Depaul Business and Commercial Law Journal

This note examines the complex state of financial innovation and preexisting investor protection regimes, mainly the Investment Advisers Act of 1940, which do not properly address the question of whether a robo-advisor platform serving as registered investment advisers satisfies the fiduciary standard elements laid out in the Act. This article examines the current regulation from the Department of Labor, the Financial Industry Regulatory Authority, and the Securities and Exchange Commission and addresses the inadequacies in each regulatory entity’s policy prescription. This article contends that robo-advisors can not act as a fiduciary for several reasons – primarily because these platforms do not provide the type of individualized portfolio analysis that traditional fiduciary agents provide. I. GLOBAL FINANCIAL MARKETS ARE NOT IMMUNE TO THE DISRUPTIVE FORCES OF TECHNOLOGY AND ROBO-ADVISORS HAVE ENTERED THIS MARKET DISRUPTING THE MARKET SHARE OF INDUSTRY BEHEMOTHS SUCH AS JPMORGAN, CITIBANK, AND OTHERS. The business environment in the United States, and across the globe, has faced continued automation in all aspects of industry. Technology has become a disruptive force as seen by companies like Uber who disrupt monopolistic cab services in urban centers, or Airbnb which challenges global hotel chains. 1 While most commentary has been related to the impact of automation on manufacturing, attention is shifting to the financial services industry as robo-advisors steadily begin  Bret E. Strzelczyk is a Class of 2018 Juris Doctor Candidate at DePaul University College of Law and Executive Editor of the DePaul Business and Commercial Law Journal. Having previously served as Honors Intern with the United States Securities and Exchange Commission, he is fascinated with financial markets and the regulatory environment. He earned a B.A., cum laude, in Political Science with a concentration in Political Economy from Illinois Wesleyan University in 2014. He would like to thank his parents, John and Kim Strzelczyk, for their continued support throughout his academic career. 1 Seth Archer, EL ERIAN: Airbnb and Uber Used the Same 3 Factors to Disrupt Huge Industries, BUSINESS INSIDER (June 21, 2016, 9:18 AM), http://www.businessinsider.com/el-erian-airbnbuber-used-same-factors-disrupt-huge-industries-2016-6. RISE OF THE MACHINES Vol. 16 Issue 1 DEPAUL BUSINESS & COMMERCIAL LAW JOURNAL 55 to manage increasing sums of investors’ money. In 2010, the roboadvisor platform, Betterment, burst onto the scene offering low cost financial advice without a human element. As of 2017, more than ten other “robolike” platforms have been opened by the more traditional financial services firms like Charles Schwab, Fidelity Investments, and Bank of America. This technological explosion has coincided with one of the longest “bull markets” in American history. A bull market is a financial market where the prices of securities is expected to rise overall while a bear market is indicative of a downward trend. On March 9, 2017, the market celebrated its eighth birthday with the S&P 500 posting a gain of 249%. The S&P 500 is “an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists.” These positive returns have prompted passive investing to grow its market share against more active managers. Passive investing is where managers attempt to match the return and risk of an appropriate benchmark such as the S&P 500 or the FTSE 100. The FTSE is often regarded as an indicator of prosperity among qualifying United Kingdom companies and the global economy in general. Active managers take more “active” steps to outperform a benchmark. Active management incurs more costs which are passed on to the investors through the manager’s fee structure. Therefore, retail investors and institutional investors alike have shifted their investments into these low-cost, passive managers as the market has given them no reason to incur the high costs of active managers. A retail investor is an individual investor with usually much lower investable assets that buys and sells securities for a 2 Robo Advisors v. Human Financial Advisors: Why Not Both?, BUSINESS INSIDER: MYPRIVATEBANKING (Aug. 24, 2016, 6:32 PM), http://www.businessinsider.com/hybrid-roboadvisors-will-manage-10-of-all-investable-assets-by-2025-2016-8. 3 The History of Betterment: How We Started a Company That Changed an Industry, BETTERMENT, https://www.betterment.com/resources/inside-betterment/our-story/the-history-ofbetterment/, (last visited July 27, 2017). 4 Alex Eule, Rating the Robo-Advisors, BARRON’S (July 29, 2017), http://www.barrons.com/articles/rating-the-robo-advisors-1501303316. 5 Jen Wieczner, Happy Birthday, Bull Market! It May Be Your Last, FORTUNE, (Mar. 9, 2017), http://fortune.com/2017/03/09/stock-market-bull-market-longest. 6 Bull market, INVESTOPEDIA, http://www.investopedia.com/terms/b/bullmarket.asp (last visited Sept. 15, 2017). 7 Wieczner, supra note 4 8 S&P 500, INVESTOPEDIA, http://www.investopedia.com/terms/s/sp500.asp (last visited Sept. 15, 2017). 9 FTSE 100, INVESTOPEDIA, http://www.investopedia.com/terms/f/ftse.asp (last visited Sept. 15, 2017). Lessons in Clarity: Active vs. Passive Management, CFA INSTITUTE, https://www.cfainstitute.org/programs/investmentfoundations/courseofstudy/Pages/lessons_in_clari ty_active_vs_passive.aspx (last visited Jan. 15, 2017) RISE OF THE MACHINES Vol. 16 Issue 1 DEPAUL BUSINESS & COMMERCIAL LAW JOURNAL 56 personal account. 11 An institutional investor is an organization that invests its assets under management on behalf of its members. These types of entities include pension funds, commercial banks, mutual funds, and other private funds. Due to this shift to passive management, the robo-advisor has emerged as one of the prominent financial platforms of the 21 century and the longest bull market in history. The law surrounding this financial platform has faced an uncertain and often contradictory path. A. There Are Several Different Types Of Investment Models That Have Spawned From This Shift To Passive Investing. A pure robo-advisor is an entirely online financial product that provides automated, algorithm-based wealth management services without human assistance. The use of the term “robo-advisor” in this article refers to these types of pure models without any human element. A hybrid robo-advisor combines both the automated, algorithm-based method with dedicated human oversight. This article will refer to this type of advisor as a “hybrid advisor.” As the market for low cost investment services grow, so too do the types of offerings provided. Currently, models based on varying levels of robo to human interaction are used including pure robo-advisors, hybrid robo-advisors, and many other mixed models. American financial markets are regulated under a variety of complicated and extensive legislation that attempt to provide investor protection and protect against systemic risk. Numerous agencies are empowered to create and enforce specific rules relative to their regulatory mission. The controlling legislation regarding robo-advisors is the Investment Advisers Act of 1940 (“IAA”). The purpose of this legislation was to protect investors by creating a fiduciary duty between the investor and their registered investment adviser (“RIA”). By creating 11 Retail Investor, INVESTOPEDIA, http://www.investopedia.com/terms/r/retailinvestor.asp (last visited Sept. 15, 2017). 12 Institutional Investor, INVESTOPEDIA, http://www.investopedia.com/terms/i/institutionalinvestor.asp (last visited Sept. 15, 2017). 13 Id. 14 Robo-advisor, INVESTOPEDIA, http://www.investopedia.com/terms/r/roboadvisorroboadviser.asp (last visited Sept. 15, 2017). 15 Barbara A. Friedberg, Growth of Hybrid Robo-Advisors to Outpace Pure Robos, INVESTOPEDIA (Feb. 23, 2017. 06:00 AM EST), http://www.investopedia.com/articles/financialadvisor/100616/growth-hybrid-roboadvisors-outpace-pure-robos.asp. 16 Id. 17 Within the industry, human advisers are spelled with an “e” rather than “o” which is more commonly used to describe robo-advisors. RISE OF THE MACHINES Vol. 16 Issue 1 DEPAUL BUSINESS & COMMERCIAL LAW JOURNAL 57 this fiduciary duty, a higher level of protection was afforded to the average investor. This is because the average investor relied upon the expertise and professionalism of their financial advisor for their longterm wealth management. While the IAA had been amended several times since 1940, its current state is lacking in its ability to regulate the current financial services environment. The United States Congress and the relevant regulatory agencies have not adapted to the current technological disruption within the industry. These government actors have moved slowly, and often contradicting one another, in defining the terms and responsibilities that robo-advisors are held to as they begin to control a larger market share. There are two dominant regulatory agencies that are heavily involved in the issue of robo-advisors. The first of these agencies is the Securities and Exchange Commission (the “SEC”) which is a public organization funded the federal government to regulate and police the securities market. The other is the Financial Industry Regulatory Authority (“FINRA”) which is a self-regulating organization (an “SRO”) tasked with regulating broker-dealers. An SRO is a non-governmental entity that is created by industry participants to self-police the industry by establishing best practices and other rules. The SEC has stated “[a]dvisers owe their clients a duty to provide only suitable investment advice. This duty generally requires an adviser to make a reasonable inquiry into the client’s financial situation, investment experience and investment objectives, and to make a reasonable determination that the advice is suitable in light of the client’s situatio

This Article aims to assess the claim that three countries only (Italy, Japan and Portugal) present a tripartite, Latin, classic, hybrid, model of corporate governance. In May 2015, Law June 27th 2014, n. 90, elaborated within the Japan Revitalization Strategy, entered into force. Once again, it attested the attention of the Japanese legislator for corporate governance issues, namely to (i) the need to appoint outside directors, (ii) the promotion of board diversity, and therefore the appointment of women to hold managerial and executive positions, (iii) the introduction of a joint-stock companies with audit committee, on which we will focus in the present piece.

In order to prevent abusive and meritless securities lawsuits, Congress enacted the Private Securities Litigation Reform Act of 1995 (PSLRA). One provision of that legislation requires pleading with particularity the relevant state of mind for each defendant. Plaintiff's failure to so plead leads to dismissal of the lawsuit. The question the article examines is the extent to which pleading and satisfies the statutory standard. The article first traces pre-PSLRA law where the Second Circuit enunciated a more stringent pleading standard for securities fraud claims. Initially, it seemed the Second Circuit might be satisfied by plaintiff pleading motive and opportunity. The article then examines the legislative history for the PSLRA. That history is unclear on whether alleging motive and opportunity alone would satisfy the PSLRA's heightened pleading standards. The article examines case law in the Second, Sixth and Ninth Circuits. The article concludes that the tests of the Second and Sixth Circuit are essentially the same. Both restrictively define motive and opportunity to facts that would give rise to an inference of scienter on the part of a particular defendant. The article criticizes the position of the Ninth Circuit. Even though that Court recognized that Congress generally did not intend to change requirements for scienter level stringent. But the Ninth Circuit's evaluation of pleadings required the same particularized assessment of pleadings as the Second Circuit. The consequence is needless confusion.

A seminal assumption that underlies current franchise law is that franchisees are intrinsically rational. As such, franchisees are presumed to be able to rationally assess the risks involved in the franchise contract and avoid those risks. Based on this rationality assumption, current law is predominantly based on the FTC Franchise Rule, in which franchisors are obliged to disclose to franchisees information regarding future risks. Equipped with this information, franchisees, as rational actors, are assumed to be capable of protecting themselves against the franchise risks. This paper questions the validity of the assumption that franchisees are rational actors. Based on a significant body of existing empirical research, which has thus far been overlooked in the legal debate over the FTC Franchise Rule, this article presents the following arguments: First, although franchisees are often perceived as sophisticated business people, they systematically suffer from a common psychological bias: over-optimism about the future. Second, franchisees, being optimistically biased about the future, repeatedly avoid reading disclosure documents, which contain informative data about future risks. The conclusion therefore is that the efficiency of the Franchise Rule in protecting franchisees is dubious. * Faculty of Law, College of Law & Business. J.S.D. (UC Berkeley); LL.M (Columbia University). ** Business School, University of New South Wales. PhD (QUT); LLM (Melbourne University); LLB (Otago University). We are grateful to Oren Bar-Gil, Tamar Frankel, Arie Reichel, and James White for their invaluable comments.