Global Trustee and Fiduciary Services News and Views Issue 48

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Markets and Securities Services | United States 30
controls to meet the expectations of the staff
as expressed in the Guidance Update.
It is also recommend that such investment
advisers consult the Office of the Comptroller of
the Currency’s (OCC’s) Supervisory Guidance on
Model Risk Management.9 Although the OCC does
not have jurisdictional authority over investment
advisers that are not banks, many advisers have
leveraged the OCC’s guidance in developing their
controls with respect to their use of algorithms in
formulating investment advice.
Michael B. Koffler
Partner
Clifford Kirsch
Partner
Issa J. Hanna
Associate
Eversheds Sutherland
Rule 3a-4 creates a non-exclusive safe harbour
from the definition of “investment company” set
forth at Section 3(a)(1) of the Investment Company
Act of 1940, as amended (the Company Act) for
investment advisory programmes that meet the
specified requirements under the rule. Among
such requirements are that:
• The advisory programme must permit the
advisory client to impose reasonable restrictions
on the management of his or her account.
• And advisory personnel must reach out to the
client annually to determine whether there
have been any changes to the client’s financial
situation or investment objectives, and whether
the client wishes to impose any reasonable
restrictions on the management of the account
or reasonably modify existing restrictions.
In addition, the sponsor of the advisory
programme and personnel of the manager
of the client’s account who are knowledgeable
about the account and its management
must be reasonably available to the client
for consultation.
Given the lack of human interaction associated
with many robo-adviser business models, the
reasonable availability requirement of Rule
3a-4 may prove challenging for robo-advisers.
In addition, to the extent that a robo-adviser’s
algorithm does not permit clients to place
reasonable restrictions on their portfolios,
the robo-adviser may not qualify for the Rule
3a-4 safe harbour and may thus be subject
to additional risk of being deemed to be an
“investment company” under the Company Act.
Conclusion
Given the SEC’s staff’s focus on the unique
regulatory compliance risks created by the robo-
adviser business model, all investment advisers
doing business in the US and using algorithms to
provide digital investment advice to clients should
review and, as appropriate, implement the IM
Staff’s recommendations in the Guidance Update.
The SEC staff will likely view the recommendations
in the Guidance Update as the minimum
regulatory and compliance enhancements that
robo-advisers should implement to account for the
unique nature of their business model.
In addition, any investment adviser utilising
algorithms to provide investment advice
(including investment advisers that are not
robo-advisers) would be well served to design
and implement policies, procedures and internal
1 Robo-advisers with less than USD100 million in regulatory
assets under management are generally required to register
in any states where they have a place of business and have
more than five advisory clients.
2 See SEC Office of Compliance Inspections and Examinations,
National Exam Program, Examination Priorities for 2017
(Jan. 12, 2017), available at
offices/ocie/national-examination-program-priorities-2017.
pdf, last downloaded on 5 May 2017. Link
3 See SEC Office of Investor Education and Advocacy, Investor
Bulletin: Robo-Advisers (Feb. 23, 2017), available at https://
www.sec.gov/oiea/investor-alerts-bulletins/ib_robo-advisers.
html, last accessed on 5 May 2017. Link
4 See SEC Office of Investor Education and Advocacy and the
Financial Industry Regulatory Authority, Inc., Investor Alert:
Automated Investment Tools (May 8, 2015), available at https://
www.sec.gov/oiea/investor-alerts-bulletins/autolistingtoolshtm.
html, last accessed on 5 May 2017. Link
5 See SEC Division of Investment Management Guidance Update
No. 2017-02, “Robo-Advisers” (Feb. 2017). While the State of
Massachusetts’ Securities Division issued a policy statement on
robo-advisers in April 2016, we expect other States to look to the
SEC staff’s guidance going forward in deciding how to regulate
robo-advisers operating in their jurisdictions.
6 Although the Guidance Update is mostly directed
toward robo-advisers, certain aspects of it also apply to
traditional investment advisers that use algorithms to
develop investment advice. Accordingly, any investment
adviser, whether automated or not, that uses algorithms
as part of its business should be familiar with the IM Staff
recommendations in the Guidance Update.
7 See , last
downloaded on 5 May 2017.
8 See SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963).
9 See Board of Governors of the Federal Reserve System
and Office of the Comptroller of the Currency, Supervisory
Guidance on Model Risk Management (Apr. 4, 2011), available
at:
sr1107a1.pdf, last downloaded on 5 May 2017. Link