Robo-Advisers Tag Archives — RIA Compliance Blog

Investment Adviser Touting COVID-19 Investments Sued By SEC

June 8, 2020 | Steve Parker

On June 3, 2020, the U.S. Securities and Exchange Commission filed suit against a company claiming to be an internet-only investment adviser, based on the firm’s failure to respond to a request for documents and information, in violation of the Investment Advisers Act and rules. The company, E*Hedge Securities, Inc., is registered as an investment adviser with the SEC. The complaint also alleges, however, that E*Hedge is not properly registered, as it is ineligible to claim the basis for registration of an “internet only” adviser under Rule 203A-2(e), and does not meet any other qualification for federal registration. E*Hedge’s President, Devon W. Parks, is also named as a defendant in the complaint.

The complaint alleges that in March 2020, E*Hedge began marketing investment opportunities relating to COVID-19 related products and services, particularly tests and treatments. The firm began operating a website at www.Covid19invest.com. It also used social media websites for the same purposes. Together the websites touted investments in companies involved in manufacturing vaccines, diagnostic tests, and treatments for COVID-19. E*Hedge’s website identifies the company’s primary business is to provide a platform for initial public offerings, offerings under Regulation A+, and private offerings under Rule 506 (c). Continue reading ›

Robo-Advisers Included Among SEC Examination Priorities

January 31, 2020 | Steve Parker

In our previous post, we described the SEC’s announcement of examination priorities in 2020 for the Commission’s Office of Compliance Inspections and Examinations (OCIE). In that post, we discussed areas of examination that will apply to a large percentage of registered investment advisors and other regulated entities. In this post, we focus on another priority, namely robo-advisers.

Otherwise known as automated investment platforms, “robo-advisers” have come under increased scrutiny by OCIE. The number of these advisers has increased substantially over the last four years. OCIE intends to focus on issues such as the eligibility of the robo-adviser to register with the SEC, marketing practices engaged in by robo-advisers, the ability to comply with fiduciary duty, the adequacy of the adviser’s disclosures, the effectiveness of the adviser’s compliance program, and the firm’s cybersecurity policies, procedures and practices.

Advisers Act Rule 203A-2(e) permits “internet only advisers” to register with the SEC, provided certain conditions are met and maintained. Specifically, the adviser must provide investment advice to all clients exclusively through an interactive website and maintain records demonstrating that it does so. Under the rule, an adviser may provide investment advice through means other than the internet to up to fourteen clients during any twelve-month period. Undoubtedly there are some firms that registered on this basis who were either not eligible at the time or, through the evolution of their business, have strayed from the conditions required to remain eligible for registration.

Robo-Adviser Settles Charges with SEC for Making Misleading Statements

January 25, 2019 | Elizabeth Dalziel

Demonstrating its regulatory interest in the robo adviser industry, on December 21, 2018, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Wealthfront Advisers, LLC, a registered investment adviser which uses a software-based “robo adviser” platform in servicing its clients. The action is the second case against robo advisers filed on the same day. Wealthfront submitted an offer of settlement in light of the proceeding.

According to the SEC’s Order, Wealthfront utilizes a proprietary tax loss harvesting program (“TLH”) to help its clients garner tax benefits. These tax benefits would typically come through selling assets at a loss, which could potentially be used to reduce income or gains and create a lower tax liability. From October 2012 onward, Wealthfront has featured whitepapers on its website that provide information about the TLH strategy. Continue reading ›

SEC Settles Charges with Robo Adviser for Making False Statements About Investment Performance

January 15, 2019 | Elizabeth Dalziel

On December 21, 2018, the Securities and Exchange Commission issued an Order Instituting Administrative and Cease-and-Desist Proceedings against Hedgeable, Inc., a registered investment adviser. Hedgeable utilizes a “robo adviser” program, which it offers to individuals, small business owners, trusts, corporations, and partnerships through both its website and social media. The SEC’s Order alleges that from about 2016 through April 2017, Hedgeable made various misleading statements in advertising and performance data. Hedgeable submitted an offer of settlement in order to resolve the proceeding.

According to the Order, Hedgeable launched a so-called “Robo-Index” to present comparisons of its performance against that of two unaffiliated robo advisers. These comparisons were featured on both Hedgeable’s website and various social media sites. The SEC found that Hedgeable’s method of preparing the Robo-Index had significant material issues. For example, the SEC found that data from 2014 and 2015 only featured data from a small pool of Hedgeable client accounts and excluded over 1,000 other client accounts. The SEC alleged that, because of the small sample sizes, the data likely reflected “survivorship bias,” stemming from the fact that the sample size likely only contained clients who received higher than average returns compared to Hedgeable’s other clients. The SEC also determined that Hedgeable’s calculation methods did not correctly estimate expected returns for a standard client of the other two robo advisers. Hedgeable allegedly produced the data in the Robo-Index using estimations of the other robo advisers’ trading models rather than using the robo advisers’ actual models. Continue reading ›

Massachusetts Issues Policy Statement Questioning Robo-Advisers

June 27, 2016 | Steve Parker

The Massachusetts Securities Division (the “Division”) recently issued a policy statement in which it stated, “It is the position of the Division that fully automated robo-advisers, as currently structured, may be inherently unable to carry out the fiduciary obligations of a state-registered investment adviser.” According to the Division, robo-advisers are generally incapable of fulfilling their fiduciary obligations, principally because they do not meet with clients, gather sufficient information on which investment advice can be rendered, nor provide highly personalized advice tailored to the information gathered. Continue reading ›