The Securities and Exchange Commissioned brought its first enforcement actions against robo-advisers on Friday, charging Wealthfront and Hedgeable with making false statements about investment products and publishing misleading advertising.
Wealthfront told clients its tax-loss harvesting strategy, a centerpiece of the digital advice startup’s marketing, would monitor all client accounts for transactions that would trigger a wash sale, according to the SEC order. Wealthfront failed to do so, the SEC said.
For three years, wash sales occurred in at least 31% of accounts enrolled in Wealthfront’s tax-loss harvesting, the SEC said.
The SEC also alleges Wealthfront re-tweeted prohibited client testimonials, paid bloggers for client referrals without making the required disclosure and documentation, and did not maintain a compliance program that could reasonably prevent violations of securities laws.
Wealthfront will pay a $250,000 penalty to settle the charges and consented to a censure, which requires the firm cease and desist from further violations.
In a statement, Wealthfront said it was happy to have reached a settlement with the agency and offered an example for what could trigger a wash sale.
“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% of tax losses harvested for the benefit of clients. Therefore the average Wealthfront client would have received 5.67% of the total annual harvesting yield versus 5.8%,” the digital advice firm said.