On December 21, 2018, the Securities and Exchange Commission (SEC) settled proceedings against two robo-advisors for making false statements about investment products and publishing misleading advertising. The proceedings were the SEC’s first enforcement actions against robo-advisors, providing guidance on some of the disclosure issues robo-advisors may face going forward.

Wealthfront proceedings

The first action involved Wealthfront Advisers, LLC  (Wealthfront), a robo-advisor holding approximately $11 billion USD in client assets under management. Among other things, the SEC found that Wealthfront made false statements regarding a proprietary tax loss harvesting program (the Tax Program) it applied to clients’ taxable accounts over a span of more than three years. Wealthfront stated in its Tax Program whitepaper that it would detect and avoid certain transactions with negative tax consequences, when in fact no such monitoring existed. This resulted in around 31% of accounts enrolled in the Tax Program experiencing negative tax consequences.

Additionally, the SEC found that Wealthfront selectively retweeted certain tweets from its clients on its Twitter account that constituted testimonials, including posts from individuals which the company knew, or ought to have known, had an economic interest in the company, without disclosing the potential conflict of interest. Wealthfront also paid bloggers for new client referrals without complying with the applicable disclosure and documentation requirements.

Hedgeable proceedings

The second action involved Hedgeable, Inc. (Hedgeable), a robo-advisor holding approximately $81 million USD in client assets under management at the time of the conduct in issue. Among other things, the SEC found that Hedgeable posted on its website and social media platforms a purported comparison of the investment performance of the robo-advisor’s clients with those of two of its competitors. However, Hedgeable’s advertised client performance was based on a subset of only around 4% of its clients who were more likely to have received higher than average returns. Hedgeable also made other misrepresentations, both in its comparison and in its published fact sheets describing its performance.

Disclosure failures breached the Investment Advisers Act

In both actions, the SEC found that the robo-advisors violated the Investment Advisers Act of 1940 (the Act) by engaging in fraudulent and/or deceitful practices and by distributing advertisements containing untrue statements of material facts. Additionally, both robo-advisors were found to be in violation of the Act by failing to adopt and implement policies and procedures reasonably designed to prevent violations of the Act.

With respect to Wealthfront, the SEC also found that Wealthfront breached the Act by publishing advertisements containing testimonials, making untrue statements in material filed with the Commission, and breaching record-keeping requirements. Wealthfront’s utilization of bloggers was also found to be in breach of the Act, which requires payments to third parties for client referrals to (among other things) be disclosed to, and acknowledged in writing by, the referred clients before any services are provided.

Along with agreeing to general cease and desist orders regarding future conduct, both companies consented to substantial cash penalties in their respective settlements: $250,000 USD for Wealthfront and $80,000 USD for Hedgeable. Wealthfront also undertook to advise each of its clients of the order within 30 days.


These settlements indicate that the SEC will hold robo-advisors to the same standards of conduct as other advisors when it comes to application of rules regarding advertising, marketing and promotion of funds and products.


The author would like to thank Ahmed Labib, Articling Student, for his contribution to this article.