In the Matter of Charles Schwab Investment Management
Securities and Exchange Commission
Investment Company Act Release No. 29552 (2011)
Charles Schwab Investment Management, Inc. (CSIM) was the investment adviser to Schwab YieldPlus Fund, a mutual-fund series of Schwab Investments distributed by Charles Schwab & Co., Inc. (CS&Co.). Prior to a significant decline in YieldPlus Fund’s performance during the 2007–2008 financial crisis, the fund was billed by CSIM and CS&Co. as a cash alternative with a higher yield and slightly higher risk than a money-market fund. There was little explanation of how YieldPlus Fund differed from a money-market fund, however, especially as to risk. YieldPlus Fund’s weighted-average maturity (WAM) was also understated in communications to investors, which further obscured the fund’s risk. A registration statement filed by Schwab Investments with the Securities and Exchange Commission (SEC) stated that YieldPlus Fund would not concentrate, or invest more than 25 percent of its assets, in any one industry. Mortgage-backed securities issued by private lenders and not guaranteed by U.S. agencies (non-agency MBS) were considered a separate industry under the concentration policy. YieldPlus Fund deviated from this policy by investing more than 25 percent of its assets in non-agency MBS, which § 13(a)(3) of the Investment Company Act of 1940 (Company Act) prohibited without shareholder approval. When the value of YieldPlus Fund declined during the financial crisis, many investors redeemed their shares, which forced the fund to sell assets to raise cash needed for redemptions. In multiple calls with investors and advisers, CSIM and CS&Co. misrepresented the level of redemptions and made other misstatements about the fund. Insufficiencies in CSIM and CS&Co. policies and procedures enabled some Schwab-related persons to use material nonpublic information about YieldPlus Fund to their advantage when redeeming their fund shares. The SEC brought an administrative proceeding against CSIM, CS&Co., and Schwab Investments for violations of the Company Act, the Investment Advisers Act of 1940 (Advisers Act), and the Securities Act of 1933 (Securities Act).
Rule of Law
Holding and Reasoning ()
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