Companies in the growing “wealthtech” space often face novel regulatory and legal issues under the federal securities laws. Wealthtech companies blend traditional asset management and brokerage services with new technologies: among others, algorithmic modeling, including but not limited to artificial intelligence (AI); social media tools that allow investors to interact with one another; sophisticated communication protocols that facilitate more efficient trading; and data scraping to generate new sources of information about the economy, investments, and particular investors. Some wealthtech companies are registered broker-dealers or investment advisers; some provide services to these registered entities but are themselves unregistered.
An increasingly prominent slice of the fintech sector, wealthtech companies have caught the attention of the U.S. Securities and Exchange Commission (SEC), which has highlighted emerging technologies as an examination priority, issued guidance on their use, and announced proposed rules relevant to the industry.1
Especially in light of this SEC scrutiny, a few key issues for wealthtech companies to consider include the following:
For additional information, please contact Amy Caiazza or any member of the fintech and financial services practice.
[1] See, e.g., Office of Information and Regulatory Affairs, Agency Rule List – Spring 2024 – Securities and Exchange Commission (agenda including rules on use of predictive data analytics such as artificial intelligence (AI); safeguarding assets, including digital assets; outsourcing by investment advisers to third parties, including financial technology companies; and others); SEC Division of Examinations, 2023 Examination Priorities, at 14 (noting the division’s focus on examinations of investment advisers and broker-dealers offering new products or services or incorporating new technologies); SEC, Further Definition of “As a Part of a Regular Business” in the Definition of Dealer and Government Securities Dealer in Connection with Certain Liquidity Providers (adopting release) (Feb. 6, 2024) (stating that emerging technologies such as defi platforms that provide liquidity and market making services can be regulated as dealers); SEC, Conflicts of Interest Associated with the Use of Predictive Data Analytics by Broker-Dealers and Investment Advisers (Proposing Release) (July 26, 2023) (proposing rules governing the use of AI and other data analytics by broker-dealers and investment advisers); SEC, Outsourcing by Investment Advisers (Proposing Release) (Oct. 26, 2022) (proposing rules governing relationship with service providers, including financial technology companies).
[2] See, e.g., Datastream International, Inc., SEC Staff No-Action Letter (Mar. 15, 1993); EJV Partners, L.P., SEC Staff No-Action letter (Dec 7, 1992).
[3] See, e.g., Lowe v. SEC, 472 U.S. 181 (1985) at 207–08 (stating the Investment Advisers Act of 1940 (Advisers Act) was designed regulate those who provide personalized advice); see also Advisers Act Section 202(a)(11) (defining an investment adviser as a person who provides investment advice for compensation). Historically, the SEC has taken an expansive view of what constitutes compensation. See, e.g., SEC v. Ahmed, 308 F. Supp. 3d 628, 653 (D. Conn.) (“There is no requirement that an investment adviser be compensated in any particular way”) 343 F. Supp. 3d 16 (D. Conn. 2018); Family Life Ins. Co., SEC Staff No-Action Letter. (Apr. 2, 1974) (potential for new business in the form of insurance contracts sufficient “compensation”).
[4] See Outsourcing by Investment Advisers; Agency Rule List.