More On Legal & Compliancefrom The Advisor's Professional Library
- Proxy Voting RIAs are not required to vote proxies on behalf of their clients. However, when an RIA does assume responsibility for voting proxies, the firm’s policies and procedures should help to ensure that votes are cast in the best interest of clients.
- Pay-to-Play Rule Violating the pay-to-play rule can result in serious consequences, and RIAs should adopt robust policies and procedures to prevent and detect contributions made to influence the selection of the firm by a government entity.
Lawyers are warning that a recent lawsuit filed against Financial Engines for patent infringement could be applied to other types of robo-advisors.
On Aug. 8, GRQ Investment Management LLC sued Financial Engines Inc. and Financial Engines Advisors LLC, claiming patent infringement relating to certain computer-based advice strategies it used in 401(k)s and other participant-directed retirement plans, the law firm Dechert wrote in a recent legal update.
In the complaint, filed in the U.S. District Court for the Eastern District of Texas, GRQ Investment Management asserts that it owns patents — numbered 600 and 825 — that have been and are being infringed upon by Financial Engines.
“It is possible that the owners of the patents in question might take the position that there are other providers who are infringing on the patents in question, as well,” write Dechert lawyers Andrew Oringer and Susan Camillo.
Indeed, in an email message to ThinkAdvisor, Oringer said that this case could impact other robo-advisors because the case relates “to advice that’s generated [and] is automatically implemented (“managed,” if you will) by the system.”
The lawyers warn that financial institutions that offer or are contemplating offering computer-based advice, as well as employers that make use of the advice under their plans, may wish to familiarize themselves with the pending lawsuit to see if it has any relevance to their own situations.
In 2001, the Department of Labor indicated in an advisory opinion issued to SunAmerica that a computer-based investment program designed to provide independent and unconflicted investment advice to participants in participant-directed retirement plans did not generally involve a “prohibited transaction” under the Employee Retirement Income Security Act, as amended, the Dechert lawyers explain.
“The SunAmerica opinion enabled providers to offer qualified computer-generated investment advice to plan sponsors, and allowed plan sponsors in turn to offer the advice to plan participants and beneficiaries, without the need to obtain a prohibited transaction exemption,” the lawyers write.
Oringer notes GRQ’s lawsuit appears to argue that the computer-assisted advice that’s being “crafted and delivered” by Financial Engines, “with the intention of satisfying the SunAmerica letter, on the basis whereby the advice is automatically implemented,” infringes upon the GRQ patents.
In 2006, Congress codified the permissibility of a computer-based approach by adding a new statutory exemption for computer-based advice that meets certain conditions. A number of providers now offer computer-based investment advice to employers that then make such advice available to their employees.
Specifically, the lawsuit states, “Tarbox crucially participated in Financial Engines’ initial meeting with venture capital partners, who put up the initial $5 million to fund Financial Engines.”
Tarbox, the lawsuit states, “was instrumental in obtaining” the SunAmerica opinion, under which Financial Engines operates.
The complaint alleges that “as of 2014, Financial Engines’ existing contracts cover 7.9 million workers with $824 billion in their 401(k) plans and it is managing $92 billion of those assets.” The complaint seeks, among other things, a permanent injunction against the alleged infringement by Financial Engines, and an as-yet undetermined amount of monetary damages.
Check out Don’t Fear the Robos, Advisors Can’t Be ‘Bot-Sourced’ on ThinkAdvisor.