According to Financial Industry Regulatory Authority (FINRA) records and a June 22, 2018 report by Investment News, FINRA has issued a $400,000 fine against the online investment advice company Betterment in connection to allegations Betterment FINRA rules related to customer protection and the proper maintenance of books and records.
Betterment Securities, a FINRA member and wholly owned subsidiary of Betterment Holdings, Inc., offers brokerage services to clients of Betterment LLC, a registered investment adviser and also a subsidiary of Betterment Holdings. Betterment LLC “operates as an online wealth management service,” according to FINRA, and Betterment Securities’ customer base is composed of Betterment LLC’s clients. Created in 2010, Betterment LLC “uses software algorithms and technology to maintain its customers’ investment portfolios,” and Betterment Securities is a carrying firm that offers brokerage services to Betterment LLC’s customers; according to FINRA, it “has a primary responsibility to protect its customers’ assets.”
Despite that responsibility, according to FINRA, Betterment Securities failed to ensure its practices were in compliance with FINRA and SEC rules. For instance, between October 2013 and January 2015, it “structured its transactions on days when it was required to calculate its reserve deposits differently than on other days in order to reduce its Customer Reserve Account obligations. That is, the firm allegedly transferred client deposits to an omnibus account that “to fund its pre-settlement withdrawal program,” but on other days, when it was “required to compute its customer reserve requirement,” it did not transfer customer deposits but rather funded the program with loans from its clearing firm. In so doing, FINRA alleges, the firm “engaged in ‘window dressing'” by altering its practices to reduce its reserve requirement.
FINRA also alleged that from October 2013 until August 2014, the firm failed to “properly segregate customers’ wholly owned securities in a good control location,” in violation of FINRA rules and securities laws. FINRA alleged further that from June 2012 until December 2014, Betterment failed to make and keep certain books and records in compliance with SEC and FINRA rules, for instance, by failing to create and maintain certain records of cash movements in the proper form, and by maintaining its stock record “on a trade date basis , rather than a settlement date basis,” also in violation of FINRA rules and securities laws. FINRA finally alleged that the firm did not have a reasonably designed supervisory system to ensure compliance with relevant rules, such as the Customer Protection Rule.
In connection to these allegations, FINRA fined Betterment $400,000. It also issued an additional $10,000 fine against Eli Broverman, the former Betterment president who FINRA found to be responsible for the “window dressing” practices, according to Investment News. The firm’s financial and operations principal, Richard Feldman, was found responsible for the failure to maintain books and records in compliance with relevant rules and laws and was fined $5,000.