Investment advisory firm Betterment LLC has been charged by the SEC over material misstatements and books and records omissions within its automated tax service.

The automated investment platform – also called a robo-adviser – also failed to provide clients with notice of changes to contracts, the regulator said.

Betterment agreed to a $9m penalty and to distribute those funds to affected clients. The company did not admit or deny wrongdoing as part of its settlement agreement.

Tax burden

The SEC said that, from 2016 to 2019, Betterment, in communicating with clients, misstated or omitted several material facts concerning an automated tax 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 it had two computer coding errors that prevented it from harvesting losses for some clients.

These issues adversely affected more than 25,000 client accounts, resulting in those clients losing approximately $4m in potential tax benefits, the SEC said.

The SEC’s order also found that Betterment failed to provide 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 its written agreements with certain clients.

“Robo-advisers have the same obligations as all investment advisers to ensure they are transparent about services they provide.”

Antonia M Apps, Director, SEC New York Regional Office

The order adds that 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.”

In a statement, the company said it had fixed the related coding and customer disclosure issues by 2019. Since then, Betterment has “made significant investments to build and strengthen its compliance program,” it said.

It explained that its automated tax-loss harvesting service is estimated to have saved hundreds of millions of dollars in taxes for the more than 275,000 customers who have enabled the feature.

Lessons to learn

Charging a firm for books and records failures is fairly easy for regulators; you either kept secure and accurate records … or you didn’t.

The supervision required in this area depends on employees knowing what good oversight looks like, supplying that oversight in practice, plus employing the right regtech tools to help you implement your strategy of securely maintaining accurate recordkeeping.

The regulator expects this of every company it oversees. And when it comes to robo-advisers – automated platforms that your everyday retail investor is using on her phone while she waits for the train or takes a coffee break – the SEC is going to be considerably inquisitive.

It will want to know what oversight mechanisms are in place to ensure the information captured and disseminated is free of error – or at least flagged quickly to repair it.

As the process of maintaining books and records is a dynamic one – since the documentation being maintained always changes, as do regulatory requirements – firms need to appreciate that the processes they use may need to be adjusted from time to time.

Recurring audits on whether compliance policies and processes are still fit for purpose for the business are always important, whether it’s with an eye toward new security concerns, regulatory expectations, a question of whether tech solutions are still suitable, or for another reason.