Strategies in Applying Securities Laws to Digital Investment Advice

In 2017, the Staff of the SEC Division of Investment Management published a Guidance Update on robo-advisers (Robo Guidance), which focused on robo-advisers' disclosure obligations, the suitability of their investment advice and the effectiveness of their compliance programs.1 In 2021, the Staf...

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Bibliographic Details
Published in:The Investment Lawyer 2022-09, Vol.29 (9), p.20-32
Main Authors: Perlow, Mark D, Sherman, Michael L, Rodriguez, Ashley N
Format: Article
Language:English
Subjects:
Algorithms
Artificial intelligence
Automation
Compliance
Duty of care
Fiduciary responsibility
Initiatives
Insurance policies
Investment policy
Questionnaires
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Summary:In 2017, the Staff of the SEC Division of Investment Management published a Guidance Update on robo-advisers (Robo Guidance), which focused on robo-advisers' disclosure obligations, the suitability of their investment advice and the effectiveness of their compliance programs.1 In 2021, the Staff of the SEC Division of Examinations published a Risk Alert with the Staff's observations on recent examinations of robo-advisers, which the Staff called the Electronic Investment Advice Initiative, that focused on oversight of the automated investment advisory function, compliance with the adviser's fiduciary duty of care and suitability, and the use of robo-advisers in discretionary advisory programs, among other matters (Robo Risk Alert).2 The SEC also has brought a number of enforcement actions against robo-advisers in the past several years, which have focused on disclosure obligations, conflicts of interest and compliance policies and procedures.3 In 2021, the SEC also published a Request for Information on Digital Engagement Practices that discussed, as well as included a significant number of requests for information and comments on, the use of technology by investment advisers to develop and provide investment advice (Digital Practices RFI).4 These releases represent a serious effort to grapple with the application of the regulatory framework created by the Investment Advisers Act of 1940 (Advisers Act) and the Investment Company Act of 1940 (1940 Act) to DIA.5 However, these Acts substantially pre-date the rise of DIA, and yet the SEC and its Staff continue to seek to apply regulatory concepts and tools developed for investment advice that is formulated and provided by humans- particularly the fiduciary duty of care-rather than seeking to fully adapt them to the distinct and innovative benefits that DIA can bring to investors or to evolutions in technology and investor preferences. In actuality, the strengths of automated investment services (for example, their scalability, replicability and consistency in application) have tended to be treated in the existing regulatory framework as in tension with or even contrary to an adviser's fiduciary duty of care (for example, by viewing consistency and scalability as potentially contrary to providing advice that is suitable for a particular client). [...]the fiduciary rubric does not fully recognize that algorithms and machines can be more logical, predictable and traceable than human decisionmakers, and can be te
ISSN:1075-4512