A robo-adviser is an automated investment tool that uses mathematical algorithms to evaluate the prospects of various investment options and, in theory, choose the best one.
Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey and then uses the data to offer advice and automatically invest client assets.
Regardless of the mechanism for managing a clients investments, investment advisers, including robo-advisers, need to insure that their statements and representations are accurate.
New York based robo-adviser Wahed Invest, LLC just settled SEC charges acccusing it of making misleading statements and breaching its fiduciary duty, and for compliance failures related to its advisory business.
According to the SEC’s order, from September 2018 through July 2019, Wahed Invest advertised the existence of its own proprietary funds when no such funds existed, and also promised investors that it would periodically re-balance their advisory accounts, but did not do so. The SEC also accused the fund of using clients’ advisory assets to seed a new EFT without prior disclosure to clients of any conflicts of interest.
Finally, the charges included allegations that the adviser marketed itself as providing advisory services compliant with Islamic, or Shari’ah law, including marketing the importance of its income purification process on its website. Despite these representations, the order finds that Wahed Invest did not adopt and implement written policies and procedures addressing how it would assure Shari’ah compliance on an ongoing basis.
“Robo-advisers, like other advisers, must ensure that their marketing materials are not misleading and that conflicts are disclosed to investors,” said Adam S. Aderton, Co-Chief of the SEC Enforcement Division’s Asset Management Unit. “Registered investment advisers like Wahed Invest must also adopt and implement written policies and procedures reasonably designed to prevent the adviser from deviating from its claimed investment process.”
Wahed Invest consented to the entry of the SEC’s order finding that the firm violated Sections 206(2) and 206(4) of the Investment Advisers Act of 1940 and Rules 206(4)-1(a) and 206(4)-7. 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.
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Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.
He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.
