April 20, 2023
Who may be interested: Registered Investment Advisers, Robo-advisers, Compliance Staff.
Quick Take: The SEC settled charges against a registered adviser for misstating and omitting material information about the adviser’s automated tax loss harvesting service (TLH), failing to provide clients with notice of changes to advisory contracts, and failing to maintain required books and records.
The SEC Order stated that, from 2016 to 2019, the adviser made material misstatements and omissions relating to the TLH, including inaccurate disclosure of the service’s scanning frequency of client accounts. The adviser disclosed to clients that it automatically scanned client accounts each day for opportunities to reduce tax burdens, but then changed the scanning frequency to every other day without disclosing that change to clients. The SEC Order also stated that the adviser failed to disclose a TLH programming constraint affecting certain client accounts using third-party portfolio strategies and did not disclose two coding errors that prevented the service from harvesting losses for certain client accounts. In relation to the alleged misstatements and omissions surrounding the TLH, the SEC found that the adviser failed to implement policies and procedures reasonably designed to prevent violations of the Advisers Act under Rule 206(4)-7. These issues adversely impacted the value of the TLH for over 25,000 client accounts, and the SEC estimated that clients lost approximately $4 million in potential tax benefits as a result.
The SEC Order further stated that the adviser violated its fiduciary duty by making material changes to advisory agreements without notifying clients. The adviser entered into advisory agreements that allowed it to change agreement terms unilaterally and without notice—a practice which the SEC alleged violated the adviser’s fiduciary duty under Section 206(2) of the Advisers Act.
The SEC Order also reflects that, during the SEC’s investigation, the adviser could not produce records of its written agreements with certain clients in violation of the requirement for an adviser to maintain “true, accurate and current” records of its written agreements under Rule 204-2(a)(10).
Without admitting or denying the findings in the SEC Order, the adviser consented to a cease-and-desist order, a censure, and a $9 million civil penalty that will be distributed to affected clients. The adviser said in a statement that it has made significant investments to strengthen its compliance program since 2019.
The SEC’s order can be found here.
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The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm or its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
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