Betterment Settles FINRA Allegations Tied to Bookkeeping Practices

Without admitting guilt or even the facts of the case, Betterment has settled various allegations of improper recordkeeping and "window dressing" leveled by FINRA, to the tune of $400,000.

Responding to a challenge by the Financial Industry Regulatory Authority (FINRA), Betterment Securities has submitted a Letter of Acceptance, Waiver and Consent (AWC) for the purpose of proposing a settlement of alleged rule violations; the AWC is submitted on the condition that, if accepted, FINRA will not bring any future actions against Betterment alleging violations based on the same factual findings described therein.

Contextual information included in the AWC shows that Betterment Securities became a member of FINRA on October 21, 1999. In 2011, Betterment Securities became a wholly owned subsidiary of Betterment Holdings, Inc. Today, the business of Betterment Securities is to provide brokerage services to customers of the registered investment adviser, Betterment LLC, which is also a wholly owned subsidiary of Betterment Holdings.

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“Betterment LLC operates as an online wealth management service,” the AWC explains. “Betterment Securities’ customer base is made up of the clients of Betterment LLC. The firm’s place of business is New York, New York. Betterment Securities has one office and approximately 12 registered representatives. The firm has no relevant disciplinary history with the Securities and Exchange Commission [SEC], FINRA, any other self-regulatory organization or any state securities regulator.”

The outline included in the AWC includes Betterment’s strong growth trajectory. The firm had approximately $120,000 in annual revenues in 2011 and more than $1.2 million in annual revenues in 2014. The explanatory text of the AWC continues: “Betterment Securities holds its customers’ securities in omnibus accounts at its clearing firm. In June 2014 the value of securities in the omnibus account was approximately $608 million. During this period of significant growth in its business, the firm did not ensure that its practices complied with certain FINRA and SEC financial and operational rules and interpretations.”

First, the AWC states, during the period from October 2013 through January 2015, the firm “structured its transactions on days when it was required to calculate its reserve deposit differently than on other days in order to reduce its customer reserve account obligations.” Specifically, the firm generally moved customer deposits to its omnibus account to fund its pre-settlement withdrawal program. However, on days when the firm was required to compute its customer reserve requirement, the firm did not move customer deposits and instead used loans from its clearing firm to fund that program.

“Thus, the firm engaged in ‘window dressing’ by altering its practices on reserve computation days specifically to reduce its reserve formula computation and thereby reduce its reserve requirement,” the AWC states.

Second, during the period from October 2013 through August 2014, the firm “did not properly segregate customers’ wholly owned securities in a good control location.”

“These practices, along with other errors in the firm’s computation of its reserve requirement, constitute violations of the reserve formula and possession and control requirements of Section 15 of the Securities Exchange Act of 1934 and Rule 15c3-3 promulgated thereunder and FINRA Rule 2010 during the period from October 2013 through January 2015,” the AWC states. “In addition, from June 2012 through December 2014 the firm did not make and keep certain of its books and records in the manner required by SEC and FINRA rules.”

For example, the AWC says Betterment did not create and maintain certain records of cash movements in the form required by SEC and FINRA rules. In addition, the firm’s systems “maintained its stock record on a trade date basis, rather than settlement date basis.” By this conduct, the AWC says the firm violated Section 17 of the SEA and Rules 17a-3 and 17a-4 promulgated thereunder and FINRA Rules 4511 and 2010 during the period from June 2012 through December 2014.

The AWC goes on to suggest the firm did not have a supervisory system reasonably designed to ensure its compliance with customer protection rules and books and records rules.

“In particular, the firm did not implement a supervisory system in which certain decisions relating to financial and operational rules were made and supervised by people with appropriate expertise,” the AWC says. “For example, the firm’s former principal, who had no training or experience in applying SEC and FINRA financial and operational rules, had primary responsibility for the firm’s compliance with SEA Rule 15c3-3 during the relevant period. Further, the firm did not involve its financial and operations principal [FINOP] in certain decisions affecting the reserve computation and only provided the FINOP with monthly statements and record compilations instead of more complete access to its bank accounts and its omnibus accounts. By reason of the foregoing, the Firm violated NASD Rule 3010 (for the time period prior to December 1, 2014) and FINRA Rule 31 10(a) (for the time period on and after December 1, 2014) and FINRA Rule 2010 during the relevant period.”

As part of the agreement with FINRA, Betterment has agreed to a censure and a $400,000 fine, and it will create an “enhanced FINOP role with expanded access to review information for the purpose of maintaining compliance, as well as expanding oversight, installing new compliance leadership and updating written supervisory procedures.”

In the corrective action statement accompanying the AWC, Betterment Securities says it takes is regulatory responsibilities seriously—pointing out that the firm has cooperated with FINRA staff throughout this process and began implementing recommended changes even before the examination was complete.

The full text of the AWC is available here and includes substantial explanatory information around each of these allegations.  

MetLife Faces Court Challenges for Pension Risk Transfer and Beneficiary Practices

According to the text of the complaint, the action seeks to hold MetLife accountable for the company’s conversion of more than $500 million in annuitized retirement benefits, interest, and unlawful profits over the last 25 years. State regulatory authorities in Massachusetts are also getting involved.

A would-be class representative whose benefit liability was transferred to MetLife in a pension risk transfer (PRT) deal has filed an expansive lawsuit, challenging the company’s practices across its PRT and group annuity contract services business.

Filed in the U.S. District Court for the Southern District of New York, the complaint names as defendants MetLife, Inc.; the Metropolitan Life Insurance Company; and Brighthouse Financial, Inc. Summarizing the complaint, the lead plaintiff says he is suing these companies “for conversion and unjust enrichment relating to the taking of retirement annuity benefits from retirees.” The plaintiff also seeks “an accounting from MetLife for the amounts taken, interest, and disgorgement of unlawful profits.”

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According to the text of the complaint, this action “seeks to hold MetLife accountable for the company’s conversion of more than $500 million in retirement benefits, interest, and unlawful profits over the last 25 years—depriving retirees of important income in their golden years.” The complaint further suggests “MetLife’s systematic conversion of retirement annuity benefits betrayed thousands of annuitants and their beneficiaries.”

“MetLife systematically took ownership over the beneficiaries’ annuity assets, ultimately releasing more than $500 million in reserves that belonged to the beneficiaries, treating the funds as if they belonged to MetLife,” the complaint states. “The scope and scale of MetLife’s betrayal of trust is particularly egregious in light of its failure to pay death benefits in connection with the company’s life insurance business that resulted in the company paying $500 million in overdue death benefits—and being required to look for similar problems in its annuity business.”

The complaint points to various ways that MetLife has allegedly “admitted” or “acknowledged” that it has failed to keep track of beneficiaries, failed to contact them, and/or failed to pay them their benefits when due. In one instance, the complaint points to language in a disclosure slide presented during an earnings call with stock and credit analysts.

Seeking class certification for “all others similarly situated,” the plaintiff goes on to argue that, instead of seeking out “missing” beneficiaries and paying them the proper annuity benefits—or, in failing to locate the beneficiaries after an honest effort, tendering the assets to states under unclaimed property law—the company instead took the money for itself. According to the complaint, the company has variously “acknowledged that it owes as many as 30,000 beneficiaries more than $500 million in annuity benefits.”

“In admitting that it failed to provide these annuity benefits, MetLife provided additional detail concerning its policies and procedures concerning the payment of annuity benefits—which involved nothing more than sending two letters, one when the beneficiary turned 65 and one at age 70,” the complaint alleges. “If MetLife received no response, it simply took the money for itself.”

The text of the compliant offers substantial alleged detail on what the plaintiffs says are shortcomings in the way MetLife markets, sells and services PRT services and the underlying group annuity contracts, or “GACs.” This is especially the case, the complaint alleges, when it comes to the “procedures and protocols for notifying beneficiaries of their eligibility for retirement benefits.” According to the complaint, these “appear designed to ensure that many beneficiaries will never be paid so that MetLife can convert annuity benefits to its own use.”

“MetLife simply makes two attempts at contact—one at age 65 and the only other at age 70.5—and no effort to locate individuals when the mailings were returned as undeliverable,” the complaint alleges. “These notices did not even identify the former employer of the beneficiary. If the beneficiary did not respond to this half-hearted outreach, it was MetLife’s practice to convert the reserve for these benefits and treat the beneficiaries’ retirement benefits as income to itself.”

The full text of the complaint is available here.

Separate challenge from Massachusetts Secretary of Commonwealth

Coinciding with the emergence of this new lawsuit, Massachusetts Secretary of the Commonwealth William Galvin has also charged MetLife with “making misleading statements relating to its failure to make pension payments to hundreds of Massachusetts retirees it had wrongly designated as presumed dead.”

In a separate complaint prepared by Galvin’s office, it is argued that MetLife’s public filings contained material misstatements about the company’s finances resulting from the failure to adequately administer employer pension plans.

“Under these pension plans, MetLife was responsible for reserving enough money to make payments to Massachusetts pensioners, whose average age was 72,” the Massachusetts complaint states. “Instead, some reserves were released and became assets which inflated MetLife’s bottom line.”

As Galvin explains, these charges are the result of an investigation opened by his state’s Securities Division back in December 2017, “after MetLife announced that it had lost track of tens of thousands of pensioners to whom they owed payments.”

Galvin shared the following anecdote in a statement explaining his complaint: “My office was able to locate a majority of the missing Massachusetts residents within just a few weeks. In fact, approximately half of these seniors were still living at the same address MetLife had on file for them for the entire time MetLife failed to make payments to people they had so callously designated as ‘presumed dead.’”

Similar to the lawsuit filed in New York district court, the Massachusetts complaint states that MetLife “did not take reasonable steps to notify plan participants when their pensions were initially transferred.”

“After the transfer, MetLife’s only contact with the pensioners was two form letters, sent more than five years apart, to those to whom payments were owed,” the complaint suggests. “MetLife designated plan participants who did not respond to the notices that were sent to the address on file as presumed dead. Once a plan participant was presumed dead by MetLife, the money to which the retiree was entitled was no longer held in reserve by the company and became assets of MetLife, which were reported in public filings. The complaint states that these reserves should not have been released and resulted in misleading financial statements.”

Galvin says his office presented MetLife with the results of their search efforts in March 2018. Since then, his office “has learned that many retirees have yet to receive the payments they are owed.” Several plan participants have reported to Galvin’s Securities Division that MetLife “has been slow to respond, has lost their paperwork, or has not provided back payments with interest.”

The complaint filed by Galvin’s office seeks an order requiring MetLife to locate all Massachusetts retirees eligible for benefits and provide retroactive and continuing payments to each person. The complaint also seeks sanctions, censure, and an administrative fine.

In response to the lawsuits, MetLife shared the following statement with PLANSPONSOR: “We self-identified and self-reported this issue to our regulator and to the public. We have taken aggressive steps to locate unresponsive annuitants who are due funds and already have or will commence payment, including interest, once the necessary paperwork is complete.”

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