For the first time since issuing guidance on robo-advisor best practices in 2017, the Securities and Exchange Commission sanctioned two registered investment advisors that offered robo-advisory services for false disclosures and misleading advertising.
Without admitting or denying the SEC’s charges, Wealthfront Advisers, LLC agreed to pay a penalty of US $250,000 and consented to a censure while Hedgeable, Inc. consented to a censure and a penalty of US $85,000. According to the SEC, from October 2012 through mid-May 2016, Wealthfront provided its robo-advisor clients with false statements regarding its tax-loss harvesting strategy by claiming that it would monitor client accounts for any transactions that might trigger a wash sale, an occurrence that has a negative effect on harvesting trading strategies. However, during this time, Wealthfront’s software did not monitor for such transactions, and wash sales occurred in roughly 31 percent of the firm’s tax-loss harvesting accounts. The SEC further alleged that Wealthfront violated applicable advertising and marketing regulations by using social media to promote testimonials that were made by persons who were incentivized by Wealthfront to make such statements without disclosing the financial interest of the authors.
Separately, the SEC alleged that Hedgeable, Inc. made false statements regarding the performance of its robo-advisor’s performance. According to the SEC, from 2016 until April 2017 Hedgeable created its own index to track and market the performance of its robo-advisor clients against two independent competitor robo-advisor platforms. However, said the SEC, Hedgeable’s index performance was misleading because the composite included only 4 percent of the firm’s robo-advisor clients for the relevant time period and the index was improperly calculated because the performance of the two independent robo-advisors did not utilize their actual trading models but relied on estimates of their performance.
Both Wealthfront and Hedgeable are registered with the SEC as investment advisors.
(Click here for background, on the SEC’s 2017 robo-advisor guidance in the article “SEC Division of Investment Management Issues Guidance Regarding Robo-Advisors” in the February 26, 2017, edition of Bridging the Week.)
