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SEC's White: Robo advice has broad potential

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WASHINGTON -- Robo advice gained a strong voice of support from SEC Chairwoman Mary Jo White, who said it has the potential to offer retail investors "broader and more affordable access to our markets."

Addressing the SEC's first ever fintech forum, White said that the regulatory body was focused on treating robo advisers as RIAs. The commission is examining them based on their ability to uphold their fiduciary duty, how they safeguard client information and how they design compliance programs.

"Consistent with our mission, we have been considering how these so-called robo advisers — as registered investment advisers — meet their fiduciary and other obligations under the Advisers Act," she said. "In particular, we are looking at how advisers that provide investment advice with limited, if any, human interaction provide appropriate disclosures so that their clients understand their services and obtain information to support their duty to provide suitable advice."

The SEC will steer the burgeoning innovation in the investment advice space, she said.

"Fintech is well on its way to playing a role in the future of the securities industry," White said. "Regulators have an obligation to understand, monitor, and where appropriate, encourage such developments."

Her comments floated over the topic of robo advisers and their ability to act as fiduciaries, which has been the subject of much industry debate in the past year.

That debate first gained attention after Washington-based securities attorney Melanie Fein published a report last October arguing robo advisers may be unregistered investment companies, in violation of both the Investment Company Act of 1940 and SEC regulations.

Fein's arguments gained traction after they were included in an April policy established by Massachusetts’ securities regulator William Galvin. The policy questioned the ability of robo advisers to act as fiduciaries and would evaluate any provider seeking registration in the state "on a case-by-case basis.”

FINRA also noted some points from Fein's report when it released guidance on robo advisers for broker-dealers. "Whether it is FINRA rules or just how you treat customers, there are the same issues there whether it's a human being or an algorithm," then CEO Richard Ketchum said.

The digital advice industry responded with a study of its own this year, in a report produced by Philadelphia-based law firm Morgan Lewis that argued robo advisers can meet the fiduciary duty of care and loyalty just as well as humans.


In early public statements about digital advice late last year, SEC Commissioner Kara Stein outlined the questions that the regulator would be asking about robo advice.

“This concept did not even exist when most of the laws applicable to investment advisers were drafted,” she said. “As this innovation gains more market share— as it seems poised to do — we should be asking whether these new robo advisers can be neatly placed within our existing laws."

But in March, White touched upon the efforts by the SEC to monitor emerging robo platforms, and affirmed then to the audience of Silicon Valley executives, that "our assessment of robo-advisers is no different than for a human-based investment adviser."

She acknowledged the variation in the ability of robo advisers to gather and determine advice, but noted the same issue exists among human advisers as well.

A disappointed Fein has maintained her criticism of the SEC's take on robo advice.

"[The SEC has] displayed a very laissez faire or timid or hamstrung posture so far," Fein said. "They have made no progress on the fiduciary duty of brokers issue and let the DoL run roughshod over the industry they regulate."

The SEC on Monday also announced that White will be stepping down at the end of the Obama administration. White has been chairwoman of the SEC since April 2013.

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