SEC Urges Stricter Robo-Adviser Compliance

The SEC has suggested that investment advisers improve robo-adviser compliance by tightening policies and procedures for automated digital investment advisory services.

The regulator gave deficiency letters to “nearly all” of the advisers whose robo-advisory services it recently examined, according to a new SEC risk alert regarding electronic investment advice.

“The examinations conducted within the scope of this review resulted in a range of actions,” the SEC stated in the risk alert. “In response to the staff’s observations, some advisers elected to amend disclosures and marketing materials, modify or eliminate performance advertisements, revise compliance policies and procedures, improve data protection practices, and/or change other practices.”

The SEC examined robo-advisers under its Electronic Investment Advice Initiative after noticing “a significant increase” in the number of advisers providing automated digital investment advisory services to clients. “Millions of investors, individually and through their employer-sponsored retirement plans, now entrust their savings to advisers that provide their investment advisory services online, via mobile applications, or both (also known as robo-advisers),” the SEC stated.

“On the one hand, automation can offer significant benefits, including providing convenient, accessible, and lower cost services for investors and enhancing operational efficiency for advisers. When robo-advisers fail to comply with their regulatory obligations, however, investors may experience poor outcomes,” the SEC continued.

The SEC cited a client survey process that “does not appropriately capture a client’s risk tolerance” and a robo-adviser that is “programmed to act on conflicts of interest that raise the costs or decrease the quality of the services provided” as examples of how investors could be harmed.

“The SEC has clearly stated that robo-advisory services have important investor protection implications,” said Margie Webber, director of regulatory compliance for RegEd. “It has also concluded that advisers are not doing enough to protect investors and is therefore intervening on their behalf.”

Robo-adviser Compliance Issues

The SEC examined internet advisers as well as other advisers that provided electronic investment advice either exclusively or in addition to traditional investment advisory services. Advisers had different business models, client types, investment practices, assets under management, and bases for SEC-registration.

According to the SEC’s risk alert, in examining robo-advisers, staff most often observed deficiencies in compliance programs, portfolio management, and marketing/performance advertising.

Compliance Programs

Per the SEC: “Most advisers had inadequate compliance programs, typically as a result of either a lack of written policies and procedures or having ones that were insufficient for their operations, unimplemented, or untested.”

Portfolio Management — Oversight

“Many advisers were not testing the investment advice generated by their platforms to clients’ stated or platform-determined investment objectives or otherwise satisfying their duty of care,” examiners wrote.

Portfolio Management — Disclosures and Conflicts

Examiners observed inaccurate or incomplete disclosures “in many advisers’ Form ADV filings, including those related to conflicts of interest, advisory fees, investment practices, and ownership structure,” according to the risk alert.

Performance advertising and marketing

More than half of the advisers had advertisement-related deficiencies, such as misleading or prohibited statements on their websites, materially misleading performance advertisements on their websites, or inadequate or insufficient disclosures about “human” services.

Improving Compliance for Robo-advisers

The SEC offered the following suggestions for improving robo-adviser compliance in its risk alert.

  • Adopting, implementing, and following written policies and procedures tailored to the adviser’s practices
  • Testing algorithms periodically to ensure that they are operating as expected
  • Safeguarding algorithms

The SEC also recommended that advisers review their portfolio management practices and related disclosures; performance advertising and marketing materials; and written policies and procedures. And it encouraged advisers relying on the internet adviser exemption to review their registration eligibility. It also suggested that advisers that recommend discretionary investment advisory programs assess whether clients are being provided with individualized advice and whether sufficient policies, procedures, and practices are being employed to prevent such programs from being deemed unregistered investment companies and securities.

“The SEC is watching the use of robo-advisory services closely,” RegEd’s Webber said. “Advisers should have the proper policies and procedures in place and follow them closely to maintain compliance.”

RegEd’s Policies and Procedures Management solution assists firms with compliance by ensuring that critical compliance information is synchronized with current rules and regulations. It also streamlines preparedness for regulatory audits and market conduct exams with strong documentation and detailed evidence of compliance. For more information, please schedule a consultation.

About RegEd

RegEd is the market-leading provider of RegTech enterprise solutions with relationships with more than 200 enterprise clients, including 80% of the top 25 financial services firms.

Established in 2000 by former regulators, the company is recognized for continuous regulatory technology innovation with solutions hallmarked by workflow-directed processes, data integration, regulatory intelligence, automated validations, business process automation and compliance dashboards. The aggregate drives the highest levels of operational efficiency and enables our clients to cost-effectively comply with regulations and continuously mitigate risk.

Trusted by the nation’s top financial services firms, RegEd’s proven, holistic approach to RegTech meets firms where they are on the compliance and risk management continuum, scaling as their needs evolve and amplifying the value proposition delivered to clients. For more information, please visit

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