On Monday, we reported that Charles Schwab agreed to pay $18 million to settle FINRA charges it had failed to update marketing materials for significant issues that impacted an affiliated bond fund.  That same day, the SEC announced that Charles Schwab and Charles Schwab Investment Management jointly agreed to pay $119 million more to settle charges similar charges leveled by the SEC and Illinois state regulators.  Civil complaints also were filed against 2 senior Schwab executives who oversaw the fund.

Specifically, the SEC charged Charles Schwab Investment Management (CSIM) and Charles Schwab & Co., Inc. (CS&Co.) with making misleading statements regarding the Schwab YieldPlus Fund and failing to establish, maintain and enforce policies and procedures to prevent the misuse of material, nonpublic information.  The SEC also charged CSIM and Schwab Investments with deviating from the YieldPlus fund's concentration policy without obtaining the required shareholder approval.

The SEC also filed a complaint in federal court against Kimon Daifotis, CSIM's former CIO for fixed income, and Schwab official Randall Merk, a CS&Co. EVP, CSIM president, and a trustee of the YieldPlus and other Schwab funds.  It's alleged that Daifotis and Merk committed fraud and other securities law violations in connection with the offer, sale and management of the YieldPlus Fund.  The SEC's case continues against the executives.

"Schwab marketed the fund as a cash alternative with only slightly more risk than a money market fund even though, at one point, half of the fund's assets were invested in private-issuer, mortgage-backed and other securities with maturities and credit quality that were significantly different than investments made by money market funds."  -- Antonia Chion, Associate Director - SEC Division of Enforcement.

The YieldPlus Fund is an ultra-short bond fund that, at its peak in 2007, had $13.5 billion in assets and more than 200,000 accounts, making it the largest ultra-short bond fund in the category.  The fund suffered a significant decline during the credit crisis of 2007 and 2008, with assets falling to $1.8 billion over an 8-month stretch - due to redemptions and declining asset values.

In its administrative order issued against the Schwab entities and the SEC's related complaints against the entities and the 2 executives filed in federal court in San Francisco, the SEC accused them of having failed to inform investors adequately about the risks of investing in the YieldPlus Fund.

e.g. - they described the fund as a cash alternative that had only slightly higher risk than a money market fund. The statements were misleading because the fund was more than slightly riskier than money market funds, and the Schwab entities and Merk and Daifotis did not adequately inform investors about the differences between YieldPlus and money market funds.

    Sanctions.   CSIM and CS&Co. agreed to pay a total of $119 million, including $52mn in disgorgement of CSIM fees, a $52mn penalty against CSIM, a $5mn penalty against CS&Co., and pre-judgment interest of $9mn.  The SEC seeks to have payments placed in a Fair Fund for distribution to harmed investors.  $9 million will go to the Illinois regulator. 

The SEC order also requires them to comply with certain undertakings, including correction of all disclosures regarding the funds' concentration policy.  In addition, the Commission censured CSIM and CS&Co., and required them to retain an independent consultant to review and make recommendations about their policies and procedures to prevent the misuse of material, nonpublic information.  

For further details, go to:  [SEC Public Release 11-7, 1/11]