Betterment Fully Paid Securities Lending Supplemental Disclosures

MTG LLC d/b/a Betterment Securities (“Betterment Securities”) offers customers the ability to lend securities in their brokerage account through Apex Clearing Corporation’s (“Apex”) Fully-Paid Securities Lending Program (the “FPSL Program”). The FPSL Program allows customers to earn loan fees by lending their fully paid securities to Apex. To participate in the FPSL Program, customers must (i) accept and execute the Master Securities Lending Agreement (the “MSLA”) between the client and Apex, (ii) receive and review Apex’s “Important Disclosures Regarding Risks and Characteristics of Participating in Apex Clearing Corporation’s Fully-Paid Securities Lending Program” (the “Apex Disclosures”), (iii) receive and review Apex’s “Fully Paid Lending Trust Agreement” (the “FPSL Trust Agreement ”), and (iv) receive and accept the terms of these Supplemental Disclosures for the Fully Paid Securities Lending Program (the “Supplemental Disclosures” and, together with the MSLA, the Apex Disclosures, and the FPSL Trust Agreement, the “FPSL Program Documents”). Capitalized terms used but not defined herein shall have the meanings set forth in the MSLA.

Apex will be the sole borrower of securities under the FPSL Program, and Apex may lend those securities to other market participants. Securities loaned out typically earn a market-driven rate, which Apex shares with the client and Betterment Securities.

Customers will receive at least 25% of the total proceeds earned for lending their shares. That rate may be adjusted by Betterment Securities from time to time, but will always be at least 25%. To see the current percentage share of the net proceeds on loaned securities, please refer to our earnings schedule. 

Apex will deposit collateral in a custody account (the “Custody Account”) at JP Morgan Chase Bank, N.A. (the “Custodian”) to secure each loan of securities; the Custody Account is administered by Wilmington Trust, National Association, as trustee (the “Trustee”).

Betterment Securities offers its customers access to the FPSL Program through its omnibus clearing arrangement with Apex. Betterment Securities accounts are governed by the Betterment client agreements, including the Common Provisions and the Brokerage Agreement. Please read these agreements and the FPSL Program Disclosures carefully before deciding whether to participate in the Program and before agreeing to the Apex MSLA. These agreements and disclosures describe important aspects of the FPSL Program, its structure, potential benefits, risks, and conflicts of interest information.

A client may opt-out of the FPSL Program at any time in the account settings tab in Betterment’s online account interface.

II. Client Participation

Customers must first opt in via Betterment’s online account interface. To do so, customers must first have completed the sign-up process for a Betterment account. Based on information customers provide  about their financial situation and investment objectives, and the receipt and acceptance of FPSL Program Documents as disclosed above, Betterment Securities will determine which customers may be deemed appropriate to participate. By opting-in to the FPSL Program, customers authorize Betterment Securities to lend their Securities to Apex without notice or prior approval of any loan activity. Customers also authorize Betterment Securities to choose which securities are eligible for loans. If a client chooses to opt-in to the FPSL Program, such election applies across all of the client’s investing accounts with Betterment Securities (e.g., individual and joint, taxable and tax-advantaged); a client cannot choose to have some accounts participate and not others. Securities lending and enrollment in the FPSL Program for joint accounts is controlled by the primary account owner. 

III. FPSL Program and Omnibus Clearing

 Betterment Securities executes and clears trades in customers’ brokerage accounts on an omnibus basis through accounts at Apex. Betterment Securities tracks its customers’ assets and transactions and allocates their assets to and from the omnibus accounts with Apex to effect transactions in the customers’ brokerage accounts. Apex borrows securities directly from Betterment Securities’ customers through the omnibus account as part of the FPSL program. Apex’s direct borrowing makes Apex a “principal” on each loan. Betterment Securities provides access to the FPSL Program to its customers, but is not a party to its customers’ securities loans. 

IV. Allocation Approach 

The supply of Betterment Securities’ customer securities enrolled in the FPSL Program may exceed market demand for loaned securities. In these circumstances, Betterment Securities will allocate lending opportunities among participating customers. Betterment Securities will seek to allocate lending so that every participating client has the opportunity to loan shares, but at any time some client securities may be on loan while other customers holding the same security are not. Betterment Securities’ lending allocation is designed to lend securities when it estimates a customer’s earnings will exceed their incremental tax costs, as determined based on a customer’s financial profile. For customers expected to receive a net benefit from lending securities, Betterment Securities seeks to allocate lending opportunities to such customers generally on a pro-rata basis, subject to a minimum floor of shares in the security, and subject to tax optimizations on certain days. On such days, Betterment Securities prioritizes lending securities to minimize the estimated tax impact from lending (i.e. the estimated tax impact of cash-in-lieu payments in place of qualified dividends on and around the dividend record date). 

The calculation of the estimated tax impact from lending can cause Betterment Securities to prioritize lending shares of certain customers relative to others on certain days, and depends on self-reported information from customers. Additionally, although Betterment Securities’s allocation approach is designed to only lend shares if a client stands to receive a net benefit. Betterment Securities does not guarantee that earnings from lent shares will offset tax impact or other losses that a client may experience.

V. Allocation of Loan Fees 

On a monthly basis, Betterment Securities will receive accrued aggregated loan fees from Apex for all loaned securities, and will allocate the loan fees among applicable Betterment Securities customers following the month in which the fees were accrued.

VI. Collateral 

As security for its loans, Apex will pledge to customers cash collateral of at least 100% of the market value of the securities on loan. Apex will deposit collateral to the Custody Account with the Custodian, which is administered by the Trustee. Each day, Apex will compare the market value of securities on loan to the value of the deposited collateral, and deposit additional collateral by the end of the following business day as necessary to maintain the required cash collateral for the duration of each loan.

VII. Risks and Conflicts of Interest Associated with Omnibus Clearing in FPSL Program

Customers incur no direct cost or fee for participation in the FPSL Program, but there are certain risks in participating in the FPSL Program. Please consider these risks before participating in the program.

Customers Do Not Approve Individual Loans: Betterment Securities, in its sole discretion, determines which client accounts and which shares in each client account are eligible for the FPSL Program, or deem any previously eligible securities to be ineligible. Customers cannot approve individual loans of securities. Betterment Securities will, in its discretion, allocate borrowings of securities by Apex among eligible client accounts as described above in “Allocation Approach”, and those assets will be loaned to Apex in accordance with the FPSL Program Documents without the customer’s further approval or consent. This may impact the overall income the customer may receive from the Program. Betterment Securities can decide at any time for any reason that a customer is no longer eligible to participate in the FPSL Program and will make reasonable efforts to notify such customers.

Earnings by Betterment Securities and Client: Betterment Securities will receive compensation from the FPSL Program and has a financial incentive to share a lower percentage rate of earnings with customers, subject to the 25% revenue share floor described above. Compensation that Betterment Securities receives reduces customers’ compensation. Market demand, availability of securities, and other factors (such as the perceived stability of a loan) impact the total amount of FPSL Program revenue available to be shared with customers. 

Betterment Securities reserves the right to amend this compensation-sharing arrangement upon written notice to customers. Betterment LLC (“Betterment”) also continues to charge its wrap fee on assets that are on loan. 

Use of Third Parties: Betterment Securities and multiple third parties including, without limitation, Apex, the Custodian, and the Trustee, are involved in making the FPSL Program available, as described in the FPSL Program Documents. Any of the parties that provide services to the FPSL Program could fail to timely perform their obligations, make errors, provide inaccurate or incomplete information, or otherwise take or fail to take any action which adversely affects the administration of the FPSL Program, which may cause customers to experience losses. Further, any interruption of services to or operations of any of the parties involved in making the FPSL Program available could result in delays in the administration of the FPSL Program and in losses to customers.

Market Risk: The value of securities involved in the lending program may fluctuate based on market conditions. A decrease in the value of loaned securities can result in losses. Customers may also have market risk of losses, or adverse tax consequences, if Betterment Securities must purchase securities to replace securities from loans that have defaulted.

No Guarantee of Recovery: Although the FPSL Program is designed to mitigate the risk of losses to customers by requiring Apex, as borrower, to deposit collateral in an account administered by the Trustee, there is no assurance that a client will be able to recover the full amount of any losses they may experience in connection with the FPSL Program, including the loss of the value of securities loaned and loss of collateral. Customers further understand, agree and acknowledge that neither Betterment nor Betterment Securities guarantee Apex’s performance on any loan under which Apex borrows securities from customers, and that customers do not have any right of setoff of obligations against Betterment or Betterment Securities arising out of Apex’s failure to perform on any loan under the FPSL Program.

Apex or any third party borrower may default on their loan obligations, including but not limited to the obligation to pay compensation and make payments in lieu of dividends, and/or return securities on loan at the termination of the loan. If a borrower defaults, Betterment Securities will assist customers in accessing their collateral held in trust by Wilmington Trust. Customers should be aware that the cash collateral is the only available recourse.

Voting Rights and Treatment of Dividends: Customers will not have the right to vote or take part in other proxy related actions for securities on loan. Customers who lend their fully paid securities are entitled to receive the value of all dividends and distributions made in respect of the loaned securities, and will receive cash payments in lieu of dividends on lent shares. Such payments are not the same as qualified dividends for tax purposes and are taxed as ordinary income, rather than at a potentially preferential qualified dividend rate. If a client’s ordinary income tax rate is higher than the preferential qualified dividend rate, cash payments in lieu of dividends are taxed at a higher rate than qualified dividends. Betterment Securities will withhold taxes on such payments if you are subject to backup withholding, unless an exception applies. You should consult a tax advisor to understand how these payments may be treated under applicable tax laws. Neither Betterment nor Betterment Securities is a tax advisor.

Account Statements and Confirmations

Each customer participating in the FPSL Program will receive consolidated account statements, which include information on both assets held in, and activity occurring in, the Betterment Securities brokerage account, and information about fully paid securities that Apex has borrowed from the customer and collateral that Apex has deposited for the securities borrowed. Customers acknowledge and consent to receiving consolidated documents.

Customer Authorization for Information Access
 
Apex does not store individualized information about Betterment customers and their brokerage accounts under the omnibus clearing arrangement in the ordinary course of Apex’s trading and custody functions, but requires certain individualized information to operate the FPSL Program. Customers authorize the sharing of relevant customer information between Betterment and Apex, and with third parties, as Betterment and Apex reasonably determine is necessary, in furtherance of providing the FPSL Program to customers. This authorization includes, but is not limited to, details of the securities lending activities, contracts, personal details, account information, and any other pertinent data necessary for the purpose of providing the service. Customers understand that the shared information will be treated with confidentiality and used solely for the specified purpose. Customers acknowledge that the rights and responsibilities of Betterment and customers regarding the collection, processing, and use of a customer’s personal information and a customer’s right to limit the use and disclosure of such information, are set forth in Betterment’s Privacy Policy.