U.S. robo advisor Betterment LLC has been sanctioned by the U.S. Securities and Exchange Commission (SEC) for alleged misstatements about its automated tax-loss harvesting service.
The firm agreed to settle the case without admitting or denying the SEC’s charges. In settling it agreed to a US$9-million penalty that will be distributed to clients, along with a censure and a cease-and-desist order.
The regulator’s order found that the firm misstated or omitted material facts about its tax-loss harvesting service, which resulted in clients losing about US$4 million in potential tax benefits.
The alleged issues included failing to alert clients to a change in its software scanning frequency, failing to disclose a programming constraint, and failing to disclose coding errors that prevented its service from harvesting losses for certain clients.
By failing to provide clients with advance notice of changes to its advisory contract, the firm violated its fiduciary duty, the SEC alleged. It also said the firm violated its record-keeping requirements and failed to adopt compliance policies to prevent these violations.
“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 Apps, director of the SEC’s New York office, in a 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.”