SEC Charges Investment Adviser Betterment for Misstatements Concerning Tax Loss Harvesting Service
FOR IMMEDIATE RELEASE
Washington D.C., April 18, 2023 —
The Securities and Exchange Commission today charged investment advisory firm Betterment LLC for material misstatements and omissions related to its automated tax loss harvesting service (TLH), 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 to distribute funds to affected clients.
The SEC’s order finds 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, 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. Collectively, these issues adversely impacted more than 25,000 client accounts, resulting in those clients losing approximately $4 million in potential tax benefits.
The SEC’s order also finds that Betterment failed to provide advance notice of changes to its advisory contract, which is a violation of its fiduciary duty as an investment adviser, and failed, during certain times, to maintain accurate and current books and records reflecting written agreements with certain clients. Also, the order finds 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.
“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,” said 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.”
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. Without admitting or denying the SEC’s findings, Betterment agreed to a cease-and-desist order, a censure, and to pay a $9 million civil penalty that will be distributed to affected clients.
The SEC’s investigation was conducted by Nicholas Karasimas and Sandeep Satwalekar of the New York Regional Office and Salvatore Massa of the Asset Management Unit, with assistance from Ke Li of the Division of Examinations’ Quantitative Analytics Unit. It was supervised by Andrew Dean of the Asset Management Unit and Thomas P. Smith Jr. of the New York Regional Office. The examination that led to the investigation was conducted by Arjuman Sultana, Majid Mahmood, and Beth Abraham of the SEC’s New York Regional Office.