fiduciary duty – FinTech and Blockchain Law Watch

Are robo-advisers required to act in their clients best interests?

Oct 24 2016

In Australia, robo-advisers providing personal financial product advice must comply with the statutory fiduciary duty to act in the client’s best interests. The Australian Securities and Investments Commission (ASIC) has made it clear that the duty is technology neutral and applies to robo-advisers as well as traditional advisers. ASIC also clearly stated its position that robo-advisers are able to comply with the duty (Regulatory Guide 255)

Robo-advisers in the US do not currently have the same clarity as their Australian counterparts. US advisors are subject to fiduciary duties from a number of sources depending on the type of advice given and the type of adviser giving it. The Massachusetts Securities Division (MSD) has stated that robo-advisers and traditional advisers have the same fiduciary duty. However, MSD and the Securities and Exchange Commission (SEC) have raised questions over robo-advisers’ ability to comply with the duty and hold themselves out to be fiduciaries. MSD is particularly concerned that from its research it appeared to be usual for robo-advisers not to perform any significant due diligence on their client’s circumstances which is needed to make appropriate investment decisions. The SEC is currently working on a fiduciary rule for advisers with plans to release the proposal in April 2017.

In the UK, the Financial Conduct Authority (FCA) has developed the Principles for Businesses (PRIN) which includes the requirement to pay due regard to the interests of customers and treat them fairly. The FCA has stated that the PRIN applies to all regulated firms including robo-advisers. The FCA established an Advice Unit to provide particular guidance to robo-advisers in June 2016.

U.S. Regulatory Scrutiny of Robo-Advisers and Other Providers of Digital Investment Advice

Apr 07 2016

By C. Todd Gibson

Recently, regulators in the US have issued guidance with respect to providers of automated investment advice, including robo-advisers. On April 1, the Massachusetts Securities Division (“MSD”) issued guidance questioning whether a Massachusetts state-registered robo-adviser could fulfil its fiduciary obligations without some element of human-provided services (including initial and ongoing due diligence), stating that the registration of such advisers would be reviewed on a case-by-case basis. Of particular concern to the MSD were “fully-automated” robo-advisers, characterized as those that: 1) do not meet with or conduct significant (or any) due diligence on a client, 2) provide investment advice that is minimally personalized, 3) may fail to meet the high standard of care that is imposed on the appropriateness of investment advisers’ investment decision-making, and 4) specifically decline the obligation to act in a client’s best interests.

FINRA, the US self-regulatory organization for broker-dealers, also recently published a report after having discussions with member firms and others with respect to the use of “digital investment advice.” Although the report did not purport to create any new legal requirements or change any existing regulatory obligations for brokers, FINRA identified certain practices they believe brokers should consider when using digital tools. The report focused on digital tools (including robo-advice) used by firms to perform client services.

US investment advisers, through application of the anti-fraud provisions of the Investment Advisers Act of 1940 and interpretations of US courts and regulators, owe a general fiduciary duty to their clients. With the recent proliferation and growth of complex, automated investment advice, regulators are becoming more focused on the use of such tools in the context of existing regulatory and fiduciary obligations.

The MSD policy statement can be found here and the FINRA report can be found here.

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