Robo-Adviser Sanctioned for Compliance Failures, Non-Adherence to Investment Process

The SEC recently charged New York-based robo-adviser Wahed Invest, LLC with making misleading statements and breaching its fiduciary duty, and for compliance failures related to its Shari’ah advisory business. Without admitting or denying the SEC’s findings, Wahed Invest agreed to a cease-and-desist order, to pay a $300,000 penalty, and to retain an independent compliance consultant among other undertakings. According to the SEC’s order, from September 2018 through July 2019, Wahed Invest advertised the existence of its own proprietary funds when no such funds existed, and also promised investors that it would periodically rebalance their advisory accounts, but did not do so. The SEC’s order also found that when Wahed Invest ultimately launched a proprietary ETF in July 2019, it used its clients’ advisory assets to seed the ETF without prior disclosure to clients of any conflicts of interest. The SEC’s order alleged that while Wahed Invest advertised its adherence to Shari’ah compliant investing, Wahed Invest failed to adopt and implement written policies and procedures reasonably designed to address its Shari’ah advisory decision-making processes and compliance reviews and oversight. The SEC staff wrote that on the Wahed Invest Website, in its marketing materials, and in interviews, Wahed Invest extensively discussed the importance of its income purification process that included a “unique annual purification report” for each robo-advisory client. The SEC found that despite these representations to clients and prospective clients, Wahed Invest had no written policies and procedures addressing how it would assure Shari’ah compliance on an ongoing basis or how it would calculate and report the purification of unpure income. Wahed Invest also failed to adopt policies and procedures to ensure Wahed obtained reasonable support for its Shari’ah-related marketing claims. “Robo-advisers, like other advisers, must ensure that their marketing materials are not misleading and that conflicts are disclosed to investors,” said Adam S. Aderton, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Registered investment advisers like Wahed Invest must also adopt and implement written policies and procedures reasonably designed to prevent the adviser from deviating from its claimed investment process.”