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SEC charges Betterment with misstatements on tax loss harvesting service

On Behalf of | Apr 26, 2023 | Investment Loss

The Securities and Exchange Commission announced charges against investment advisory firm Betterment LLC over violations related to its automated tax loss harvesting service (TLH), Advisor Hub reports.

Under a settlement reached with the commission, Betterment agreed to pay a $9 million penalty and to pay restitution to 25,000 clients who were affected.

TLH is a service that scans clients’ accounts for opportunities to reduce their tax burden. The SEC said that from 2016 to 2019, Betterment made material misstatements and omissions related to TLH, failed to give clients notice of changes to contracts, and failed to maintain certain required books and records reflecting agreements with certain clients.

According to the SEC’s order, Betterment failed to disclose a change in the software related to its scanning frequency and did not disclose a programming constraint affecting certain clients. The firm also allegedly had two computer coding errors that prevented TLH from harvesting losses for some clients. As a result of these violations, clients lost about $4 million in potential tax benefits.

The company was also accused of violating its fiduciary duty by failing to provide advance notice of changes to its advisory contract.

“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.”

The SEC’s order found that Betterment failed to adopt and implement written compliance policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940.

Betterment was found to have violated Sections 204, 206(2), and 206(4) of the Investment Advisers Act of 1940 and related rules. The company did not admit or deny the findings, but agreed to a cease-and-desist order, a censure, and to pay the $9 million civil penalty.

Lewitas Hyman routinely represents investors nationwide who were harmed when financial professionals and their firms breached their fiduciary and other duties. Our team includes lawyers who have worked for large financial institutions, including Morgan Stanley and UBS Financial Services, and regulatory bodies such as the SEC. If you were the victim of a breach of fiduciary or other duties owed to you by a financial professional or financial firm, contact Lewitas Hyman at (888) 655-6002 or through our online contact form for a no-cost evaluation of your matter.