In the first action of its kind, the Securities and Exchange Commission has charged two robo-advisors with failing to make the proper disclosures and misleading advertising, the SEC announced Friday.

Both robo-advisors, without admitting or denying the charges, have agreed to cease the activities that resulted in the SEC complaints. They are accused of making false statements about investment products and publishing misleading advertising.

The larger of the two, Wealthfront Advisors of Redwood, Calif., which has $11 billion in client assets under management, allegedly made false statements about a tax-loss harvesting strategy it offered to clients. Wealthfront told clients employing its tax-loss harvesting strategy that it would monitor all client accounts for any transactions that might trigger a wash sale, which can diminish the benefits of the harvesting strategy, but it failed to do so.

Over a period of more than three years during which it told clients it was using this strategy, wash sales occurred in at least 31 percent of accounts enrolled in Wealthfront’s tax-loss harvesting strategy, the SEC said.

The SEC also said Wealthfront improperly re-tweeted prohibited client testimonials, paid bloggers for client referrals without the required disclosure and documentation, and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws.

Wealthfront responded. "We take our regulatory duties seriously at Wealthfront and are happy to have reached a settlement with the SEC. The settlement order addressed Wealthfront’s retweets of clients’ positive tweets from our corporate account and compensation to some bloggers for client referrals without proper disclosures.

"Additionally, Wealthfront did not have proper disclosure in its tax-loss harvesting whitepaper concerning monitoring for any and all wash sales that could occur in client accounts. For example, a wash sale can be triggered by infrequent events outside of tax-loss harvesting trading including a client changing their risk score or a withdrawal. During the period January 1, 2014 to December 31, 2016, wash sales made up approximately 2.3 percent of tax losses harvested for the benefit of clients. Therefore the average Wealthfront client received 5.67 percent in total annual harvesting yield versus 5.8 percetn," the firm added.

A smaller robo-advisor, Hedgeable, based in New York City, which has $81 million in client assets under management, made a series of misleading statements about its investment performance, the complaint said.

From 2016 until April 2017, Hedgeable posted on its website and social media purported comparisons of the investment performance of Hedgeable’s clients with those of two robo-advisor competitors, the SEC said. The performance comparisons were misleading because Hedgeable included less than 4 percent of its client accounts, which had higher-than-average returns. 

Hedgeable compared this with rates of return that were not based on competitors’ actual trading models. The SEC’s complaint also found that Hedgeable failed to maintain required documentation and failed to maintain a compliance program reasonably designed to prevent violations of the securities laws.

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