SEC Issues Risk Alert on Investment Advisers that Provide Electronic Investment Advice

On November 9, 2021, the Division of Examinations of the Securities and Alternate Fee (the Employees) issued a risk alert highlighting notable deficiencies and associated business greatest practices noticed by the Employees in a just lately accomplished nationwide examination initiative of funding advisers that present their purchasers with automated digital funding advisory providers (in any other case known as robo-advisers). By means of the examination initiative, the Employees recognized deficiencies with a majority of advisers examined, most frequently referring to (i) compliance applications, together with insurance policies, procedures, and testing; (ii) portfolio administration, together with, however not restricted to, an adviser’s fiduciary obligation to supply recommendation that is in every shopper’s greatest curiosity; and (iii) advertising and marketing and efficiency promoting, together with deceptive statements and lacking or insufficient disclosure. Robo-advisers could be well-served to pay attention to the Employees’s observations relating to business greatest practices:

  • Undertake, implement and comply with written insurance policies and procedures that are tailor-made to the adviser’s practices. Insurance policies and procedures ought to be particular to an adviser’s use of a web based platform and/or different digital instruments for the supply of funding recommendation. Insurance policies and procedures ought to assess, amongst different issues, whether or not the adviser’s: (i) algorithms carry out as meant, (ii) asset allocation and/or rebalancing providers happen as disclosed, (iii) knowledge aggregation providers, if any, current any custody implications. Advisers using white-label platforms ought to have insurance policies and procedures addressing the platform suppliers’ consideration to such issues. Compliance applications have to be examined no less than yearly.

  • Collect adequate info from purchasers to type an affordable perception that purchasers are receiving funding recommendation that is of their greatest curiosity, primarily based on every shopper’s monetary state of affairs and funding aims. Preliminary questionnaires used to formulate funding recommendation for purchasers ought to elicit adequate info as a way to fairly decide preliminary and ongoing suitability of every shopper’s funding technique. Advisers ought to comply with up with their purchasers periodically to inquire about any modifications to their monetary state of affairs or funding aims, or require them to retake the preliminary questionnaire.   

  • Take a look at algorithms periodically to make sure they’re working as anticipated.

  • Create info boundaries to safeguard algorithms. Advisers ought to restrict code entry to licensed personnel. Compliance ought to be notified upfront of a substantive algorithm change or override. If utilizing a white-label platform, the platform supplier ought to notify the adviser of any such modifications. 

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