On December 21, 2018, the Securities and Exchange Commission (SEC) announced settlements with two robo-advisors, Wealthfront Advisers LLC (Wealthfront) and Hedgeable Inc. (Hedgeable), for making false statements about investment products and engaging in misleading advertising in violation of the Investment Advisors Act of 1940 (Act). These settlements mark the SEC’s first enforcement actions against robo-advisors and serve as a reminder that, although technology may change how an investment adviser operates, the SEC expects full compliance with all requirements of the Act.

Wealthfront Order

According to the SEC’s order, Wealthfront falsely stated that its tax loss harvesting (TLH) service was monitoring client accounts to prevent wash sales, which would erase potential tax benefits generated by the TLH program. The false statement appeared in a whitepaper Wealthfront published in 2012 regarding its TLH program. However, Wealthfront did not monitor for potential wash sales until May 2016. As a result, several client accounts experienced wash sales and lost the potential tax benefits from the TLH program.

In addition, from mid-2014 to mid-2015, Wealthfront used a cash referral program to pay bloggers for each new client who signed up for Wealthfront after following a link from the blogger’s website. Wealthfront paid approximately $97,000 to bloggers and received tens of millions of dollars’ worth of new assets under management as a result of the arrangements. However, Wealthfront failed to provide certain required disclosures to the new clients or execute solicitation agreements with the bloggers as required by the Act’s cash solicitation rule, despite stating in its Form ADV and written policies that it would.

Finally, Wealthfront retweeted several flattering posts without disclosing the author’s conflict of interest, including posts by individuals with a financial interest in Wealthfront’s success. Wealthfront also retweeted certain testimonials in violation of the Act’s advertising rule.

As a result, the SEC found that Wealthfront violated the antifraud, advertising, compliance and certain other provisions of the Act. Without admitting or denying fault, Wealthfront agreed to pay a $250,000 fine and be censured.

Hedgeable Order

According to the SEC’s order, from at least 2016 to April 2017, Hedgeable had posted misleading comparisons of its returns against two other robo-advisors and circulated misleading “fact sheets” suggesting Hedgeable’s portfolios performed better than they really did.

The SEC found Hedgeable’s performance comparisons misleading for three main reasons. First, Hedgeable didn’t disclose that its composite return was based on a very small subset of client accounts that were more likely to have performed well. Second, Hedgeable miscalculated the returns for the other robo-advisors. Third, Hedgeable mislabeled the returns as “annualized” when they were actually cumulative. Had Hedgeable’s comparison actually used annualized returns, the other robo-advisors’ returns would have been higher and Hedgeable’s lower. Relatedly, Hedgeable did not maintain any documentation that could substantiate its calculated returns.

Additionally, the SEC found that separate “fact sheets” disseminated by Hedgeable were misleading due to Hedgeable miscalculating certain benchmarks and its own portfolio returns, resulting in Hedgeable’s portfolios appearing to perform better versus the benchmark than they actually performed.

As a result, the SEC found that Hedgeable violated the antifraud, advertising, compliance and books and records provisions of the Act. Without admitting or denying fault, Hedgeable agreed to pay a $80,000 fine and be censured.


Focus on Social Media Advertising. The settlements illustrate the SEC’s continued focus on social media advertising by advisers. This follows five settlements from July 2018 where the SEC fined multiple advisers and a marketing consultant for violating the advertising rules. While social media is a powerful advertising tool, advisers, both digital and traditional, should ensure they are complying with applicable rules and SEC guidance, such as retaining records of social media posts and avoiding posting testimonials. Chief compliance officers and compliance staff should similarly focus on this type of advertising in adopting and implementing policies and procedures.

Soliciting Clients Through Bloggers. The settlement with Wealthfront also marks the first instance of the SEC directly addressing referral relationships with bloggers. An adviser that encourages bloggers to “review” or advertise the adviser’s services by compensating the blogger for any new clients it directs toward the adviser is subject to the Act’s cash solicitation rule. Generally, that rule requires that (i) the parties enter into a written agreement, (ii) the solicitor deliver specific disclosures to the prospective client, (iii) the adviser receives confirmation from the client that she received the disclosures and (iv) that the adviser make a “bona fide effort” to ensure the solicitor complied with its obligations. Advisers should ensure that any referral arrangements it has with bloggers comply with the rule and take steps to ensure bloggers are providing appropriate disclosures.

SEC Enforcement Against Digital Advisers. The settlements are the first by the SEC against an automated digital platform following the publication of guidance for robo-advisors. Ramping up its scrutiny of these digital platforms in this way fully aligns with SEC Chairman Jay Clayton’s stated initiative to focus more on protecting retail investors since robo-advisors are frequently advertised as a lower cost option for retail investors who cannot afford the higher fees or account minimums charged by traditional advisers. These settlements should serve as a reminder that registered investment advisers are all subject to the requirements of the Act and must adopt adequate policies and procedures to ensure compliance, regardless of whether it operates on a solely digital platform.