Key Compliance Issues and Remedial Actions in SEC Action Against Leading Robo-Adviser

The Securities and Exchange Commission (SEC) recently charged Betterment, a leading robo-adviser, for making misstatements regarding its automated tax loss harvesting service (TLH). Betterment allegedly misled investors about the benefits and effectiveness of the service, which aims to minimize tax liability through strategic sales and repurchases of securities, and fined the company $9 million. The SEC found that Betterment failed to provide accurate information and may have overstated potential tax savings for its clients.

The key compliance issues in the SEC action against Betterment for misstatements concerning its TLH are:

1. Misleading statements: Betterment allegedly made misleading statements about the benefits and effectiveness of its TLH, causing investors to have inaccurate information about the service.
2. Inadequate disclosure: Betterment failed to provide clear and accurate disclosures to investors about the potential tax savings and the limitations of the service, potentially leading to uninformed decision-making by clients.
3. Overstating potential tax savings: Betterment may have overstated the potential tax savings for clients using the TLH, which could have influenced their decision to use the service.
4. Violation of securities laws: The misstatements and inadequate disclosures by Betterment are considered violations of securities laws, specifically the Investment Advisers Act of 1940, which requires investment advisers to act in their clients' best interests and provide accurate and complete information.

To address the compliance issues in the SEC action against Betterment for misstatements concerning its TLH, Registered Investment Advisers (RIA) can take the following remedial actions:

1. Thoroughly reviewing all disclosures related to advisory services and ensure that they provide accurate, clear and complete information to clients. This includes clearly outlining the potential benefits, limitations and risks associated with the service.
2. Strengthening internal compliance policies and procedures to ensure that all communications, marketing materials, and disclosures related to advisory services comply with regulatory requirements and best practices.
3. Providing ongoing comprehensive training to employees about the regulatory requirements and compliance best practices related to advisory services, as well as the importance of providing accurate and complete information to clients.
4. Establishing a system to regularly monitor and review communications, marketing materials, and disclosures related to advisory services, with the goal of identifying and addressing potential compliance issues proactively.
5. Hiring external compliance consultants or legal counsel to help assess and address compliance issues, provide guidance on best practices, and ensure that RIA is in full compliance with regulatory requirements.
6. Fully cooperating with the SEC and other regulators, providing all requested information and documentation, as well as demonstrating a commitment to addressing compliance issues and preventing future violations.
7. Creating a strong culture of compliance within the RIA, emphasizing the importance of adhering to regulatory requirements and prioritizing clients' best interests.

By implementing these remedial actions, RIAs can address the compliance issues raised in the SEC action and work to maintain trust with both clients and regulators.

Our investment management attorneys are versed in counseling investment advisers on complex regulatory and compliance challenges as they grow and operate their businesses. Reach out to a member of the Faegre Drinker investment management team if you have any questions.