The robo-advisor Betterment has agreed to pay $9 million to settle charges by the U.S. Securities and Exchange Commission that it caused clients to lose millions when it made material misstatements and omissions to the clients about its automated tax-loss harvesting service.

“Collectively, these issues adversely impacted the value of [tax-loss harvesting] for over 25,000 client accounts, and as a result, clients lost approximately $4 million dollars in potential tax benefits,” the SEC said in its administrative order announcing cease-and-desist proceedings and the $9 million civil penalty against Betterment, a registered investment advisor.

The agency said that at various times between March 2016 and April 2019, Betterment failed to alert clients about changes in their advisory contracts and failed to maintain books and records. The robo-advisor also failed to adopt investment policies and procedures to avoid violating the Investment Advisers Act of 1940, the agency said.

Betterment’s service, according to the complaint, was designed to scan for tax-loss-harvesting opportunities in client accounts. In January 2016, the complaint says, Betterment started scanning on alternate days instead of every day, yet continued to say until April 2019 that it was scanning daily in some of its materials.

Also, “at different times during the relevant period, Betterment had two computer coding errors that prevented [the service] from harvesting losses for certain impacted clients,” the SEC claims.

“Beginning in April 2016, a coding error caused two Betterment client databases to not interface properly for certain accounts. The result was that for at least 150 accounts, [tax-loss-harvesting] was disabled although clients had enabled it.”

Betterment, a pioneer among robo-advisors, was registered with the SEC in 2009 and effectively launched in 2010 in the Chelsea neighborhood of Manhattan by Harvard and Columbia Business School grad Jon Stein, who wanted to provide automated, software-based portfolio management. As of December 31, the firm said it had $34 billion in assets under management.

The company launched its tax-loss harvesting service in 2014.

“In order to take advantage of the service, clients must affirmatively enable [tax-loss harvesting] by selecting it through the online user interface,” the SEC order says. This is “an automated, algorithm-driven process whereby individual positions in client taxable accounts are scanned to identify unrealized investment losses. If, after meeting certain conditions, an ETF is identified where a client has an unrealized loss that could potentially be used to reduce their liability, it is sold and replaced with a closely correlated ETF with similar exposure.

“In other words, [tax-loss harvesting] is designed to replace a security with another security to capture a potential tax benefit while maintaining a similar exposure and allocation in a client’s account. Since its introduction through January 2023, over 275,000 client accounts have enabled [the service]."