20 July 2018

FINRA Hits Betterment With 400k Fine

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Without admitting or denying the findings, Betterment Securities agreed to a $400,000 settlement and censure over alleged violations that its practices during a period of rapid growth did not comply with certain FINRA and SEC financial and operational rules and interpretations.

Betterment LLC, an online wealth management service that was created in 2010, is a wholly owned subsidiary of Betterment Holdings. Betterment Securities, which became a wholly owned subsidiary in 2011, provides brokerage services to the customers of Betterment LLC and is a carrying firm. FINRA’s June 11 Letter of Acceptance notes that Betterment Securities grew quickly as Betterment grew, from approximately $120,000 in annual revenues in 2011 to more than $1.2 million in 2014. In 2014, the value of securities in the omnibus account was approximately $608 million.

According to the FINRA acceptance letter, 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. In particular, the letter explains that the firm generally moved customer deposits to its omnibus account to fund its pre-settlement withdrawal program. But on days when the firm was required to compute its customer reserve requirement, it did not move customer deposits and instead used loans from its clearing firm to fund that program.

As a result, the letter contends that 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.

FINRA also alleges that 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 PINRA Rule 2010 during the period from October 2013 through January 2015,” the letter states.

In addition, from June 2012 through Dec. 2014, the firm apparently did not maintain its books and records as required by SEC and FINRA rules. The letter explains, for example, the firm did not create and maintain certain records of cash movements as required under the rules. In addition, the firm’s systems maintained its stock record on a trade date basis, rather than settlement date basis.

Moreover, FINRA contends that the firm did not have a supervisory system “reasonably designed” to ensure its compliance with the Customer Protection Rule 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 letter states.

In addition to censure and the $400,000 fine, the firm agreed to a Corrective Action Statement, including 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, Betterment Securities said that it “takes seriously its responsibility to customers and its obligations under the Securities Exchange Act and FINRA rules and regulations. Throughout FINRA’s 2014 examination, the Firm worked cooperatively with the Staff and began implementing recommended changes before the examination was complete, including a series of systems, policy and procedure enhancements.”

Click here for the original article from Napa Net.

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