Dive Brief:

• The Securities and Exchange Commission announced that investment advisory firm Betterment agreed to pay $9 million to settle charges that it made material misstatements and omissions related to its automated tax loss harvesting service, among other violations.

• In communications with clients from 2016 to 2019, Betterment misstated or omitted several material facts concerning its tax loss harvesting service, which scans clients’ accounts for opportunities to reduce their tax burden, according to an SEC order released Tuesday.

• “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,” Antonia Apps, director of the SEC’s New York Regional Office, said in a press release. “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.”

Dive Insight:

Betterment, which is based in New York, is a technology-driven financial services company that offers investment and retirement services. 

According to the SEC’s order, at different times, the company failed to disclose a change related to the scanning frequency of its tax loss harvesting software. It also neglected to report a programming constraint that impacted certain clients, as well as two computer coding errors that prevented the harvesting of losses for some clients, the commission stated.

These issues adversely impacted more than 25,000 clients, causing them to lose about $4 million in potential tax benefits, according to the order.

The commission also found that Betterment failed to provide advance notice of changes to its advisory contract, which constituted 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 commission found that, in connection with the failures related to the tax loss harvesting service, Betterment failed to adopt and implement written compliance policies and procedures “reasonably” designed to prevent violations of the Investment Advisers Act of 1940.

Without admitting guilt, 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 commission said.

“While Betterment reached a settlement with the SEC, it neither admits nor denies any wrongdoing,” the company said in a statement. “It fully cooperated with the SEC’s inquiry and is pleased to have reached a resolution on these issues.”

The settlement payment will be deposited into a fund that will compensate impacted customers for any potential tax benefits they missed due to issues related to the tax loss harvesting service, the statement said. “Impacted customers will be notified of their compensation later this year, once the SEC approves a distribution plan,” it said.