IM Guidance Update

FEBRUARY 2017 | No. 2017-02

ROBO-ADVISERS

Automated advisers, which are often colloquially referred to as “robo-advisers,” 

represent a fast-growing trend within the investment advisory industry, and have the 

potential to give retail investors more affordable access to investment advisory services 

as well as change the competitive landscape in the market for investment advice.1

While many robo-advisers were initially geared towards millennials, their popularity has 

been expanding among all age groups and classes of investors.2 Robo-advisers, which 

are typically registered investment advisers, use innovative technologies to provide 

discretionary asset management services to their clients3 through online algorithmicbased programs.4 A client that wishes to utilize a robo-adviser enters personal 

information and other data into an interactive, digital platform (e.g., a website and/or 

mobile application). Based on such information, the robo-adviser generates a portfolio 

for the client and subsequently manages the client’s account.

Robo-advisers operate under a wide variety of business models and provide a range of 

advisory services. For example, robo-advisers offer varying levels of human interaction 

to their clients. Some robo-advisers provide investment advice directly to the client 

with limited, if any, direct human interaction between the client and investment 

advisory personnel. For other robo-advisers, advice is provided by investment advisory 

personnel using the interactive platform to generate an investment plan that is 

discussed and refined with the client. Robo-advisers may also use a range of methods 

to collect information from their clients. For example, many robo-advisers rely solely 

on questionnaires of varying lengths to obtain information from their clients. Other 

robo-advisers obtain additional information through direct client contact or by allowing 

clients to provide information with regard to their other accounts.5

The Staff of the Division of Investment Management, in coordination with the Staff 

of the Office of Compliance Inspections and Examinations, has been monitoring and 

engaging with robo-advisers to evaluate how these advisers meet their obligations 

under the Investment Advisers Act of 1940 (the “Advisers Act”), given the unique 

US Securities and Exchange Commission

 Division of Investment Management
IM GUIDANCE UPDATE 2

challenges and opportunities presented by these programs. In addition, on November 

14, 2016, the Commission held a Fintech Forum that included an informative panel on 

these programs.6 Based on input at the Forum and the Staff’s observations, the Staff 

believes that, depending on their business models and operations, robo-advisers should 

keep in mind certain unique considerations as they seek to meet their legal obligations 

under the Advisers Act. This Staff guidance offers suggestions for how robo-advisers 

may address some of these issues. The Staff recognizes that there may be a variety of 

means for a robo-adviser to meet its obligations to its clients under the Advisers Act, 

and that not all of the issues addressed in this guidance will be applicable to every 

robo-adviser.

This Staff guidance focuses on robo-advisers that provide services directly to clients 

over the internet. This guidance, however, may be helpful for other types of roboadvisers as well as other registered investment advisers.7

Potential Considerations under the Advisers Act

Robo-advisers, like all registered investment advisers, are subject to the substantive and 

fiduciary obligations of the Advisers Act.8 Because robo-advisers rely on algorithms, 

provide advisory services over the internet, and may offer limited, if any, direct 

human interaction to their clients, their unique business models may raise certain 

considerations when seeking to comply with the Advisers Act. This guidance focuses 

on three distinct areas identified by the Staff, listed below, and provides suggestions on 

how robo-advisers may address them:

1. The substance and presentation of disclosures to clients about the robo-adviser 

and the investment advisory services it offers; 

2. The obligation to obtain information from clients to support the robo-adviser’s duty 

to provide suitable advice; and 

3. The adoption and implementation of effective compliance programs reasonably 

designed to address particular concerns relevant to providing automated advice.

While this guidance focuses on the obligations of robo-advisers under the Advisers 

Act, robo-advisers should consider whether the organization and operation of 

their programs raise any issues under the other federal securities laws, including 

the Investment Company Act of 1940 (the “Investment Company Act”), and in 

particular Rule 3a-4 under that Act.9 To the extent that a robo-adviser believes that its 

organization and operation raise unique facts or circumstances not addressed by Rule 

3a-4, such adviser may wish to consider contacting the Staff for further guidance.
IM GUIDANCE UPDATE 3

1. Substance and Presentation of Disclosures

The information a client receives from an investment adviser is critical to his or her 

ability to make informed decisions about engaging, and then managing the relationship 

with, the investment adviser.10 As a fiduciary, an investment adviser has a duty to make 

full and fair disclosure of all material facts to, and to employ reasonable care to avoid 

misleading, clients.11 The information provided must be sufficiently specific so that a 

client is able to understand the investment adviser’s business practices and conflicts 

of interests.12 Such information must be presented in a manner that clients are likely to 

read (if in writing) and understand.13

Particularly because client relationships with robo-advisers may occur with limited, if 

any, human interaction, robo-advisers should be mindful that the ability of a client to 

make an informed decision about whether to enter into, or continue, an investment 

advisory relationship may be dependent solely on a robo-adviser’s electronic 

disclosures made via email, websites, mobile applications, and/or other electronic 

media.14 Furthermore, given the unique aspects of their business models, including their 

reliance on algorithms and the internet as a means of providing advisory services, roboadvisers may wish to consider the most effective way to communicate to their clients 

the limitations, risks, and operational aspects of their advisory services. Accordingly, as 

discussed below, when designing its disclosures, it may be useful for a robo-adviser to 

consider how it explains its business model and the scope of the investment advisory 

services it provides, as well as how it presents material information to clients.

Explanation of Business Model

To address potential gaps in a client’s understanding of how a robo-adviser provides 

its investment advice, the robo-adviser (like all registered investment advisers) should 

disclose, in addition to other required information,15 information regarding its particular 

business practices and related risks.16 Information a robo-adviser should consider 

providing includes:

• A statement that an algorithm is used to manage individual client accounts;

• A description of the algorithmic functions used to manage client accounts (e.g., 

that the algorithm generates recommended portfolios; that individual client 

accounts are invested and rebalanced by the algorithm);

• A description of the assumptions and limitations of the algorithm used to manage 

client accounts (e.g., if the algorithm is based on modern portfolio theory, a 

description of the assumptions behind and the limitations of that theory);
IM GUIDANCE UPDATE 4

• A description of the particular risks inherent in the use of an algorithm to 

manage client accounts (e.g., that the algorithm might rebalance client accounts 

without regard to market conditions or on a more frequent basis than the client 

might expect; that the algorithm may not address prolonged changes in market 

conditions);

• A description of any circumstances that might cause the robo-adviser to override 

the algorithm used to manage client accounts (e.g., that the robo-adviser might halt 

trading or take other temporary defensive measures in stressed market conditions); 

• A description of any involvement by a third party in the development, management, 

or ownership of the algorithm used to manage client accounts, including an 

explanation of any conflicts of interest such an arrangement may create (e.g., if the 

third party offers the algorithm to the robo-adviser at a discount, but the algorithm 

directs clients into products from which the third party earns a fee);

• An explanation of any fees the client will be charged directly by the robo-adviser, 

and of any other costs that the client may bear either directly or indirectly (e.g., 

fees or expenses clients may pay in connection with the advisory services provided, 

such as custodian or mutual fund expenses; brokerage and other transaction costs);

• An explanation of the degree of human involvement in the oversight and 

management of individual client accounts (e.g., that investment advisory personnel 

oversee the algorithm but may not monitor each client’s account);

• A description of how the robo-adviser uses the information gathered from a client 

to generate a recommended portfolio and any limitations (e.g., if a questionnaire 

is used, that the responses to the questionnaire may be the sole basis for the 

robo-adviser’s advice; if the robo-adviser has access to other client information or 

accounts, whether, and if so, how, that information is used in generating investment 

advice); and

• An explanation of how and when a client should update information he or she has 

provided to the robo-adviser. 
IM GUIDANCE UPDATE 5

Scope of Advisory Services

Robo-advisers, like all registered investment advisers, should consider the clarity of the 

descriptions of the investment advisory services they offer and use reasonable care to 

avoid creating a false implication or sense about the scope of those services which may 

materially mislead clients.17 Robo-advisers should be careful not to mislead clients by 

implying, for example, that:

• The robo-adviser is providing a comprehensive financial plan if it is not in fact doing 

so (e.g., if the robo-adviser does not take into consideration a client’s tax situation 

or debt obligations, or if the investment advice is only targeted to meet a specific 

goal—such as paying for a large purchase or college tuition—without regard to the 

client’s broader financial situation);

• A tax-loss harvesting service also provides comprehensive tax advice; or

• Information other than that collected by the questionnaire (e.g., information 

concerning other client accounts held with the robo-adviser, its affiliates or 

third parties; information supplementally submitted by the client) is considered 

when generating investment recommendations if such information is not in 

fact considered. 

Presentation of Disclosures

Robo-advisers may or may not make investment advisory personnel available to 

clients to highlight and explain important concepts. Clients may also be unlikely to 

read or understand disclosures that are dense and that are not in plain English. After 

reviewing the websites and disclosures of a number of robo-advisers, we have observed 

that robo-advisers utilize a variety of practices in providing important information 

to their clients. Because of robo-advisers’ reliance on online disclosures to provide 

such information, there may be unique issues that arise when communicating key 

information, risks, and disclaimers.18 We therefore remind robo-advisers to carefully 

consider whether their written disclosures are designed to be effective (e.g., are not 

buried19 or incomprehensible20). In particular, in presenting their disclosures, roboadvisers may wish to consider:

• Whether key disclosures are presented prior to the sign-up process so that 

information necessary to make an informed investment decision is available to 

clients before they engage, and make any investment with, the robo-adviser;

• Whether key disclosures are specially emphasized (e.g., through design features 

such as pop-up boxes);
IM GUIDANCE UPDATE 6

• Whether some disclosures should be accompanied by interactive text (e.g., through 

design features such as tooltips21) or other means to provide additional details 

to clients who are seeking more information (e.g., through a “Frequently Asked 

Questions” section); and

• Whether the presentation and formatting of disclosure made available on a mobile 

platform have been appropriately adapted for that platform.

2. Provision of Suitable Advice

An investment adviser’s fiduciary duty includes an obligation to act in the best interests 

of its clients and to provide only suitable investment advice.22 Consistent with these 

obligations, an investment adviser must make a reasonable determination that the 

investment advice provided is suitable for the client based on the client’s financial 

situation and investment objectives.23

Reliance on Questionnaires to Gather Client Information

We have observed that robo-advisers may provide investment advice based primarily, 

if not solely, on client responses to online questionnaires. The questionnaires we have 

reviewed have varied with respect to length and the types of information requested. 

For example, some robo-advisers generate a recommended portfolio based upon a 

client’s age, income and financial goals. Other robo-advisers may obtain through their 

questionnaires different or additional information such as investment horizon, risk 

tolerance, and/or living and other expenses when generating a recommended portfolio. 

We have also observed that some of these questionnaires are not designed to provide 

a client with the opportunity to give additional information or context concerning the 

client’s selected responses. In addition, robo-advisers may not be designed so that 

advisory personnel may ask follow-up or clarifying questions about a client’s responses, 

address inconsistencies in client responses, or provide a client with help when filling 

out the questionnaire. Given this limited interaction, when considering whether its 

questionnaire is designed to elicit sufficient information to support its suitability 

obligation, a robo-adviser may wish to consider factors such as:

• Whether the questions elicit sufficient information to allow the robo-adviser to 

conclude that its initial recommendations and ongoing investment advice are 

suitable and appropriate for that client based on his or her financial situation and 

investment objectives;24

• Whether the questions in the questionnaire are sufficiently clear and/or whether the 

questionnaire is designed to provide additional clarification or examples to clients 

when necessary (e.g., through the use of design features, such as tool-tips or popup boxes); and
IM GUIDANCE UPDATE 7

• Whether steps have been taken to address inconsistent client responses, such as:

— Incorporating into the questionnaire design features to alert a client when his 

or her responses appear internally inconsistent and suggest that the client may 

wish to reconsider such responses; or 

— Implementing systems to automatically flag apparently inconsistent information 

provided by a client for review or follow-up by the robo-adviser.25

Client-Directed Changes in Investment Strategy

Many robo-advisers give clients the opportunity to select portfolios other than those 

that they have recommended.26 Some robo-advisers do not, however, give a client 

the opportunity to consult with investment advisory personnel about how the clientselected portfolio relates to the client’s stated investment objective and risk profile, and 

its suitability for that client. This may result in a client selecting a portfolio that the roboadviser believes is not suitable for the investment objective and risk profile the roboadviser has generated for the client based on his or her questionnaire responses. Thus, 

consistent with its obligation to act in its client’s best interests, a robo-adviser should 

consider providing commentary as to why it believes particular portfolios may be more 

appropriate for a given investment objective and risk profile. In this regard, a roboadviser may wish to consider whether pop-up boxes or other design features would be 

useful to alert a client of potential inconsistencies between the client’s stated objective 

and the selected portfolio.

3. Effective Compliance Programs

Rule 206(4)-7 under the Advisers Act requires each registered investment adviser to 

establish an internal compliance program that addresses the adviser’s performance 

of its fiduciary and substantive obligations under that Act. To comply with the rule, 

a registered investment adviser must adopt, implement, and annually review written 

policies and procedures that are reasonably designed to prevent violations of the 

Advisers Act and the rules thereunder, and that take into consideration the nature of 

the firm’s operations and the risk exposures created by such operations.27 A registered 

investment adviser must also designate a chief compliance officer who is competent 

and knowledgeable about the Advisers Act to be responsible for administering the 

written policies and procedures adopted.28

In developing its compliance program, a robo-adviser should be mindful of the unique 

aspects of its business model. For example, a robo-adviser’s reliance on algorithms, the 

limited, if any, human interaction with clients, and the provision of advisory services over 

the internet may create or accentuate risk exposures for the robo-adviser that should 
IM GUIDANCE UPDATE 8

be addressed through written policies and procedures.29 Thus, in addition to adopting 

and implementing written policies and procedures that address issues relevant to 

traditional investment advisers,30 robo-advisers should consider whether to adopt and 

implement written policies and procedures that address areas such as:

• The development, testing, and backtesting of the algorithmic code and the postimplementation monitoring of its performance31 (e.g., to ensure that the code is 

adequately tested before, and periodically after, it is integrated into the roboadvisers’ platform; the code performs as represented;32 and any modifications to 

the code would not adversely affect client accounts);

• The questionnaire eliciting sufficient information to allow the robo-adviser to 

conclude that its initial recommendations and ongoing investment advice are 

suitable and appropriate for that 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 utilized by the robo-adviser; 

• The prevention and detection of, and response to, cybersecurity threats;33

• The use of social and other forms of electronic media in connection with the 

marketing of advisory services (e.g., websites; Twitter; compensation of bloggers to 

publicize services; “refer-a-friend” programs);34 and 

• The protection of client accounts35 and key advisory systems.36

Conclusion

Robo-advisers represent a fast-growing trend within the investment advisory industry, 

and have the potential to give retail investors more affordable access to investment 

advisory services. As registered investment advisers, robo-advisers should be mindful 

that they are subject to the fiduciary and other substantive requirements of the 

Advisers Act. This guidance is intended to provide suggestions to such advisers as 

they seek to meet their obligations under that Act. As the investment advisory industry 

continues to innovate and develop new ways to provide advisory services to clients, the 

Staff will monitor these innovations and implement safeguards, as necessary, to help 

facilitate such developments and protect investors.
IM GUIDANCE UPDATE 9

Endnotes

1 See, e.g., Andrew Meola, The Fintech Report 2016: Financial Industry Trends 

and Investment, Business Insider (Dec. 14, 2016), available at: http://www.

businessinsider.com/the-fintech-report-2016-financial-industry-trends-andinvestment-2016-12?r=UK&IR=T; Marlene Y. Satter, Robo-Advisors Will Disrupt 

Market: Study, Benefitspro.com (Aug. 8, 2016), available at: http://www.benefitspro.

com/2016/08/08/robo-advisors-will-disrupt-market-study; Sarah Kocianski,

Robo-Advisor Report: Market Share, Returns and Key Growth Drivers, Business 

Insider (June 9, 2016), available at: http://www.businessinsider.com/the-roboadvising-report-market-forecasts-key-growth-drivers-and-how-automated-assetmanagement-will-change-the-advisory-industry-2016-6.

2 See, e.g., Richard Eisenberg, Robo-Advisers: Not Just for Millennials Anymore? (Dec. 

6, 2016), available at: http://www.forbes.com/sites/nextavenue/2016/12/06/roboadvisers-not-just-for-millennials-anymore/.

3 For purposes of this guidance, the term “client” also includes “prospective client.”

4 For purposes of this guidance, the term “robo-adviser” includes both the registered 

investment adviser and any automated investment advisory program it offers.

5 We also note that some robo-advisers operate as stand-alone companies, while 

others are business units of larger, traditional investment advisers. Furthermore, 

some robo-advisers enable clients to access their services directly. Other roboadvisers are offered as digital portfolio management tools by traditional advisers 

that view these programs as components of their existing advisory practices. 

6 See generally Fintech Forum, SEC (Nov. 14, 2016), available at: https://www.sec.

gov/spotlight/fintech (“Fintech Forum”). An unofficial transcript of the November 

14, 2016 Fintech Forum is available at: https://www.sec.gov/spotlight/fintech/

transcript-111416.pdf (“Forum Transcript”).

The increasing use of digital advice tools has also been the focus of other 

regulators and certain international bodies. See, e.g., Update to the Report on the 

IOSCO Automated Advice Tools Survey, International Organization of the Securities 

Commissions (Dec. 2016), available at: http://www.iosco.org/library/pubdocs/

pdf/IOSCOPD552.pdf; Report on Digital Investment Advice, FINRA (March, 2016), 

available at: http://www.finra.org/sites/default/files/digital-investment-advicereport.pdf; Regulating Digital Financial Product Advice, Australian Securities 
IM GUIDANCE UPDATE 1 0

& Investments Commission (March 21, 2016), available at: http://asic.gov.au/

regulatory-resources/find-a-document/consultation-papers/cp-254-regulatingdigital-financial-product-advice/.

7 See generally Forum Transcript, supra note 6, at 38 (Bo Lu, Co-Founder and CEO of 

Future Advisor at Blackrock) (“Digital advice actually underpins a whole spectrum 

of delivery models. And there will be places where . . . you’ll have an almost 

exclusively digital relationship, and places where you’ll have what appears to the 

end user an almost exclusively human-based relationship, underpinned by digital 

[advice] that the client never knew about.”).

8 As SEC-registered investment advisers, robo-advisers are subject to all of the 

requirements of the Advisers Act, including the requirement that they provide 

advice consistent with the fiduciary duty they owe to their clients. A general 

overview of the regulatory requirements of the Advisers Act can be found at 

https://www.sec.gov/divisions/investment/advoverview.htm. This guidance focuses 

on certain issues that robo-advisers should consider due to the nature of their 

business model.

9 See Rule 3a-4 under the Investment Company Act (creating a non-exclusive safeharbor from the definition of “investment company” for advisory programs that 

meet Rule 3a-4’s requirements). See also Status of Investment Advisory Programs 

under the Investment Company Act of 1940, Investment Company Act Release No. 

21260 (July 27, 1995) (discussing circumstances in which an investment advisory 

program may be considered an investment company).

10 See Amendments to Form ADV, Advisers Act Release No. 3060 (July 28, 2010) 

(“Amendments to Form ADV Adopting Release”). See also Advisers Act Rule 204-

3(b) (requiring delivery of a brochure before or at the time an adviser enters into an 

investment advisory contract with a client). An adviser’s disclosure responsibilities 

are broad and delivery of the adviser’s brochure alone may not fully satisfy the 

adviser’s disclosure obligations. See Instruction 3 of General Instructions for Part 

2 of Form ADV; Advisers Act Rule 204-3(f) (delivery of a brochure or brochure 

supplement does not relieve an adviser of any other disclosure obligations it has to 

its advisory clients).

11 See SEC v. Capital Gains Research Bureau, Inc., et al., 375 U.S. 180, 186, 194 (1963). 

See also H. R. Rep. No. 85, 73d Cong., 1st Sess. 2; General Instruction 3 to Part 2 of 

Form ADV.
IM GUIDANCE UPDATE 1 1

12 See Amendments to Form ADV Adopting Release, supra note 10, at n. 28. See 

also Staff of the U.S. Securities and Exchange Commission, Study on Investment 

Advisers and Broker-Dealers As Required by Section 913 of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act, n. 531 (Jan. 2011) (the “Study”), 

available at: www.sec.gov/news/studies/2011/913studyfinal.pdf; Instruction 3 of 

General Instructions for Part 2 of Form ADV.

13 Amendments to Form ADV Adopting Release, supra note 10. See also In the Matter 

of Arlene W. Hughes d/b/a E. W. Hughes & Company, Securities Exchange Act 

Release No. 4048 (Feb. 18, 1947).

14 Robo-advisers should also be mindful to make disclosures in plain English. See 

generally Instruction 2 of General Instructions for Part 2 of Form ADV (providing 

guidance on drafting in plain English); Amendments to Form ADV Adopting 

Release, supra note 10. See also A Plain English Handbook, SEC Office of Investor 

Education and Assistance (August 1998), available at: https://www.sec.gov/pdf/

handbook.pdf.

15 See supra note 10.

16 See Amendments to Form ADV Adopting Release, supra note 10 (“To allow clients 

and prospective clients to evaluate the risks associated with a particular investment 

adviser, its business practices, and its investment strategies, it is essential that 

clients and prospective clients have clear disclosure that they are likely to read and 

understand”). See generally Forum Transcript, supra note 6, at 71 (Mark Goines, Vice 

Chairman of Personal Capital) (“[T]he other area that I think is really important for 

us. . . [is] making sure . . . that the accountability to the clients is clear and that that’s 

fully disclosed.”).

17 See, e.g., In the Matter of T. Rowe Price and Associates, Inc., Advisers Act Release 

No. 658 (Jan. 16, 1979) (settled action) (a registered investment adviser “willfully 

violated Section 206 of the Investment Advisers Act of 1940 in that it failed to 

adequately and accurately disclose in certain promotional literature and otherwise 

to actual and prospective . . . clients the amount of individualized treatment 

provided to each . . . account and the extent to which investment decisions for . . . 

accounts would be made and implemented based upon ‘model portfolios.’”).
IM GUIDANCE UPDATE 1 2

18 In other contexts, the Staff has taken the position that a relevant factor to consider 

when determining if potentially confusing disclosures are misleading is whether 

such disclosures are individually highlighted and explained during an in-person 

meeting. See, e.g., Heitman Capital Management, LLC, SEC Staff No-Action Letter 

(Feb. 12, 2007) (addressing the use of certain hedge clauses in certain advisory 

contracts). 

19 Under the “buried facts” doctrine, a court would consider disclosure to be false and 

misleading if its overall significance is obscured because material information is 

“buried,” for example in a footnote or appendix. See Commission Guidance on the 

Use of Company Web Sites, Investment Company Act Release No. 28351 (Aug. 1, 

2008) at n. 68.

20 See generally id.

21 A tooltip allows additional information to be shown in a text box when a mouse 

cursor hovers over a particular item on a web page.

22 Status of Investment Advisory Programs under the Investment Company Act 

of 1940, Investment Company Act Release No. 22579 (Mar. 24, 1997) at text 

accompanying n.32 (“Investment advisers under the Advisers Act owe their clients 

the duty to provide only suitable investment advice, whether or not the advice is 

provided to clients through an investment advisory program. To fulfill this suitability 

obligation, an investment adviser must make a reasonable determination that the 

investment advice provided is suitable for the client based on the client’s financial 

situation and investment objectives.”) (“Rule 3a-4 Adopting Release”), citing to 

Suitability of Investment Advice Provided by Investment Advisers, Advisers Act 

Release No. 1406 (Mar. 16, 1994) (“Suitability Rule Proposing Release”) (proposing 

a rule under Section 206(4) of the Advisers Act that would expressly require 

advisers to give clients only suitable advice; the rule would have codified existing 

suitability obligations of advisers). See also The Study, supra note 12, at 22, 27. We 

note that the Commission has brought a number of enforcement actions against 

investment advisers for failing to provide suitable investment advice. See, e.g., In re 

David A. King and King Capital Corp., Advisers Act Release No. 1391 (Nov. 9, 1993)

(investment adviser recommended investments in a risky pool of first, second and 

third mortgages to retirees and others of limited means); In re George Sein Lin, 

Advisers Act Release No. 1174 (June 19, 1989) (investment adviser with discretionary 

investment authority invested funds of clients desiring low-risk investments 

in uncovered option contracts and utilized margin brokerage accounts); In re 
IM GUIDANCE UPDATE 1 3

Westmark Financial Services, Corp., Advisers Act Release No. 1117 (May 16, 1988) 

(financial planner recommended speculative equipment leasing partnerships to 

unsophisticated investors with modest incomes); In re Shearson, Hammill & Co., 

42 SEC 811 (1965) (sections 206(1) and (2) violated when adviser recommended 

investments unsuitable to child and widow).

23 See Rule 3a-4 Adopting Release, supra note 22, at text accompanying n.32. See also 

The Study, supra note 12, at 27; Suitability Rule Proposing Release, supra note 22.

24 See generally Forum Transcript, supra note 6, at 66 (Mark Goines, Vice Chairman of 

Personal Capital) (“[Does the robo-adviser] have enough of an understanding of 

the client to be able to apply the algorithm, or is the algorithm actually collecting 

enough data to actually apply its applied rules effectively? . . . We have to be very 

careful that the algorithms are very good but that the inputs are robust, so that we 

really truly understand the client before we apply it. . . . [A]lgorithms with minimal 

input run the risk of not fully understanding the client.”).

25 For example, a client could indicate that he or she wants a conservative strategy, 

but would like to invest primarily in high-yield bonds. Similarly, an elderly client may 

indicate a long-term investment time horizon.

26 For example, some robo-advisers allow a client to adjust his or her portfolio away 

from the strategy the adviser has recommended — including by allowing the client 

to adjust a slider or risk score to select a portfolio that is more or less aggressive 

than the portfolio recommended by the robo-adviser. 

27 Compliance Programs of Investment Companies and Investment Advisers, Advisers 

Act Release No. 2204 (Dec. 17, 2003) at n.10 and n. 17 and accompanying text 

(“Adopting Release to Rule 206(4)-7”) (“Each adviser, in designing its policies and 

procedures, should first identify conflicts and other compliance factors creating risk 

exposure for the firm and its clients in light of the firm’s particular operations, and 

then design policies and procedures that address those risks”). The Commission has 

generally stated that these policies and procedures should cover at a minimum (to 

the extent they are applicable to the adviser), such areas as portfolio management 

processes, trading practices, proprietary trading, personal trading activities of 

supervised persons, disclosure requirements, custody, maintenance of books and 

records, marketing and cash solicitation activities, valuation, privacy concerns and 

business continuity plans. See id. at nn.17-22 and accompanying text (setting forth a 

detailed list of areas where the Commission expects registered investment advisers 

to adopt policies and procedures). 
IM GUIDANCE UPDATE 1 4

28 Id. at n.73 and accompanying text.

29 See supra note 27 and accompanying text.

30 See id.

31 See generally Forum Transcript, supra note 6, at 59 (Jim Allen, Head of Capital 

Markets Policy Group, CFA Institute) (“[Many CFA Institute members believe] 

the biggest risk in the Fintech space is . . . flaws in the algorithms behind these 

technologies.”).

32 See, e.g., In the Matter of AXA Rosenberg Group, LLC, et al., Advisers Act Release 

No. 3149 (Feb. 3, 2011) (settled action) (In a settled administrative proceeding, the 

Commission found that two affiliated investment advisers that used a quantitative 

investment model in managing client accounts breached their fiduciary obligations 

to their clients by concealing and delaying to fix a material error in the model. One 

of the investment advisers was also found to have failed to adopt and implement 

policies and procedures reasonably designed to ensure that it did not make false 

and misleading statements to clients and investors, including failing to ensure that 

the model performed as represented, in violation of antifraud provisions of the 

Advisers Act).

33 See, e.g., Cybersecurity Guidance, IM Guidance Update No. 2015-02, April 2015. See 

also Adviser Business Continuity and Transition Plans, Advisers Act Release No. 

4439 (June 28, 2016) at n. 77 and accompanying text (“An adviser generally should 

consider and address as relevant the operational and other risks related to cyberattacks”).

34 See, e.g., Advisers Act Rule 206(4)-1 (addressing advertisements by investment 

advisers and prohibiting client testimonials); Advisers Act Rule 206(4)-3 (making 

cash payments to solicitors by registered investment advisers unlawful unless 

certain conditions are met); Guidance on the Testimonial Rule and Social Media, IM 

Guidance Update No. 2014-04, March 2014.

35 See, e.g., Advisers Act Rule 206(4)-2 (addressing custody of funds or securities 

of clients by investment advisers). See also Staff Responses to Questions About 

the Custody Rule, Question II.6. (Sept. 1, 2013) available at: http://www.sec.gov/

divisions/investment/custody_faq_030510.htm (an investment adviser is deemed 
IM GUIDANCE UPDATE 1 5

The mission of the Securities and Exchange Commission is to protect investors; maintain fair, 

orderly, and efficient markets; and facilitate capital formation.

If you have any questions about this IM Guidance Update, please contact:

ROCHELLE KAUFFMAN PLESSET

ROBERT H. SHAPIRO

CHIEF COUNSEL’S OFFICE

PHONE: 202.551.6825

EMAIL: IMOCC@SEC.GOV

 IM Guidance Updates are recurring publications that summarize the staff’s views regarding 

to have custody of client assets if the adviser is provided password access to an 

account and such access provides the adviser with the ability to withdraw funds 

or securities or transfer them to an account not in the client’s name at a qualified 

custodian).

36 See, e.g., Adopting Release to Rule 206(4)-7, supra note 27, at n. 22 (“We believe 

that an adviser’s fiduciary obligation to its clients includes the obligation to take 

steps to protect the clients’ interests from being placed at risk as a result of the 

adviser’s inability to provide advisory services.”).