SEC Fines Betterment $9M for Not Revealing Tax-Loss Harvesting Errors

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The robo advisor Betterment will pay $9 million to settle charges with the Securities and Exchange Commission that it omitted “material information” in clients’ statements about its automated tax-loss harvesting service, including that coding errors prevented the firm from harvesting some clients’ losses.

“Robo advisors have the same obligations as all investment advisors 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,” Antonia M. Apps, director of the SEC’s New York Regional Office, said.

According to the SEC, the allegations center on conduct between January 2016 and April 2019 regarding Betterment’s tax-loss harvesting options, which automatically scan client accounts for opportunities to lower their tax burden. 

But in January 2016, Betterment stopped automatically checking accounts daily, and did so on alternating days, but continued to state the firm checked daily in some marketing and disclosure materials. 

Additionally, Betterment, with $33.8 billion in regulatory assets under management, didn’t tell clients about certain “constraints” on tax-loss harvesting for those selecting a third-party portfolio strategy, and failed to alert users about two computer coding errors stopping the firm from harvesting losses for certain clients. All told, the lapses affected about 25,000 accounts and cost clients about $4 million in tax benefits.

Betterment also didn’t inform some clients about changes to its advisory contract, according to the commission. Specifically, until last month, the firm could change contact terms “unilaterally without advance notice to clients,” and the company also didn’t keep accurate books and records or compliance rules relating to its tax-loss harvesting policies (and shortfalls).

In a statement about the settlement, Betterment argued the tax-loss harvesting issues involved less than 1% of the firm’s total losses since the service was introduced, and is expecting the median payout to harmed customers to be less than $100.

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“The SEC order acknowledges that Betterment addressed the TLH-related coding and disclosure issues by 2019,” the statement read. “In the years since 2019, Betterment has also made significant investments to build and strengthen its compliance program.”

In addition to the fine, Betterment agreed to a cease and desist and censure (without admitting or denying the charges), and will help establish a “fair fund” to make harmed investors whole. 

In February, Betterment laid off 28 of its 397 employees and announced it would close its Philadelphia office, while subleasing a portion of its New York City location (the firm cited higher operating costs based on elevated inflation as the reasoning behind the layoffs).

https://www.wealthmanagement.com/regulation-compliance/sec-fines-betterment-9m-not-revealing-tax-loss-harvesting-errors

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