Betterment has been handed a $400,000 fine from FINRA for failing to comply with customer protection rules and not properly handling its books and records.

For almost two years beginning in 2013, the firm arranged to make transactions differently on the days that it was required to calculate its reserve deposits, a practice known as “window dressing.” The practice reduced its customer reserve account obligations, the regulator says.

During the time period, Betterment provided customers with cash proceeds two days before those trades settled. Instead of funding its pre-settlement withdrawal program with customer deposits, as it usually did, Betterment used loans from its clearing firm to cover the expense, according to the FINRA letter of acceptance, consent and waiver.

“On most days, the firm moved customer deposits from its sweep account to the omnibus account before settlement date and used the resulting customer free credits to fund pre-settlement withdrawals for selling customers,” according to the FINRA letter. “The firm deviated from this practice at week and month-end, when the reserve computation was required to be calculated.”

Betterment CEO Jon Stein boasted his firm has nearly $10 billion in AUM.
Betterment CEO Jon Stein boasted his firm has nearly $10 billion in AUM. Bloomberg News


The loans also led to other errors as well. For example, in May 2014, the firm failed to count about $1.1 million in loans as credit. FINRA says that Betterment also incorrectly classified receivables from its clearing firm as receivables from customers, which in one case, caused the firm to overstate customer-related debits by $816,000 in one reserve calculation.

In addition to violating customer protections rules, FINRA also said the firm did not maintain proper books and records of its transactions. “Although the firm electronically captured daily records of cash movements, it did not create and maintain records of those cash movements in the form required by FINRA and SEC Rules,” according to the letter.

“Betterment Securities takes its regulatory responsibilities seriously,” a company spokeswoman says. “Betterment Securities worked cooperatively with FINRA during the 2014 review to address its concerns and we are proud that every examination since then has been completed without any deficiency findings.”

Betterment also filed a corrective action statement with the regulator. According to the filing, the firm enhanced compliance procedures in recent years, including hiring a new chief compliance officer in 2017 and conducting a full review of its written procedures.

The largest independent robo advice provider now manages over $14 billion in assets, according to the firm. “In the years since the 2014 examination, Betterment Securities has enhanced its policies and procedures and made personnel and other changes to ensure compliance with all applicable regulations.”

Sean Allocca

Sean Allocca is an associate editor of Financial Planning, On Wall Street and Bank Investment Consultant.