The SEC staff’s recent guidance on robo-advisers is the most comprehensive SEC guidance to date concerning the considerations robo-advisers should keep in mind in meeting their legal obligations under the Advisers Act. The staff notes that robo-advisers, like all registered investment advisers, are subject to the substantive and fiduciary obligations of the Advisers Act. The staff further indicates that because robo-advisers rely on algorithms, provide advisory services over the internet, and may offer limited, if any, direct human interaction to their clients, their unique business models may raise certain considerations when seeking to comply with the Advisers Act.
More than anything else the SEC staff guidance is notable in that it evinces a flexible approach by robo-advisers in meeting their compliance obligations under the Advisers Act and because of this, the guidance does not present any significant roadblocks to the continued development and evolution of robo-advice. The SEC’s guidance stands in stark contrast to the April 2016 policy paper by the Massachusetts Securities Department which indicated Massachusetts’ concern regarding state-registered robo-advisers meeting their fiduciary obligations under Massachusetts law given the lack of human interaction.
The guidance focuses on three distinct areas and how robo-advisers may address them:
- Disclosures about the robo-adviser and the investment advisory services it offers;
- Obtaining information from clients to support the robo-adviser’s duty to provide suitable advice; and
- Adopting and implementing an effective compliance program reasonably designed to address particular concerns relevant to providing automated investment advice.