The Securities and Exchange Commission took its first enforcement actions against robo-advisors on Friday, tied to false statements about investment products and misleading advertisements.
An SEC order found Wealthfront Advisers, which has $11 billion in client assets, made false statements about a tax-loss harvesting strategy.
The robo-advisor said it would monitor client accounts for transactions that could trigger a wash sale, which can diminish the benefits of harvesting, but failed to do so over three years. During this time, wash sales took place in over 30% of accounts enrolled in Wealthfront’s tax-loss harvesting strategy.
The SEC also says Wealthfront “improperly retweeted prohibited client testimonials, paid bloggers for client referrals without required disclosure and documentation, and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws.”
Without admitting or denying the findings, Wealthfront consented to the entry of the SEC’s order censuring it, requiring it to cease and desist from further violations, and imposing a $250,000 fine.
“Technology is rapidly changing the way investment advisers are able to advertise and deliver their services to clients,” C. Dabney O’Riordan, chief of the SEC Enforcement Division’s Asset Management Unit, said in a statement. “Regardless of their format, however, all advisers must take seriously their obligations to comply with the securities laws, which were put in place to protect investors.”
For its part, Wealthfront said on Friday: “We take our regulatory duties seriously … . The settlement order addressed Wealthfront’s retweets of clients’ positive tweets from our corporate account and compensation to some bloggers for client referrals without proper disclosures.”
In addition, Wealthfront explains, the firm “did not have proper disclosure in its tax-loss harvesting white paper concerning monitoring for any and all wash sales that could occur in client accounts.”
A wash sale, for instance, “can be triggered by infrequent events outside of tax-loss harvesting trading including a client changing their risk score or a withdrawal,” according to Wealthfront. “During the period Jan. 1, 2014 to Dec. 31, 2016, wash sales made up approximately 2.3% of tax losses harvested for the benefit of clients. Therefore the average Wealthfront client received 5.67% in total annual harvesting yield versus 5.8%.”
Hedgeable Made False Performance Comparisons, SEC Says
Separately, the regulatory body said Hedgeable, which managed about $81 million in assets before ceasing operations, made several of misleading statements about its investment performance.
From 2016 through April 2017, Hedgeable shared “purported comparisons of the investment performance of Hedgable’s clients with those of two robo-advisor competitors” online, according to the SEC. The comparisons, though, were misleading because Hedgeable included less than 4% of its client accounts, i.e., those with higher-than-average returns.
Hedgable, which began closing down its operations in June, compared these returns with those not based on competitors’ actual trading models. The SEC also found that the firm “failed to maintain required documentation and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws.”
Hedgeable also consented to the entry of the SEC’s order, including a $80,000 penalty.
A bulletin published by SEC’s Office of Investor Education and Advocacy contains further information about robo-advisors.
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