SEC enforces action for robo adviser compliance infraction

March 14, 2019 | Financial services

SEC Robo Adviser Enforcement Action

In December 2018, the SEC settled proceedings¹ against “robo-adviser” investment platforms for making false statements about investment products and misleading advertising. These proceedings are the first SEC enforcement actions brought against robo advisers, which are automated investment management platforms that utilize software to provide investment management services.

An order found that a California-based registered automated investment adviser about $10 billion in client assets made false statements about a tax-loss harvesting strategy is offered to clients through its automated investment platform. For more than three years, the adviser disclosed it would monitor eligible accounts for wash sales but failed to identify wash sales in more than 30 percent of accounts enrolled in tax loss harvesting strategy. This failure likely diminished the benefits of the tax loss harvesting strategy.

The SEC order also found that the adviser improperly used client testimonials, paid for client referrals without the required disclosure and did not maintain a compliance program reasonably designed to prevent violations of securities laws. The SEC’s order found that the adviser violated the antifraud, advertising, compliance, and other provisions of the Investment Advisers Act of 1940.

Another SEC order found a New York City-based automated investment adviser with about $80 million in client assets made misleading statements about its investment performance. From 2016 until April 2017, the adviser posted comparisons between the investment performance for its clients with those of two robo adviser competitors. The adviser included a small sample of client accounts (less than 4 percent) with higher-than-average returns in the comparison. In addition, the competitor rates-of-return were not based on the actual trading models used by the competitors.

The SEC order also found that the adviser failed to maintain required documentation and failed to maintain a compliance program reasonably designed to prevent violations of securities laws. The SEC’s order found the adviser violated the antifraud, advertising, compliance, and books and records provisions of the Investment Advisers Act of 1940.

The Chief of Enforcements Asset Management Unit, C. Dabney O’Riorden stated: “Technology is rapidly changing the way investment advisers are able to advertise and deliver their services to clients. Regardless of their format, however, all advisers must take seriously their obligations to comply with the securities laws which were put in place to protect investors.”

Deloitte’s automated investment advisory service is an assessment of the how the automated investment platform initiates investor accounts for all strategic asset allocations, rebalances accounts, implements tax loss harvesting, and applies portfolio level rules across all accounts for strategic asset allocations. Tests are conducted across all strategic asset allocations for different account sizes and across all asset classes.

Tax loss harvesting is assessed to verify that the platform correctly identifies tax loss harvesting opportunities, preserves the wash sale rule, and correctly applies the loss rules at the trade lot level and across household accounts where applicable. Deloitte’s team customizes algorithm tests based on the platform implementation and client’s requirements and provides clients with deliverables that describe how the algorithm responded and highlights instances where the platform may not have responded as expected.

¹ https://www.sec.gov/news/press-release/2018-300

Contact us