SEC Charges Charles Schwab & Co. with Improperly Allowing Certain Customers to Purchase Mutual Fund Shares After Market Close

Washington, D.C. —  The Securities and Exchange Commission announced  today that it has instituted settled enforcement  proceedings against San Francisco-based broker-dealer  Charles Schwab & Co., Inc. The Commission  charged that Schwab allowed investment adviser  customers to change mutual fund orders after  the 4:00 p.m. Eastern time market close, creating  the risk that such customers could unfairly  capitalize on late-breaking news at the expense  of other mutual fund investors. Schwab consented  to the entry of an order that it cease and  desist from such violations and pay a $350,000  civil penalty.

Helane Morrison, District Administrator for  the SEC's San Francisco Office, said, "The  Commission requires diligent compliance with  mutual fund pricing restrictions to maintain  fairness to all mutual fund investors. Schwab's  improper practices created an unacceptable  risk that certain customers would be disadvantaged."

Added Marc Fagel, Assistant District Administrator  for the SEC's San Francisco Office, "Schwab  management failed to ensure that their personnel  knew and understood the mutual fund pricing  rules. 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."

The Commission found that, since at least  January 2001, Schwab engaged in a practice  of allowing its investment adviser customers  to change mutual fund orders after market  close under certain circumstances and still  receive that day's fund price. This occurred  when a customer's original pre-4:00 p.m. mutual  fund order was rejected by Schwab's computer  system (such as when the customer had been  banned from trading in a particular mutual  fund or the mutual fund was closed to new  investors). Schwab permitted the adviser to  submit a substitute order in a different mutual  fund. According to the Commission's Order,  on hundreds of occasions since 2001, Schwab  personnel contacted customers after the 4:00  p.m. market close and allowed the customer  to submit a substitute order in a different  fund while still receiving the current day's  price. Schwab's practice of processing the  substitute purchase order at the current day's  price violated Rule 22c-1(a) under the Investment  Company Act, which requires orders for mutual  fund shares placed after 4:00 p.m. to receive  the next day's fund price.

The Commission's Order does not find that  Schwab personnel entered into any improper  agreements with customers allowing the substitute  orders, or that Schwab's customers engaged  in any scheme to exploit Schwab's order entry  process or circumvent its controls. However,  Schwab's practice of allowing investment advisers  to substitute mutual fund orders created a  risk that investment advisers and their clients  could capitalize on post-market close information  by trading after hours based on stale fund  prices. Schwab ceased the practice in October  2003, following an inquiry by the Commission  staff and the initiation of an internal investigation  by Schwab.

Without admitting or denying the Commission's  findings, Schwab consented to issuance of  the Order, which orders Schwab to cease and  desist from committing or causing any violations  and any future violations of Rule 22c-1(a)  and pay a $350,000 penalty, and censures Schwab  for its misconduct.

The Commission acknowledges the assistance  of the New York Stock Exchange in this matter.

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