WASHINGTON—Securities regulators brought
their first enforcement action on Friday against a robo adviser, accusing
Wealthfront Advisers LLC of misleading clients.
Wealthfront,
which manages $11 billion in assets, agreed to pay $250,000 to settle
Securities and Exchange Commission claims that it failed to monitor accounts as
it promised to avoid transactions that could erode tax benefits from other
trades.
The SEC
on Friday also settled an enforcement action with a smaller robo adviser,
Hedgeable Inc.
The SEC
two years ago said it would sweep the growing robo-advisory industry to
check how the upstart firms complied with securities laws. Robo advisers use
automated tools to create portfolios for clients, rather than relying on people
to pick investments and counsel customers through decisions. Assets with robo
advisers have grown to more than $200 billion,
according to research firm Backend Benchmarking.
In the
case against Wealthfront, the SEC alleged the company failed to monitor
accounts for “wash sales,” or trades that involve buying a security back
shortly after selling the same shares. Wash sales can eliminate tax benefits
that come from selling a security at a loss. Wealthfront had told clients it
would look for wash sales to ensure they didn’t interfere with tax losses
clients could claim.
Wealthfront
said wash sales didn’t happen often: The number of wash sales from 2014 through
2016 was just 2.3% of all tax losses harvested for clients.
Nonetheless,
the SEC said the robo adviser misled clients by telling them it “monitors all
the accounts it manages for each client to avoid any transactions that might
trigger a wash sale.”
“We
take our regulatory duties seriously at Wealthfront and are happy to have
reached a settlement with the SEC,” the company said.
The
SEC’s settlement order also alleges that Wealthfront paid some bloggers when
articles or advertisements on their webpages resulted in people opening new
accounts with the robo adviser. Wealthfront should have had written agreements
with the bloggers stipulating how they solicit clients, and should have made
certain disclosures of its own about the program, the SEC said.
The
payments to bloggers amounted to $97,000 over about one year, the SEC’s order
said.
The SEC
also said that Wealthfront violated a rule prohibiting investment advisers from
using client endorsements to drum up new business. The agency said the robo
adviser did that when it retweeted positive statements from its employees,
investors and clients.
The
SEC’s enforcement cases have increasingly made use of statements that
executives, traders or companies make on social media, including Twitter. The
SEC said some clients retweeting Wealthfront’s messages could earn free
services if a person who saw the tweet later enrolled with Wealthfront.
In a
separate case, Hedgeable, a robo adviser that manages $81 million, agreed to
pay $80,000 to settle SEC allegations that it misleadingly compared its
performance to that of other robo advisers. The SEC said Hedgeable calculated
its returns based on less than 4% of client accounts.
A
lawyer for Hedgeable didn’t return a message seeking comment.
On
Friday the SEC also settled an enforcement action with accounting firm Crowe
LLP over claims it failed to properly audit a company that went bankrupt in 2015
after the discovery of $100 million in federal payroll-tax liabilities that
were unpaid.
The
accounting firm, formerly called Crowe Horwath LLP, will pay $1.5 million to
settle the case, the SEC said. Crowe said that the claims were related to a
single audit in 2014 and that it is committed to “the highest standards of
audit quality and regulatory compliance.”
Crowe’s
lead auditor on the account will pay $25,000 and agreed to be barred from
auditing public companies for three years.
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