During a speech given yesterday at the SEC-Rock Center for Corporate Governance, Securities & Exchange Commission (“SEC”) Chairperson Mary Jo White discussed how the SEC’s National Exam Program are examining robo-advisors for adherence to requirements under the Investment Advisers Act of 1940 (“Advisers Act”). Robo-advisors are investment advisers that offer a variety of investment models via automated electronic platforms. Investment advice provided through a robo-advisor platform is generally implemented on a discretionary basis, with assets being managed using algorithms. Each investor answers a number of questions pertaining to investment experience and objectives, and from there an investment model is selected.
Ms. White outlined that the SEC’s key focus is determining if robo-advisors are meeting their fiduciary duties and following requirements under the Advisers Act. Specifically, she stated:
“Providing financial advisory services electronically is different than the traditional adviser model, but in many respects our assessment of robo-advisors is no different than for a human-based investment adviser. Just like a conversation with a “real person” about a client’s financial goals, risk tolerances, and sophistication may be more or less robust, so too there is variation in the content and flexibility of information gathered by robo-advisors before advice is given.”
SEC registered investment advisory firms have a plethora of requirements under the Advisers Act they must follow. Whether or not all such requirements apply to robo-advisors is a facts and circumstances based consideration. However, there is one very important rule under the Advisers Act that is applicable to all advisory firms regardless of how they offer or provide their services and remains at the core of SEC exams. Rule 206(4)-7 of the Advisers Act, which is commonly known as the Compliance Program Rule requires SEC registered investment advisers to: (i) have written policies and procedures that are reasonably designed to prevent violations of securities laws; (ii) appoint a named Chief Compliance Officer; and (iii) perform an annual review of the firm’s policies, procedures and internal controls to ensure they remain effective in preventing violations.
CCLS can assist firms with the implementation and review of compliance programs, including drafting policies and procedures, assessing internal controls, and performing annual reviews. For more information, please contact us at firstname.lastname@example.org or (619) 278-0020.