The U.S. Securities & Exchange Commission took action against TD Ameritrade and its sales of the "enhanced cash" Reserve Yield Plus Fund. This follows an earlier SEC action against Charles Schwab over "misleading statements" and its YieldPlus Fund. Yesterday, the Commission issued a press release entitled, "SEC Charges TD Ameritrade for Failing to Supervise Its Representatives Who Sold Shares of the Reserve Yield Plus Fund.
The release says, "The Securities and Exchange Commission today charged TD Ameritrade Inc. for failing to reasonably supervise its registered representatives, some of whom misled customers when selling shares of the Reserve Yield Plus Fund, a mutual fund that "broke the buck" in September 2008. According to the SEC's order, TD Ameritrade's representatives offered and sold the fund through the firm's various sales channels prior to Sept. 16, 2008. The order finds that a number of the representatives violated the securities laws when they mischaracterized the fund as a money market fund, as safe as cash, or as an investment with guaranteed liquidity."
It continues, "They also failed to disclose the nature or risks of the fund when offering the investment to customers. TD Ameritrade failed to prevent the misconduct by its representatives because it did not establish adequate supervisory policies and procedures or a system to implement them with respect to the offers and sales of the fund. To settle the SEC's charges, TD Ameritrade has agreed to distribute approximately $10 million to eligible customers who continue to hold shares of the fund."
The statement added, "The SEC's administrative order finds that the Reserve Yield Plus Fund sought to provide higher returns than a money market fund while seeking to maintain a net asset value (NAV) of $1.00. The fund's NAV fell to 97 cents on Sept. 16, 2008, after the Reserve wrote down the fund's investments in commercial paper issued by Lehman Brothers Holdings Inc."
A January 11 release, "SEC Charges Schwab Entities and Two Executives With Making Misleading Statements Schwab Entities to Pay More Than $118 Million to Settle SEC Charges, says, "The Securities and Exchange Commission today 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."
Robert Khuzami, Director of the SEC's Division of Enforcement said, "All financial firms and professionals -- including large mutual fund providers -- must be vigilant in accurately describing the risks of the products they sell to the public, especially the widely-held mutual funds that are the bread-and-butter investments of retail investors." Antonia Chion, Associate Director of the SEC's Division of Enforcement, adds, "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."
Finally, the SEC says, "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. Its assets fell from $13.5 billion to $1.8 billion during an eight-month period due to redemptions and declining asset values."
