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

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)