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.
“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.