At the end of February 2017 the U.S. Securities and Exchange Commission ("SEC") published the Guidance Update No. 2017-02 (the "Update") concerning the regulation of automated advisers also known as "robo-advisers". Most of the automated advisers in the United States fall under the Investment Advisers Act of 1940 that imposes a number of obligations. The Update considers how the provisions of this act apply to these new business models at the intersection of modern technologies and the traditional investment advice.

Simultaneously with the Update, SEC published the Investor Bulletin (the "Bulletin") intended for individual investors interested in using robo-advisers. The Bulletin outlines the features of the new tools: both their advantages (low commissions) and disadvantages (lack of individual approach). It also contains special recommendations for investors when choosing an automated adviser.

What did SEC focus on?

SEC emphasized in its Update that automated investment advisers are required to fully disclose all relevant facts and to exert all reasonable efforts in order to prevent misleading the customer. The required information should be provided in the form most likely to be read and understood by the customer. Such information should also include a description of the algorithm and related limitations and risks. To meet these requirements, automated advisers should consider such issues as the timing of providing important information (before or after the account is opened by the customer), as well as the ways to draw the attention of the customer to particularly important items, e.g. by using pop-ups.

Since robo-advisers are obliged to act in the best interests of their customer, the methods they use for obtaining information about the customer (usually questionnaires) are of particular importance. SEC emphasized the importance of carefully considering whether the questions provide sufficient information to make an investment decision suitable for a particular customer, whether the questions are clear enough and whether any methods are used to ensure that the customer does not provide contradictory information. If the customer chooses an investment portfolio that was not recommended by the adviser, the latter should consider informing the customer why other investment options may be more appropriate. The last thing that the Update refers to is the obligation of robo-advisers to have a compliance policy and to appoint an officer whose responsibilities shall include ensuring and regularly reviewing compliance with all the requirements of the Investment Advisers Act.

Regulation of robo-advisers in Russia

The activities of the automated advisers in Russia are not subject to any specific regulation provided that such advisers do not carry out operations with securities on behalf of their customers. The latter would result in their qualification as brokers and dealers. In contrast, in the United States the activities of the investment advisers are subject to licensing, and in accordance with the Investment Advisers Act of 1940 an "investor adviser" includes any persons advising on acquisition of securities for consideration.

Despite the absence of direct regulation in Russia, this type of services will be subject to traditional civil law rules and, where the consumer is involved, the consumer protection laws. In particular, in accordance with the latter the consumer would have at least the following rights:

  1. The right to receive quality service. In this case, in the absence of the quality clause in the contract, the service provider is obliged to render the service that complies with the usual requirements and suitable for the purposes for which this type of service is commonly used.
  2. The right to receive service that under normal conditions is safe for the life and health of the consumer, the environment and that does not inflict damage on the property of the consumer.
  3. The right to receive necessary and reliable information about the services that ensures their correct choice including terms and conditions for the effective and safe use of the services.

These requirements and a number of other requirements of the consumer protection laws may have unexpected implications for robo-advisers in Russia. For example, what is meant by a quality investment service? Is the adviser obliged to disclose how the customer portfolio is formed and, if so, to what extent?

The U.S. legislation imposes fiduciary duties on all investment advisers, that is obligations to act in good faith and reasonably in the interests of their customers. Generally, SEC holds liable the unscrupulous players for the violation of this very obligation.

In Russia, such obligation is not imposed by the consumer protection laws. The closest analog of such a rule in the field of investment activity regulation is the provision of Art. 1022 of the Civil Code of the Russian Federation pertaining to the activities of trustees:

The trustee failing to exercise due diligence when administering property on behalf of a beneficiary or a trustor shall reimburse to the beneficiary the lost profits for the period of trust management of property and to the trustor – losses caused by loss of or damage to property adjusted for natural wear and tear as well as lost profits.

If the segment of automated advisers becomes similarly popular in Russia, we expect that national regulators will also provide explanations regarding their activities. Such clarifications will be mainly aimed at protecting the rights of individual investors. In the absence of special regulation, the Russian companies (especially those targeting the foreign audience) are advised to keep track of the developments on other foreign developed markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.