The Financial Industry Regulatory Authority has imposed a $400,000 fine on robo-advisor Betterment Securities for a series of supervisory and compliance issues, including problems with how it protected customers as it was growing at a rapid pace — from about $120,000 in sales in 2011 to over $1.2 million in 2014.
The online-investing shop, founded in 2010, “did not ensure that its practices complied with certain FINRA and [Securities and Exchange Commission] financial and operational rules and interpretations,” the settlement document states.
For instance, from October 2013 to January 2015, it varied how it structured transactions on days when it was required to calculate reserve deposits “in order to reduce its Customer Reserve Account obligations,” according the FINRA.
This behavior amounted to “window dressing,” the letter of acceptance, waiver and consent explains, since Betterment altered “its practices on reserve computation days specifically to reduce its reserve formula computation and thereby reduce its reserve requirement. In addition, the firm failed to properly segregate clients’ wholly owned securities “in a good control location.”
The regulatory document also explains that Betterment “did not make and keep certain of its books and records in the matter required by SEC and FINRA rules” from June 2012 to December 2014. Plus, it maintained its stock records on a trade date basis and not a settlement date basis, as required.
FINRA also explained that Betterment failed to employ a supervisory system that was “reasonably designed to ensure compliance with the Customer Protection Rule and books and records rules.” Namely, the robo-advisor did not have a system in which key decisions were taken and overseen by “people with appropriate expertise.”
It cited the firm’s former principal and ex-president, Eli Broverman, as having “no training or expertise in applying FINRA and SEC … rules,” despite the fact that he had primary responsibility for the firm’s compliance.
Separately, FINRA fined Broverman — who left the firm in early 2017 — $10,000.
For its part, Betterment Securities says it “worked cooperatively with FINRA during the 2014 review to address its concerns and we are proud that every examination since then has been completed without any deficiency findings.”
The firm added in a statement that since 2014, the firm has “enhanced its policies and procedures and made personnel and other changes to ensure compliance with all applicable regulations.”
— Check out Robo Pioneer Betterment Goes Upscale, Boosts Human Advice on ThinkAdvisor.