by Howard Haykin

In August 2018, FINRA sanctioned Betterment Securities and two Financial and Operations (Series 27) over various SEC and FINRA rule violations committed by Betterment. Here are the highlights of the 3 cases.

MTG LLC d/b/a BETTERMENT SECURITIES … agreed to pay a $400K fine to settle FINRA charges that it did not ensure that its practices complied with certain FINRA and SEC financial and operational rules and interpretations.  [FINRA AWC #2015048047101]

• 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.
  • 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, it 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 firm also did not properly segregate customers’ wholly owned securities in a good control location.
  • The firm holds its customers’ securities in omnibus accounts at its clearing firm, and because the clearing firm had a claim on debit balances in the omnibus accounts, the omnibus accounts were not a good control location.
  • To the contrary, customer securities that were in the omnibus accounts were potentially available for use by the clearing firm, to the extent of existing debit balances.

INDIVIDUAL #1 - A Series 27 Rent-A-Finop Who’s Been Registered with Betterment LLC … since May 2012, agreed to pay a $5K to settle FINRA charges that he caused his member firm to fail to properly make and keep certain of its books and records.  [FINRA AWC #2015048047102]

• Acting on behalf of the firm, he did not create and maintain certain records of cash movements in the form required by SEC and FINRA rules.

• He also did not ensure that the firm’s stock record was maintained on a settlement date basis - instead, the firm’s systems maintained its stock record on a trade date basis.

►     FINRA notes that, to the individual’s credit, he was limited by the narrow scope of his involvement with the firm’s day-to-day business and his insufficient access to the materials he needed to help the firm comply with the rules.

►     Nevertheless, he was the firm’s FinOp, and could/should have insisted on receiving more complete information or access from the firm.

INDIVIDUAL #2 –An Operations Professional and A FinOp Principal Through His Association with Betterment Securities … beginning in December 2011, agreed to pay a $10K fine to settle FINRA charges that he did not ensure that the firm’s practices complied with certain FINRA and SEC financial and operational rules and interpretations.  [FINRA AWC #2015048047103]

• He designed the practice by which the firm altered its practices on reserve computation days specifically to reduce its reserve formula computation, thereby reducing its reserve requirement – enabling the firm to engage in “window dressing.”
  • The firm funded its pre-settlement withdrawal payments by moving the deposits of purchasing customers from its FDIC-insured sweep account to its omnibus account one day before settlement of the purchase transactions.
  • The individual was aware that using these customer free credit balances to fund the pre-settlement withdrawal program was beneficial to the firm, and that the practice of moving customer deposits to the omnibus account before settlement date to fund pre-settlement withdrawals had an effect on the firm’s reserve calculation.

• He also caused the firm to fail to properly segregate customers’ wholly owned securities in a good control location.
  • Inasmuch as the firm held its customers’ securities in omnibus accounts at its clearing firm, and because the clearing firm had a claim on debit balances in the omnibus accounts, the omnibus accounts were not a good control location.
  • To the contrary, customer securities that were in the omnibus accounts were potentially available for use by the clearing firm, to the extent of existing debit balances.

These cases were reported in FINRA Disciplinary Actions for August 2018.

For details on any case, go to ...  FINRA Disciplinary Actions Online, and refer to the Respective Case Number.