Published on Nov 10th, 2021 |

SEC Releases | Risk Alert on Advisers Providing Electronic Investment Advice

The Division of Examinations (the “Division”) released a Risk Alert yesterday, November 9th, with the goal of raising awareness of certain compliance issues relating to advisers providing or claiming to provide Robo-Advisory Services. It is important to note that this also includes advisers that recommend, operate, and sponsor discretionary investment advisory programs.

The Division staff determined that almost every examined adviser received a deficiency letter upon further examination. The following areas below were the most frequent issues found:

  1. Compliance Programs: Includes policies, procedures, and testing.
  2. Portfolio Management: Includes an adviser’s fiduciary obligation to provide advice that is in each client’s best interest.
  3. Marketing/Performance Advertising: Includes deceiving statements and absent disclosures.
The Division also focused on two key areas during their Examination:
  • Provision of Electronic Investment Advice
    • Compliance programs;
    • Formulation of investment advice;
    • Marketing and performance advertising practices;
    • Data protection practices; and
    • Registration information.
  • Use of Discretionary Investment Advisory Program
    • The Staff examined if certain programs were considered investment companies in accordance to the Company Act.
    • Staff Inquired at to whether the Advisers were operating the programs in accordance with the nonexclusive safe harbor provided by Rule 3a-4.

Brief Synopsis

As a result of the examinations, there was a range of actions taken in response to the staff’s observations.

Some advisers elected to do the following after they were examined:

  • Amend disclosures and marketing materials;
  • Modify or eliminate performance advertisements;
  • Revise compliance policies and procedures; and
  • Improve data protection practices.

It is important for advisers to make sure that they are persistent with the Advisers Act, the rules under it, and the federal securities laws. There is a recommendation for advisers to review their registration eligibility as well if they rely on Internet adviser exemption.

Lastly, for advisers to prevent being deemed as unregistered investment companies and securities, it is important to be sure that clients are being provided with individualized advice and to be sure the policies and procedures, and practices are ample.

Need an Extra set of Eyes on your Compliance Policies, Procedures, and Practices?

Contact Us to help your Firm comply with the new Risk Alert.