Global Trustee and Fiduciary Services News and Views Issue 48

Global Trustee and Fiduciary Services News and Views

| Issue 48 | 2017

To address these regulatory and compliance

challenges, the IM Staff provides several suggestions

for improving client information-collection practices

and providing suitable investment advice. Examples

of these suggestions include:

• Implement systems to automatically flag

inconsistent information provided by a client

for review or follow-up by the robo-adviser, e.g.

alert clients through pop-up boxes or other

design features when there are inconsistencies

between the client’s stated investment

objective and the selected portfolio.

• And provide commentary on why the

robo-adviser believes particular portfolios

may be more appropriate given the client’s

stated investment objective or risk profile.

Effective compliance programmes

Rule 206(4)-7 under the Advisers Act requires each

registered investment adviser, including registered

robo-advisers, to establish an internal compliance

programme that addresses the adviser’s

performance of its fiduciary and substantive

obligations under the Advisers Act. According to

the IM Staff, the typical robo-adviser’s reliance on

algorithms, limited human interaction with clients

and provision of advisory services over the

internet may create or accentuate risk exposures

for the robo-adviser that should be addressed

through written policies and procedures specially

designed to address these risks.

Accordingly, the IM Staff provides suggestions

regarding the adoption and implementation

of particular written policies and procedures

that address certain regulatory and compliance

risks that are created or enhanced by a robo-

adviser business model, such as policies and

procedures governing:

• The development, testing and back-testing

of the algorithmic code and the post-

implementation monitoring of its performance,

e.g. to ensure that the code is adequately tested

before, and periodically after, it is integrated into

the robo-adviser’s platform, the code performs

as represented and any modifications to the

code do not adversely affect client accounts.

• The questionnaire eliciting sufficient

information to ensure it allows the robo-adviser

to conclude that its initial recommendations

and ongoing investment advice are suitable and

appropriate for the client based on his or her

financial situation and investment objectives.

• The disclosure to clients of changes to the

algorithmic code that may materially affect

their portfolios.

• The appropriate oversight of any third

party that develops, owns or manages the

algorithmic code or software modules utilised

by the robo-adviser.

• And the prevention and detection of, and

response to, cyber-security threats.

Compliance with Rule 3a-4

In the Guidance Update, the IM Staff cautions

that robo-advisers should consider whether the

organisation and operation of their programmes

raise any issues under the other federal securities

laws, including Rule 3a-4 in particular. In general,

Like all investment advisers,

robo-advisers have a fiduciary

duty to act in the best interests

of clients and to provide suitable

investment advice.