Gregg Greenberg

Return to Article

SEC Censures Schwab on Late Trading

Gregg Greenberg

Charles Schwab (SCH) joined the list of financial firms settling with the Securities and Exchange Commission over their role in the mutual fund scandal.

The San Francisco-based broker-dealer agreed Tuesday to pay a fine of $350,000 to settle a so-called late trading case. The company, which neither admitted nor denied wrongdoing in the case, also consented to an SEC censure.

The SEC charged that Schwab allowed its investment adviser customers to change mutual fund orders after the 4 p.m. Eastern time market close. Late trading enables certain customers to unfairly capitalize on late-breaking news at the expense of long-term mutual fund investors.

"Schwab management failed to ensure that their personnel knew and understood the mutual fund pricing rules," said Marc Fagel, assistant district administrator for the SEC's San Francisco office. "In order to maintain a fair playing field, broker-dealers must make certain that their personnel understand and enforce both the letter and spirit of the rules governing the pricing of mutual fund orders."

Although the SEC found that the practice at issue created a risk of "potential abuse," it did not find any instances where Schwab customers or employees actually placed trades based on the use of postclose market information.

In a statement, Schwab says it has implemented a number of enhancements to its systems and procedures since these issues were identified, including improved oversight of order-processing activity, increased reporting and documentation of mutual fund order-processing activity and supplemental training.

Schwab said an internal review that began last fall "found instances where Schwab employees allowed clients to place substitute mutual fund orders after the 4 p.m. market close when their original orders were rejected by Schwab's electronic order systems and could not be processed as originally submitted."

"All of the original orders were placed before the 4 p.m. market close," Schwab said. "However, the SEC determined that a number of the order substitutions in question were not permitted under SEC rules."

Schwab also noted that the transactions in question represented only several hundred of the more than 34 million mutual fund trades executed by the company over the relevant three-year period.

On Tuesday, Schwab fell 9 cents to $9.60.