Risk Alert on Robo-Advisers Urges Vigilance on Compliance Programs

The SEC’s office of Exams recently published a risk alert based on its examinations of robo-advisers run by firms that provided roboadvisory services to employer-sponsored retirement plans (“retirement plans”) and/or retail investors, including retirement plan participants;  sold, licensed, or otherwise granted interactive, digital platform access to third parties, such as advisers, broker-dealers, and banks; and/or provided advisory or sub-advisory services to an interactive, digital investment platform. According to the alert, nearly all of the examined advisers received a deficiency letter, with staff observations most often noted in the areas of: (1) compliance programs, including policies, procedures, and testing; (2) portfolio management, including, but not limited to, an adviser’s fiduciary obligation to provide advice that is in each client’s best interest; and (3) marketing/performance advertising, including misleading statements and missing or inadequate disclosure. Lawyers from Stradley wrote that the risk alert should be considered in light of the broader examination by the SEC of digital engagement practices prompted by the “meme stock” frenzy last spring. The Stradley client alert included takeaways such as urging firms to tailor their compliance policies and procedures, disclosures, and marketing to the risks inherent in robo-advice. “Such tailoring requires robo-advisers to pay special attention to the construction, testing, and safeguarding of algorithms and any other technology robo-advisers use to deliver advice. This likely requires coordination between a robo-adviser’s legal and compliance personnel, on the one hand, and its technology personnel, on the other.”