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
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.”
here for the original article from Napa Net.