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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Tuesday, January 11, 2011

FINRA and Charles Schwab Settle Charges Related to Marketing of YieldPlus Fund

FINRA announced that it has ordered Charles Schwab & Company, Inc., to pay $18 million into a Fair Fund to be established by the Securities and Exchange Commission (SEC) to repay investors in YieldPlus, an ultra short-term bond fund managed by Schwab's affiliate, Charles Schwab Investment Management. The $18 million consists of the $17.5 million in fees that Schwab collected for sales of the fund, plus a fine of $500,000, both of which will have been designated as restitution to customers.

FINRA's investigation found that despite changes in YieldPlus' portfolio that caused the fund to be disproportionately affected by the turmoil in the mortgage-backed securities market, Schwab failed to change its marketing of the fund. In written materials and in conversations with customers, some Schwab representatives omitted or provided incomplete or inaccurate material information relating to the fund's characteristics, risk and diversification, and continued to represent YieldPlus as a relatively low-risk alternative to money market funds and other cash alternative investments that had minimal fluctuations in net asset value (NAV).

 Between Sept. 1, 2006, and Feb. 29, 2008, Schwab sold over $13.75 billion in shares of YieldPlus to customers, which accounted for approximately 98 percent of the amount Schwab customers invested in ultra short-term bond funds. During this time period, Schwab's solicited sales of YieldPlus totaled approximately $3.36 billion, approximately 40 percent of which were to customers 65 years of age or older. Schwab collected approximately $17.5 million in fees from sales of the fund.

In concluding this settlement, Schwab neither admitted nor denied the charges, but consented to the entry of FINRA's findings.

The SEC also announced a settlement with Charles Swab entities and a complaint filed against two executives, both related to the YieldPlus Fund.

http://lawprofessors.typepad.com/securities/2011/01/finra-and-charles-schwab-settle-charges-related-to-marketing-of-yieldplus-fund.html

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