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Betterment to Pay $9M SEC Fine for Tax Loss Harvesting Misstatements

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The Securities and Exchange Commission on Tuesday charged investment advisory firm Betterment with material misstatements and omissions related to its automated tax loss harvesting service, failing to provide clients with notice of changes to contracts, and failing to maintain certain required books and records.

To settle the charges, Betterment agreed to pay a $9 million penalty and distribute funds to affected clients, the SEC said.

Without admitting or denying the SEC’s findings, Betterment also agreed to a cease-and-desist order and a censure.

Betterment consented to the entry of the SEC’s order finding that it violated Sections 204, 206(2), and 206(4) of the Investment Advisers Act of 1940 and related rules.

“The TLH-related issues involved less than a percent of the total losses harvested by Betterment since TLH was introduced,” Betterment said in a statement on Tuesday. “For the segment of customers who potentially incurred financial impact by missing possible tax loss harvests, the median payout is expected to be less than $100 per customer.”

Tech Woes

The SEC’s order found that, from 2016 to 2019, Betterment, in communicating with clients, misstated or omitted several material facts concerning TLH, a service that scans clients’ accounts for opportunities to reduce their tax burden.

According to the order, filed by the SEC on Tuesday, at different times, Betterment failed to disclose a change in the software related to its scanning frequency, failed to disclose a programming constraint affecting certain clients, and had two computer coding errors that prevented TLH from harvesting losses for some clients.

Combined, those issues hurt over 25,000 client accounts, resulting in their losing about $4 million in potential tax benefits, the SEC alleged.

The order also found that Betterment failed to provide advance notice of changes to its advisory contract, which the SEC said is a violation of its fiduciary duty as an investment advisor, and failed, during certain times, to maintain accurate and current books and records reflecting written agreements with certain clients.

And, the order found that, in connection with the failures related to TLH, Betterment failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940, according to the SEC.

“Robo-advisers have the same obligations as all investment advisers to ensure they are transparent about services they provide and upfront about any material changes to those services or issues that may negatively affect clients,” according to Antonia M. Apps, director of the SEC’s New York Regional Office.

“Betterment did not describe its tax loss harvesting service accurately, and it wasn’t transparent about the service’s changes, constraints, and coding errors that adversely impacted thousands of clients,” she said.

Commenting on the $9 million settlement, David Goldstone, manager of investment research at Condor Capital Wealth Management, publishers of The Robo Report and The Robo Ranking, said: “At the Robo Report we did a study on tax-loss harvesting at various robo providers that looked at activity in our accounts through the pandemic. Betterment was quite active in executing TLH trades during the volatility” of 2020′s first quarter.

“When automated trading software is implemented, it is important to have robust reporting and tracking to ensure that trades are being placed as intended,” he said. “It is unfortunate to hear that some bugs in the software prevented some accounts from being traded as intended to harvest losses. It is also important to ensure that marketing materials and disclosures correctly reflect the services that are being performed.”

He added: “Trust is important with services that execute trading through automation. It is important the clients have a clear and accurate picture of what services are offered. While this is not good press for Betterment, we think they offer a quality service and were pleased with the performance of the tax loss harvesting we witnessed in our account there.”

(Image: Diego M. Radzinschi/ALM)


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