Charles Schwab & Company agreed to pay $18 million in fines and restitution to settle FINRA charges it failed to update its marketing materials for significant issues that impacted an affiliated bond fund.  The portfolio of the YieldPlus fund, an ultra short-term bond fund managed by an affiliated investment manager, had become disproportionately affected by MBS market turmoil.  Yet, Schwab never changed its marketing of the fund. 

FINRA noted that, in written materials and in conversations with customers, some Schwab RR's 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 9/1/06 and 2/29/08, Schwab had YieldPlus sales of $13.75 billion - Schwab customers who invested in ultra short-term bond funds, went to an unaffiliated fund only 2% of the time.  YieldPlus was a big ticket for Schwab salespeople.  Solicited sales of totaled some $3.4 billion, customers 65 and older making up 40% of that total.  Schwab's collected $17.5 million in fees.

    More FINRA Allegations.   In late August 2006, Schwab Investment's Board of Trustees approved a proposal from YieldPlus' fund manager to no longer classify non-agency mortgage-backed securities (MBS) as an "industry" for purposes of the fund's concentration policies. This change purportedly allowed the fund manager to increase the amount of non-agency MBS in the portfolio to greater than 25% of the fund's assets. As a result, by February 2008, YieldPlus held over 50% of its assets in MBS, and about 40 % in non-agency MBS.

FINRA found that Schwab was or should have been aware of the fund's significant exposure to mortgage-backed securities in light of the increasingly unfavorable financial markets. 

For the full story, go to: [FINRA Release, 1/11, "FINRA Orders Schwab to Pay..."]