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SEC Orders Robo-Advisor to Pay $300K for Misleading Clients

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What You Need to Know

  • The SEC charged robo-advisor Wahed with making misleading statements, breaching its fiduciary duty and compliance failures.
  • Wahed advertised the existence of proprietary funds when no such funds existed, the SEC alleged.
  • The firm agreed to a cease-and-desist order, to pay a $300,000 penalty, and to retain an independent compliance consultant.

The Securities and Exchange Commission on Thursday charged New York-based robo-advisor Wahed Invest with making misleading statements, breaching its fiduciary duty and compliance failures related to its Shariah advisory business, ordering the firm to pay a $300,000 penalty.

According to an SEC order, from September 2018 through July 2019, Wahed advertised the existence of its own proprietary funds when no such funds existed, and also promised clients it would periodically rebalance their advisory accounts but did not do so.

The SEC’s order also found that when Wahed ultimately launched a proprietary exchange-traded fund in July 2019, the firm used its clients’ advisory assets to seed the ETF without prior disclosure to clients of any conflicts of interest.

The order additionally found that Wahed marketed itself as providing advisory services compliant with Islamic (Shariah) law, including marketing the importance of its income purification process on its website.

Despite those representations, the order found that Wahed did not adopt and implement written policies and procedures addressing how it would assure Shariah compliance on an ongoing basis.

Wahed did not immediately respond to a request for comment on Friday. But the firm “consented to the entry of the SEC’s order finding that the firm violated” the Investment Advisers Act of 1940, the SEC said in a news release.

“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.

Robo-advisors, just like any other advisors, “must ensure that their marketing materials are not misleading and that conflicts are disclosed to investors,” according to Adam S. Aderton, co-chief of the SEC Enforcement Division’s Asset Management Unit.

RIAs like Wahed “must also adopt and implement written policies and procedures reasonably designed to prevent the adviser from deviating from its claimed investment process,” he said in a statement.