The proceedings are the SEC’s first enforcement actions against robo-advisers, which provide automated, software-based portfolio management services. Both companies were charged with violating rules on recordkeeping, antifraud, advertising, and compliance.
The SEC fined the second biggest robo-adviser, Wealthfront, $250,000 for improperly retweeting prohibited client testimonials, paying bloggers for client referrals without the required disclosure and documentation, and failing to maintain a reasonable compliance program. Wealthfront used Twitter to post advertisements and communicate online with clients but didn’t always preserve copies of the ads or retain communications made through its Twitter account relating to recommendations or advice given to clients. It retweeted positive posts by other Twitter users whom it knew or should have known had an economic interest in promoting Wealthfront, without disclosing these conflicts of interest. For example, some of the retweeted posts originally were made by Wealthfront employees, Wealthfront investors, and Wealthfront clients who received free services if a reader used the client’s personalized landing page to enroll with Wealthfront. The firm’s policies and procedures did not ensure that all retweets were assessed by the Compliance Department before being posted, as required by SEC rules. The SEC also found that Wealthfront made false statements about a tax-loss harvesting strategy that it offered to clients. It told clients that it would monitor all accounts for transactions that might trigger a wash sale, but failed to do so.
A separate SEC order fined a New York City-based robo-adviser, Hedgeable, $80,000 for misleading statements about its investment performance. According to the order, from 2016 until April 2017, Hedgeable posted on its website and social media purported comparisons of the investment performance of Hedgable’s clients with those of two robo-adviser competitors. The performance comparisons were misleading because Hedgeable included less than four percent of its client accounts, which had higher-than-average returns. Hedgable compared this with rates of return that were not based on competitors’ actual trading models. The SEC alleged Hedgeable failed to maintain documentation or maintain a reasonable compliance program.
“Technology is rapidly changing the way investment advisers are able to advertise and deliver their services to clients,” said C. Dabney O’Riordan, Chief of the SEC Enforcement Division’s Asset Management Unit, in a statement. “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.”
A broker was fined $20,000 and suspended from association with any FINRA member in all capacities for 18 months. The broker consented to the sanctions and to the entry of findings that he caused his member firm to fail to comply with its recordkeeping obligations by using text messaging and his personal email account to engage in business-related communications with a customer. The findings stated that these communications included a written complaint by a customer alleging that the broker failed to follow the customer’s instructions, which the customer alleged caused him to suffer approximately $300,000 in damages. The broker did not take steps to retain or provide his firm with any of the text messages or emails he exchanged with the customer, all of which were deleted. The findings also stated the broker provided misleading on-the-record testimony to FINRA stating that he did not send text messages to his customers, which the broker later corrected in subsequent testimony. The findings also stated that the broker willfully failed to disclose the above-referenced customer complaint on his Form U4. Additionally, FINRA found that the broker attempted to settle away two customer complaints and did not tell his firm about the complaints or his efforts to settle them. FINRA found that the broker further hid his actions from his firm by signing compliance attestations falsely stating that he used only firm-sanctioned electronic communication methods to communicate with firm customers, complied with his obligation to update his Form U4, reported all customer complaints to the firm, and that he had not settled away any customer complaints.
A broker was fined $10,000 because he used a personal email account to conduct his securities business, including to communicate with customers and prospective customers. The findings stated that broker’s firm discovered he had been using his personal email account to conduct some of his securities business and requested that he provide his personal email account password so that the firm could review the nature and extent of the securities business he had conducted through personal email. Although the broker at first provided his password to the firm, he subsequently began deleting emails from his personal account, and then changed his password, in an attempt to prevent the firm from further accessing his emails. The findings also stated that by using personal email to conduct his securities business, the broker caused the firm to maintain inaccurate books and records.
Author & Source: Marianna Shafir Esq. Corporate Counsel, Regulatory Advisor at Smarsh
Marianna Shafir is Corporate Counsel and Regulatory Advisor at Smarsh, where she’s responsible for legal and regulatory affairs worldwide. With her expertise in financial services industry, compliance and eDiscovery, Marianna counsels Smarsh clients on meeting regulatory obligations, leveraging technology and guidance on best practices related to electronic communications supervision. Prior to joining Smarsh, Marianna worked for BNY Mellon and Invesco where she was an instrumental member on compliance teams.Marianna has also served as an adjunct professor at New York Career Institute where she taught Law Office Management and Real Estate Law. She earned her Juris Doctorate from Nova Southeastern University. She is a frequent speaker at industry conferences and a contributor to various online publications.
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