SoFi Wealth, the robo-adviser ran into trouble when it substituted third-party ETFs with SoFi-sponsored ETFs in its platform.
According to the SEC order, SoFi Wealth failed to provide its clients with full and fair disclosure of its conflicts of interest relating to the transactions, including that it:
SoFi had a preference for placing clients into SoFi’s newly-created proprietary ETFs rather than third-party ETFs, and SoFi’s economic interest in these proprietary ETFs presented a conflict of interest for SoFi Wealth,
SoFi was investing client assets in these proprietary ETFs to help market the SoFi brand as having a broader array of services and products than previously offered, and
SoFi intended to use client assets to capitalize the new SoFi ETFs with significant investment on their second day of trading, making the ETFs more liquid and favorable to the market.
It’s not that an adviser can’t us its own funds or ETFs in client portfolios. It just needs to properly disclose the conflict. SoFi did not.
SoFi’s compliance group probably should have read the J.P. Morgan case from 2015. Morgan got in trouble for having a preference for investing client assets in proprietary funds and not disclosing the conflict.
The complaint once again has the SEC quibbling over the use of the word “may.” The disclosure said that SoFi would select a mix of ETFs “that represent the broad asset allocation determined by these strategies, which may include ETFs for which SoFi is the sponsor.” The SEC issue was that the SoFi investment committee had already approved the replacement of third-party ETFs with SoFi ETFs. I hate that the SEC quibbles over the use of “may.” I don’t see how the word “may” really changes anything in the disclosure.
The big problem was that SoFi replaced the ETFs in client accounts. That means it sold the old choice and had the client buy the new one. No big deal in IRAs. But it is a big deal in taxable accounts. It triggered over $1.3 million in taxable gains for the clients and offered no material benefit to the client.
All the benefit ran to SoFi whose ETFs were now bigger and more liquid.
SoFi had sweetened the pot by waiving the expense fees of the ETF. Again good for the ETF holders, but it would take some time to make up for the taxable gain.
Some compliance lessons. Be careful using the word “may” in disclosures. Don’t replace third-party choices with proprietary choices in taxable accounts unless you also disclose the tax issue.
