New York-based investment adviser Betterment agreed to pay $9 million to settle charges levied by the Securities and Exchange Commission (SEC) over material misstatements and omissions related to its automated tax loss harvesting (TLH) service.
The firm misstated or omitted material facts regarding the service, which scans clients’ accounts to reduce their tax burden, the SEC stated in its press release Tuesday.
Betterment also allegedly failed to provide clients with notice of changes to contracts, maintain required books and records, and adopt and implement written compliance policies and procedures to prevent violations of the Investment Advisers Act.
The details: Between 2016 and 2019, Betterment did not disclose changes, constraints, and computer coding errors associated with its TLH service, according to the SEC’s order.
The SEC found the firm changed the scanning frequency for individual client accounts from daily to alternating days starting in January 2016 but continued to state in marketing materials and other disclosures client accounts were scanned daily until April 2019.
From September 2017 through January 2019, the firm failed to disclose certain constraints for clients that selected a third-party portfolio strategy and, at different times during the relevant period, had two computer coding errors that prevented harvesting losses for certain impacted clients, the SEC said.
The issues impacted more than 25,000 client accounts, resulting in those clients losing approximately $4 million in potential tax benefits, the SEC said.
Compliance considerations: Betterment adopted an algorithm governance policy in July 2017 requiring its chief compliance officer or designee to evaluate whether any changes to software materially affected the client experience to the point to require an update to existing disclosures.
But until April 2021, Betterment lacked policies and procedures reasonably designed to ensure necessary communication between its compliance personnel reviewing disclosures and its engineers designing and updating its algorithms, per the order.
In the same month, Betterment revised the algorithm policy by requiring annual review of its product disclosures involving both the compliance function and engineers, along with developing more detailed guidance for its engineers outlining when to consult legal and compliance in connection with changes to algorithmic systems, according to the order.
Betterment agreed to pay the penalty, which will be distributed to affected clients, and entered into the settlement without admitting or denying wrongdoing. The firm also consented to a cease-and-desist order and censure.
Company response: Betterment said it “fully cooperated with the SEC’s inquiry and is pleased to have reached a resolution on these issues” in a press release. “The SEC order acknowledges that Betterment addressed the TLH-related coding and disclosure issues by 2019. In the years since 2019, Betterment has also made significant investments to build and strengthen its compliance program.”