By Ann C. Logue
One of the headaches of running an investment firm is the ongoing regulatory paperwork. The agencies want things done properly, which takes up lots of time and keeps lawyers billable. Aren’t you sometimes tempted, just a little, to ignore the regulations and do what you want?
That, apparently, is what the principals at Wahed Invest, LLC allegedly decided to do. Ironically, Wahed Invest is a robo-advisor that specializes in ethical investments that comply with the religious commandments of Islam.
In a wild case of faking it until making it, the agency says that Wahed advertised proprietary ETFs from September 2018 through July 2019, collecting money during this period. When the firm received SEC approval for an ETF in July of 2019 (Wahed FTSE USA Shariah ETF, ticker HLAL), the company invested client funds in it without prior approval. Their marketing materials also promised investors that the firm would periodically rebalance advisory accounts, but that didn’t happen because the firm had no rebalancing methodology in place.
That wasn’t the only problem the SEC found. Shariah investing prohibits investments that involve earning or paying interest, alcohol production, and pork processing. The rules are strict. However, Wahed Invest had no written investment policy and no process for ensuring that investments complied with the marketed standards.
Wahed Invest’s management agreed to a cease-and-desist order. They will also have to pay the SEC a $300,000 penalty and retain an independent compliance consultant as part of a process to bring the firm into compliance.
Robo advisors have been a hot area, offering individual investors advisory services at a low cost. They may be part of the startup ecosystem, but the SEC is not fond of the move fast and break things philosophy. They have rules, and they enforce them eventually. Uber was able to break taxi and transportation laws until it convinced municipalities to change them, but it seems to have followed securities regulations. Investment advisors should pay attention.
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