iIn a new risk alert, the SEC Division of Examinations identified compliance deficiencies by investment advisers that provide digital investment advisory services.
The Division staff analyzed how investment advisers using electronic "robo-advisors" fulfill their fiduciary duties to: (i) provide clear and adequate disclosures regarding the nature of their services and performance and (ii) act in their clients’ best interests.
The Division observed "robo-advisory" service deficiencies relating to:
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inadequate compliance programs, including registration matters and supervisory policies and procedures;
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portfolio management that did not satisfy advisers’ duty of care, including inadequate policies and procedures to conclude when investment advice is in each client’s best interest;
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misleading or prohibited statements in marketing and performance advertising; and
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insufficient cybersecurity protections for client data.
The Division also outlined compliance risks posed by investment advisers using electronic advisory services for discretionary (managed) accounts and relying on the nonexclusive safe harbor provisions of ICA Rule 3a-4 ("Status of investment advisory programs"). These include:
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lack of adequate questioning while establishing customer accounts;
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failure to contact each client at least annually to update their investment objectives and tolerances;
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failure to provide written communications regarding changes to account provisions; and
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improper restrictions on clients' accessibility to withdraw securities or cash from their accounts.
The Division offered best practices to assist investment advisers using electronic advisory services to implement compliance programs, including: (i) adopting, implementing, and following written policies and procedures that are tailored to the adviser’s practices, (ii) testing advisory software periodically to ensure that they are updated and operating as expected, and (iii) safeguarding program algorithms and client data.
