The Securities and Exchange Commission ordered SoFi Wealth to pay a $300,000 fine for failing to disclose conflicts of interest surrounding asset allocations to its own exchange traded funds.
The enforcement action centered on a decision by the robo adviser in April 2019 to replace third-party ETFs in approximately 20,000 automated portfolio accounts with two new ETFs sponsored by the firm’s parent company, Social Finance Inc.
In an order posted Thursday on its website, the SEC said SoFi Wealth violated its fiduciary duty by not telling clients in its SoFi Invest robo investing program about its own economic interests in the in-house ETFs, SFY and SFYX.
“SoFi Wealth intended to use client assets managed in the SoFi Invest program to infuse cash into the newly-created, proprietary ETFs to capitalize the ETFs on the second day of trading … making the ETFs more attractive to potential investors,” the SEC order states. “SoFi Wealth planned to use the new ETFs to market and increase awareness of the SoFi brand beyond its current client base. SoFi Wealth sought to use the ETFs to show that SoFi could provide a broader array of investment products and services.”
In imposing the $300,000 civil penalty, the SEC said it “considered remedial acts promptly undertaken by SoFi Wealth and cooperation afforded the Commission staff.”
SoFi, an online financial services provider, neither admitted nor denied the SEC’s findings.
“We’re pleased to have resolved this matter with the SEC,” a SoFi spokesperson said in a statement. “As a company, we treat compliance with all applicable laws and regulations as our top priority. We will continue to focus on building robust control systems as SoFi continues to grow and serve the investment needs of our members."
The SEC said the comapny amended its Form ADV Part II on March 29, 2019, to indicate that it would be changing the mix of ETFs in SoFi Invest “which may include ETFs for which SoFi is the sponsor.”
But “may” didn’t go far enough in warning clients that proprietary products would be added to their portfolios, the SEC said.
“In particular, SoFi Wealth disclosed to clients that it ‘may’ invest client assets in shares of the SoFi ETFs, despite the fact that SoFi Wealth’s Investment Committee had already approved the inclusion of two of SoFi’s new ETFs to replace existing third-party ETFs in the SoFi Invest portfolio,” the SEC order states.
The SEC said also SoFi Wealth did not assess the tax consequences of the ETF transactions. The firm sold clients’ third-party ETFs to facilitate the purchase of the SoFi ETFs, incurring a total of approximately $772,000 in short-term capital gains and $662,000 in long-term capital gains.
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