What Are SEC No-Action Letters?
In my practice advising fintech companies, one of the most frequently asked questions is: "How do I know if my platform needs to register as an investment adviser?" Often, the answer lies in understanding SEC no-action letters - a critical but underutilized source of regulatory guidance.
A no-action letter is a written response from SEC staff stating that, based on the specific facts presented, the staff would not recommend enforcement action if a company proceeds with its proposed conduct. These letters are not formal SEC rulings or binding precedent, but they provide invaluable insight into how the SEC views particular business models.
Key Characteristics of No-Action Letters
- Fact-specific: They apply only to the exact facts presented in the request
- Staff-level: They represent staff views, not formal Commission positions
- Precedential value: While not binding, they guide industry practice
- Publicly available: Published and searchable on SEC.gov
- Revocable: Staff can withdraw or modify positions over time
For trading technology platforms, no-action letters have established critical boundaries between permissible software tools and regulated investment advice. Understanding this precedent is essential for any founder building in this space.
Key No-Action Letters for Trading Technology
Over the past four decades, the SEC has issued several landmark no-action letters that define how technology platforms can operate without triggering investment adviser registration. Here is my analysis of the most important precedents.
Lowe (1985) - The Publisher's Exclusion Foundation
Lowe v. SEC (1985)
Background
While technically a Supreme Court case rather than a no-action letter, Lowe established the foundational framework that subsequent no-action letters build upon. Christopher Lowe published investment newsletters after his IA registration was revoked for misconduct.
Key Facts
- Newsletter distributed to general public
- No personalized advice based on individual circumstances
- Impersonal, general circulation publication
- Readers could not interact to receive tailored recommendations
Why This Matters for Technology Platforms
Lowe established that impersonal, non-individualized investment information distributed to the general public does not constitute investment advice requiring registration. This principle extends to software tools that provide general information without personalization.
FPL (1990s) - Automated Portfolio Tools
Financial Planning Technologies, Inc. (FPL)
The Facts
FPL proposed to offer software that would help users develop financial plans, including asset allocation recommendations based on user inputs about age, risk tolerance, and investment timeline.
- Users input their own financial data
- Software applied predetermined algorithms to generate output
- No human adviser reviewed or customized recommendations
- Software was licensed to financial institutions
SEC Staff Analysis
The SEC staff focused on several factors:
- The software operated mechanically based on objective criteria
- Users controlled all input data
- Output was based on generally accepted financial planning principles
- No subjective human judgment was applied to individual users
Asset Allocation Tools (2000s)
SunAmerica Asset Allocation Letter (2001)
The Proposal
SunAmerica sought guidance on web-based asset allocation tools that would:
- Collect user information through online questionnaires
- Generate asset allocation recommendations based on algorithms
- Recommend specific mutual fund portfolios from a menu of options
- Be offered free to retirement plan participants
Critical Distinctions
This letter pushed beyond earlier precedent by addressing tools that recommended specific securities (mutual funds), not just generic asset classes. The SEC staff found this acceptable because:
- The tools used objective, non-discretionary criteria
- Recommendations were based on modern portfolio theory
- Users made final investment decisions
- The sponsor did not receive compensation tied to specific recommendations
Robo-Adviser Related Letters
Robo-Adviser Guidance (2017)
Context
As robo-advisers emerged, the SEC provided guidance on their regulatory status. Importantly, the SEC did not issue no-action relief for robo-advisers. Instead, it confirmed they require registration.
The Distinction
The SEC drew a clear line: automated platforms that provide personalized, ongoing investment management are investment advisers, regardless of automation. Key factors triggering registration:
- Discretionary management of client assets
- Ongoing monitoring and rebalancing
- Personalized recommendations based on individual circumstances
- Fiduciary relationship with clients
The Automation Trap
Many founders mistakenly believe that automation itself creates an exemption. It does not. The SEC has consistently held that personalized advice is advice, whether delivered by human or algorithm. The relevant question is the nature of the service, not the delivery mechanism.
The "SaaS vs. Investment Advice" Line
Based on my analysis of no-action precedent, I have identified the key factors that distinguish permissible software-as-a-service from regulated investment advice.
Likely SaaS (No Registration)
- User controls inputs: Platform provides framework, user supplies data
- Objective criteria: Algorithms based on generally accepted principles
- No discretion: User makes all final decisions
- General output: Results apply to anyone with same inputs
- No ongoing relationship: Tool delivers one-time output
- Educational framing: Presented as information, not advice
- No compensation bias: Provider has no stake in specific outcomes
Likely Investment Advice (Registration Required)
- Personalized recommendations: Output tailored to individual circumstances
- Discretionary management: Platform executes without user approval
- Subjective judgment: Human review or AI "judgment" applied
- Specific securities: Recommends particular stocks, bonds, funds
- Ongoing monitoring: Continuous relationship and adjustments
- Implementation: Platform executes or facilitates trades
- Compensation tied to assets: Fees based on AUM or performance
The Critical Factors
1. Personalization Depth
The most important factor is how personalized the output is. A calculator that says "based on your age and risk tolerance, a 60/40 stock/bond allocation is typical" is different from one that says "you should buy AAPL, MSFT, and VTI in these specific proportions."
2. Implementation vs. Information
Tools that provide information for users to act on independently are treated differently than platforms that implement recommendations. Once I execute trades on behalf of users - even algorithmically - I have crossed into advisory territory.
3. Ongoing Relationship
One-time tools (calculators, screeners) are more likely to qualify for relief than ongoing services (portfolio monitoring, rebalancing alerts, position tracking with recommendations).
4. Compensation Structure
If my compensation is tied to specific investment outcomes or assets under management, the SEC will view me as having an advisory relationship regardless of how I characterize my service.
Detailed Letter Analysis
Pattern Recognition Across Letters
Analyzing the full body of no-action letters reveals consistent themes that I use when advising clients.
| Factor | Favorable for No-Action | Unfavorable |
|---|---|---|
| User Input Control | User enters all data, controls assumptions | Platform collects data passively, makes assumptions |
| Output Specificity | Generic asset classes, educational ranges | Specific securities, exact allocations |
| Algorithm Basis | Generally accepted principles (MPT, etc.) | Proprietary "alpha" strategies |
| Human Review | No human reviews individual outputs | Advisers review, approve, or customize |
| Implementation | User independently implements | Platform executes or connects to execution |
| Disclaimers | Clear, prominent, accurate | Buried, misleading, or absent |
| Marketing | Positioned as educational tool | Marketed as advisory service or "AI adviser" |
Structuring Within No-Action Precedent
When I advise clients building trading technology platforms, I recommend specific structural choices to maximize the likelihood of operating without investment adviser registration.
Platform Architecture Recommendations
The "Tool Not Adviser" Framework
Design every feature asking: "Is this a tool the user operates, or a service I provide to the user?" Tools empower users to make their own decisions. Services make decisions for users.
1. User Input Design
- Require users to affirmatively enter all data - no automatic data collection
- Allow users to override or adjust any assumptions
- Display input methodology transparently
- Never suggest specific values for subjective inputs (risk tolerance, goals)
2. Output Framing
- Present outputs as educational information, not recommendations
- Show ranges rather than single-point estimates where possible
- Explain the methodology used to generate outputs
- Avoid imperative language ("you should buy") - use descriptive language ("investors with similar profiles historically...")
3. Disclaimer Strategy
- Prominent disclaimers before output is displayed
- Explain that tool is for educational purposes only
- State that output is not personalized investment advice
- Recommend consultation with a qualified adviser
- Do not use disclaimers to contradict what the platform actually does
4. Compensation Structure
- Flat subscription fees unrelated to investment outcomes
- No revenue sharing with product providers
- No compensation for directing users to specific investments
- Transparent fee disclosure
5. Feature Boundaries
- Do not offer trade execution or order routing
- Do not provide ongoing monitoring or rebalancing alerts
- Do not save user data to track portfolios over time (or if you do, do not provide recommendations based on it)
- Do not offer "model portfolios" of specific securities
Example: Compliant Backtesting Platform
What It Does
- Users define their own trading strategies using platform tools
- Platform backtests user-defined strategies against historical data
- Results show historical performance metrics
- No recommended strategies - users build their own
Why It Works
- User controls all inputs (strategy definition)
- Platform applies objective, disclosed methodology (backtesting)
- Output is historical data, not forward-looking advice
- No implementation - users take results elsewhere
When to Seek Your Own No-Action Letter
While existing precedent covers many scenarios, sometimes I recommend clients seek their own no-action letter.
Consider Seeking a Letter When:
- Novel technology: Your platform uses AI/ML in ways not addressed by prior letters
- Hybrid models: You combine elements of tools and advisory services
- Significant investment: You are raising substantial capital and need regulatory clarity
- Institutional clients: Large clients require confirmation of regulatory status
- Prior enforcement: Similar platforms have faced SEC action
Do Not Seek a Letter When:
- Clear precedent exists: Your model is substantially similar to one with existing relief
- Obviously problematic: You know your model triggers registration - seeking a letter wastes resources
- Early stage: Your business model may change significantly
- Limited resources: The cost/benefit does not justify the investment
The No-Action Request Process
Timeline: No-Action Letter Request
Draft detailed fact statement, legal analysis, and specific request. Engage securities counsel with SEC experience.
Optional but recommended: informal discussions with SEC staff to gauge receptiveness and refine the request.
Submit request to appropriate SEC division (Investment Management for IA issues). Include all exhibits and supporting materials.
SEC staff reviews request, may ask for additional information or clarification. Timeline varies significantly.
Staff issues letter granting relief, denying relief, or declining to respond. All outcomes are possible.
Costs
| Component | Estimated Cost |
|---|---|
| Legal fees (preparation and submission) | $50,000 - $150,000 |
| SEC filing fee | None |
| Follow-up and supplementation | $10,000 - $50,000 |
| Total | $60,000 - $200,000 |
Success Rates
Based on my review of recent submissions:
- Favorable response: 40-50% of well-prepared requests
- Unfavorable response: 10-20% (explicit denial)
- No response / withdrawal: 30-40% (often after staff signals concerns)
Warning: No-Action Denials Are Public
If the SEC denies your request, that denial becomes public record. Competitors and regulators can see that the SEC rejected your business model. Consider this risk before submitting.
Recent Trends: Why Fewer Favorable Letters
In my observation, the SEC has become significantly more reluctant to issue favorable no-action letters for technology platforms. Here is why:
Regulatory Posture Shift
The SEC under recent leadership has taken a more conservative approach to no-action relief, particularly for novel technology. Staff concerns include:
- AI/ML unpredictability: Difficulty distinguishing between "objective criteria" and AI "judgment"
- Investor protection focus: Heightened concern about retail investor harm
- Robo-adviser lessons: Platforms that appeared as "tools" evolved into advisory services
- Enforcement priority: Resources shifted from guidance to enforcement
Technology Complexity
Modern platforms are harder to fit into traditional no-action frameworks:
- Machine learning models that evolve and personalize
- Integration with brokerage accounts and execution
- Social features that blur individual/general advice lines
- Gamification that may constitute "recommendations"
Staff Concerns About Precedent
The SEC staff is aware that no-action letters create industry-wide expectations. With technology evolving rapidly, staff is reluctant to issue letters that might be interpreted broadly or become outdated.
My Assessment
In the current environment, I advise clients to assume they will not receive favorable no-action relief for novel technology platforms. Build your compliance strategy around either clearly fitting within existing precedent or registering.
Alternative Regulatory Pathways
When no-action relief is not available, I counsel clients on alternative approaches.
1. Register as an Investment Adviser
Often, the simplest path forward is to register. For many platforms:
- State registration (under $100M AUM) costs $10,000-30,000 to establish
- Ongoing compliance costs are manageable with proper systems
- Registration provides regulatory clarity and credibility
- Many institutional clients require working with registered advisers
2. Partner with a Registered Adviser
Structure the platform as technology licensed to registered investment advisers:
- The technology company is not providing advice - the RIA is
- RIA takes responsibility for recommendations
- Technology company earns SaaS licensing fees
- Clear contractual allocation of responsibilities
3. Publisher's Exclusion
Restructure as a publication rather than a tool:
- General circulation to the public
- Impersonal information (same content to all subscribers)
- No personalization based on individual circumstances
- Must be "bona fide" publication, not disguised advisory
4. Educational Platform Positioning
Provide education rather than advice:
- Teach users how to analyze investments
- Provide data without recommendations
- Empower users to make their own decisions
- Avoid any suggestion of what users "should" do
5. Broker-Dealer Model
For platforms focused on execution rather than advice:
- Register as broker-dealer (or affiliate with one)
- Focus on order execution, not recommendations
- Higher regulatory burden but clearer compliance path
Practical Structuring Recommendations
Based on my experience advising trading technology platforms, here are my key recommendations.
Before You Build
- Map every feature against the "tool vs. adviser" framework
- Research existing no-action letters for similar platforms
- Consult with securities counsel before writing code
- Consider registration as a feature, not a bug
- Design for compliance from day one
During Development
- Document design decisions and regulatory rationale
- Build disclaimer systems into the product architecture
- Create clear boundaries between tool features and advisory features
- Implement audit trails for how outputs are generated
- Test with compliance counsel before launch
At Launch
- Ensure marketing materials match actual functionality
- Train customer support on regulatory positioning
- Monitor user behavior for unintended advisory relationships
- Establish ongoing legal review process
- Be prepared to register if the model evolves
My Philosophy
I tell clients: "Design your platform to be clearly on one side of the line." Operating in gray areas creates ongoing legal risk, limits fundraising options, and may require costly restructuring later. If you are providing investment advice, register and do it properly. If you are providing tools, design them to be unambiguously tools.
Conclusion
SEC no-action letters provide valuable guidance for structuring trading technology platforms, but they are not a substitute for careful legal analysis. The key principles from decades of precedent are clear:
- User control matters: Tools that empower users differ from services that serve users
- Personalization triggers registration: Tailored advice is advice, regardless of delivery mechanism
- Implementation is advisory: Executing trades crosses the line from tool to adviser
- Compensation influences analysis: How you make money affects how regulators view your service
- Disclaimers cannot override reality: What you do matters more than what you say
For founders building in this space, I recommend starting with the end in mind. Understand the regulatory landscape, make deliberate structural choices, and build compliance into your product from the beginning. The cost of getting it right upfront is a fraction of the cost of restructuring later - or facing enforcement.
Need Help Structuring Your Platform?
I help fintech founders navigate no-action precedent and design compliant platforms. Let's discuss your specific situation.
Schedule Consultation