUR TAKE:  Last September, OCIE warned advisers against misleading marketing practices.  It’s hard to believe that advisers could violate the testimonial rule, a clear prohibition that has been in effect for decades.  If you don’t know the rules, hire a compli-pro to ensure you don’t violate the black letter rules.