On Tuesday, Betterment, a robo-advisor firm, agreed to pay $9 million to settle charges with the US Securities and Exchange Commission (SEC) over alleged failures in its automated tax service. The SEC alleged that about 25,000 client accounts lost around $4 million in potential tax benefits between 2016 and 2019 due to Betterment’s actions.
Betterment estimates that the median payout for affected investors will be less than $100, and clients will be informed of their compensation later in the year after the SEC approves a distribution plan. Betterment did not admit or deny wrongdoing as part of the settlement agreement. The SEC’s allegations against Betterment concern its tax-loss harvesting service, which seeks to reduce taxes owed on investment profits by offsetting them with losses from other investments. The SEC claimed that Betterment failed to disclose several material facts in client communications related to this service.
The SEC stated that Betterment failed to disclose a software tweak that impacted the frequency with which it scanned customer accounts for tax-saving opportunities. Additionally, two coding errors prevented some clients’ losses from being harvested.
Antonia M. Apps, director of the SEC’s New York regional office, said that Betterment was not transparent about the tax-loss harvesting service’s changes, constraints, and coding errors that adversely impacted thousands of clients. Betterment claims that it fixed the related coding and customer disclosure issues by 2019 and made significant investments to strengthen its compliance program.
Since its introduction in 2014, Betterment’s tax-loss harvesting service has saved hundreds of millions of dollars in taxes for more than 275,000 customers. Betterment fully cooperated with the SEC’s inquiry and is pleased to have resolved the issues.