# SEC fines robo-adviser Betterment $9m after coding errors stopped automated tax-loss harvesting

Source: https://www.bankingnewsai.com/ai-incidents/betterment-2023-tax-loss-harvesting-coding-errors
Last updated: Oct 21, 2026

Betterment · Institution's own AI · severity 3 of 5

On 18 April 2023 the SEC settled charges that robo-adviser Betterment misstated or omitted material facts about its automated tax-loss-harvesting service (TLH) between 2016 and 2019. Per the SEC order, Betterment cut the software's scanning frequency from daily to alternating days without telling clients, did not disclose a design constraint for clients with multiple portfolio strategies, and had "two computer coding errors" that disabled harvesting for some accounts. Together these issues affected more than 25,000 client accounts, which lost about $4 million in potential tax benefits. Betterment paid a $9 million penalty into a Fair Fund for affected clients, without admitting or denying the findings, and said it had fixed the issues by 2019. The SEC described the service as automated; it was not described as AI.

## Key facts

|  |  |
| --- | --- |
| Date | Apr 18, 2023 |
| Institution | Betterment |
| Country | United States |
| AI system | Tax Loss Harvesting (TLH) · Automated tax-loss-harvesting software that scanned client accounts and sold positions at a loss; not described as AI |
| AI? | Automated system not described as AI — The system was automated, but neither the institution nor a regulator described it as AI; it is listed because it is routinely discussed as an AI failure. |
| Category | Other (Institution's own AI) |
| Status | Settled |
| Severity | 3 of 5 — Rubric 3 (regulatory finding with material harm): an SEC cease-and-desist order with a $9m penalty, after undisclosed software changes, constraints and coding errors cost more than 25,000 client accounts about $4m in potential tax benefits. |

## What happened?

Betterment's TLH service scanned client accounts for unrealized losses it could harvest to reduce clients' taxes. In January 2016 Betterment changed the scanning frequency for individual accounts from daily to alternating trading days, but until April 2019 some marketing and disclosures still said accounts were scanned daily. The SEC found that about 25,000 clients lost about $1.9 million in potential tax benefits from that undisclosed change. [1][2]

Betterment designed the TLH algorithm to avoid harvesting in asset classes where ETFs overlapped between two portfolio strategies, to limit wash-sale risk, but did not disclose this constraint to clients who combined a Betterment portfolio with a third-party strategy. From September 2017 to January 2019, at least 3,200 such accounts lost about $1 million in potential tax benefits, according to the order. [2]

Two coding errors disabled TLH for clients who had turned it on: one, from April 2016 until it was fixed in January 2019, affected at least 150 accounts after two client databases failed to interface; another, from November 2015 to June 2018, affected over 600 joint trust accounts. The SEC said at least 700 accounts lost about $1.1 million, that Betterment's notifications and credits were incomplete, and that until April 2021 it lacked procedures to ensure its compliance staff and the engineers who designed and updated its algorithms communicated. [2]

Antonia M. Apps, director of the SEC's New York Regional Office, said Betterment "wasn't transparent about the service's changes, constraints, and coding errors that adversely impacted thousands of clients". Reuters and CNBC reported the settlement the same week; CNBC said the median payout to affected clients would be under $100. [1][4][5]

## Timeline

- Jan 2016 — Betterment changes TLH scanning for individual accounts from daily to alternating days without notifying clients. [2]
- Jan 2019 — Betterment finds and fixes the database coding error that had disabled TLH for some accounts since April 2016, and updates its multiple-portfolio disclosure. [2]
- Apr 2019 — The last references to daily TLH scanning are removed from Betterment's marketing materials. [2]
- Apr 18, 2023 — The SEC issues a settled cease-and-desist order: censure and a $9 million civil penalty paid into a Fair Fund for affected clients. [1][2]

## What was the impact?

- Financial: About $4 million in potential tax benefits lost by clients; $9 million civil penalty
- Customers: More than 25,000 client accounts
- Other: Betterment said the median payout to affected customers was expected to be less than $100. [1][2][3]

## How did Betterment respond?

Betterment said it "neither admits nor denies any wrongdoing", "fully cooperated with the SEC's inquiry and is pleased to have reached a resolution on these issues", and that the SEC order acknowledges it addressed the TLH coding and disclosure issues by 2019. It said the TLH issues involved "less than a percent of the total losses harvested" since 2014 and that it has since made significant investments in its compliance program. [3][4][5]

## What was the outcome?

Betterment consented to a cease-and-desist order and a censure for violations of Sections 204, 206(2) and 206(4) of the Investment Advisers Act, and paid a $9 million civil penalty into a Fair Fund to compensate affected clients. The order also found Betterment had changed its advisory contract without advance notice; its contract allowed unilateral changes without notice until March 2023. In April 2021 Betterment revised its Algorithm Governance Policy to require annual review of product disclosures with both compliance staff and software engineers. [1][2]

## FAQ

### Was Betterment's tax-loss harvesting software AI?

No. The SEC described TLH as an automated service built on an algorithm that scanned client accounts for losses to harvest. Neither the SEC nor Betterment called it artificial intelligence. It is in this register as an automated-system failure at a fintech that led to a regulatory penalty.

### How much money did Betterment clients lose?

The SEC found that more than 25,000 client accounts lost about $4 million in potential tax benefits between 2016 and 2019: about $1.9 million from the reduced scanning frequency, about $1 million from an undisclosed portfolio constraint and about $1.1 million from two coding errors. Betterment said the median payout would be under $100.

### Did the SEC penalise Betterment, and do clients get paid?

Yes. On 18 April 2023 Betterment agreed to a cease-and-desist order, a censure and a $9 million civil penalty, without admitting or denying the findings. The penalty went into a Fair Fund to compensate affected clients; Betterment said they would be notified once the SEC approved a distribution plan.

### What did Betterment change after the coding errors?

Betterment fixed the coding errors and the disclosures by 2019. In April 2021 it revised its Algorithm Governance Policy to require an annual review of product disclosures by compliance staff together with software engineers, and wrote guidance on when engineers must consult legal and compliance about algorithm changes, per the SEC order.

## Sources

1. [SEC Charges Investment Adviser Betterment for Misstatements Concerning Tax Loss Harvesting Service (2023-80)](https://www.sec.gov/news/press-release/2023-80) — U.S. Securities and Exchange Commission, Apr 18, 2023 (official): "According to the order, at different times, Betterment failed to disclose a change in the software related to its scanning frequency, failed to disclose a programming constraint affecting certain clients, and had two computer coding errors that prevented TLH from harvesting losses for some clients. Collectively, these issues adversely impacted more than 25,000 client accounts, resulting in those clients losing approximately $4 million in potential tax benefits."
2. [Order Instituting Administrative and Cease-and-Desist Proceedings, In the Matter of Betterment LLC (IA-6288)](https://www.sec.gov/files/litigation/admin/2023/ia-6288.pdf) — U.S. Securities and Exchange Commission, Apr 18, 2023 (official): "Until April 2021, Betterment lacked policies and procedures reasonably designed to ensure necessary communication between its compliance personnel, who review disclosures, and its engineers, who design and update its algorithms."
3. [Betterment Reaches Agreement with the SEC to Resolve Legacy Disclosure and Operational Issues](https://www.betterment.com/sec-settlement-2023) — Betterment, Apr 18, 2023 (official): "The SEC found that two coding issues caused TLH not to operate for a limited subset of customers, and that certain disclosures did not fully reflect the operation of TLH. The TLH-related issues involved less than a percent of the total losses harvested by Betterment since TLH was introduced."
4. [Betterment agrees to pay $9 mln to settle U.S. SEC charges](https://www.reuters.com/legal/betterment-agrees-pay-9-mln-settle-us-sec-charges-2023-04-18/) — Reuters, Apr 18, 2023 (news): "Betterment, which did not admit or deny the SEC's allegations, said in a statement that it has made significant investments to strengthen its compliance program since 2019."
5. [Robo-advisor Betterment settles tax charges with SEC for $9 million](https://www.cnbc.com/2023/04/19/robo-advisor-betterment-settles-tax-charges-with-sec-for-9-million.html) — CNBC, Apr 19, 2023 (news): "The $9 million settlement between Betterment and the U.S. Securities and Exchange Commission will be shared among roughly 25,000 of the robo-advisor's clients, with a median payout of under $100."

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