On December 21, the SEC instituted its first enforcement actions against robo-advisers when they issued orders against Redwood City, a California-based Wealthfront Advisers LLC and Hedgeable Inc., a New York City-based robo-adviser. Robo-advisers provide software-based, automated portfolio management services. The enforcement actions took place because the advisers published misleading advertising and made false statements about investment products.
The SEC’s order against Wealthfront stated that the adviser violated antifraud, advertising, compliance, and other provisions of the Investment Advisers Act of 1940. According to the order, Wealthfront falsely asserted that its tax loss harvesting program monitors all client accounts to avoid any transactions that might trigger a wash sale when in fact, Wealthfront did not monitor clients’ accounts for this purpose. (A wash sale occurs when an investor sells a security at a loss and within 30 days of the sale, buys a substantially identical security.) Concurrently, Wealthfront retweeted client testimonials, which investment companies are prohibited from publishing without required disclosure, and paid bloggers for new client referrals without complying with applicable disclosure requirements. Wealthfront was ordered to pay a civil money penalty in the amount of $250,000 to the SEC and to cease and desist from committing any disclosure violations. (link to complaint: https://www.sec.gov/litigation/admin/2018/ia-5086.pdf)
The SEC’s order against Hedgeable found that the adviser violated antifraud, advertising, compliance, and books and records provisions of the Investment Advisers Act of 1940. The order describes Hedgeable’s “Robo-Index”, which supposedly permitted clients to compare the performance from 2014 and 2015 of two other robo-advisers to the performance of Hedgeable’s clients during the same period in a “Hedgeable Composite.”. The Robo-Index and Hedgeable Composite were misleading because the composite only included a small subset of the number of Hedgeable’s clients, and the calculation methodology of the Robo-Index was not based on the two other robo-advisers actual trading models. Hedgeable also did not maintain enough documentation to substantiate the returns presented in the Robo-Index or Hedgeable Composite. Hedgeable was ordered to pay a civil money penalty of $80,000 and to cease and desist from causing any present or future disclosure violations. (link to complaint: https://www.sec.gov/litigation/admin/2018/ia-5087.pdf)
C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit, commented: “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.”
More information about robo-advisers is in a bulletin published by SEC’s Office of Investor Education and Advocacy. (link to bulletin: (https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-robo-advisers)
If you have questions about your company’s compliance with provisions of the Investment Advisers Act of 1940 and SEC disclosure requirements, call Wilson, Bradshaw, & Cao, LLP today.