Schwab Fined $350k for Late Trading

September 15, 2004, 1:00 a.m. EDT 1 Min Read

Charles Schwab & Co. agreed Tuesday to pay $350,000 to settle charges that it permitted investment advisor customers to alter mutual fund orders after the closing bell.

The Securities and Exchange Commission , which brought the charges and announced the settlement, said that by allowing post-close changes, the firm "created an unacceptable risk that certain customers would be disadvantaged." However, the Commission did not find that Schwab entered into any improper agreements or sought to circumvent internal controls. It was the possibility for abuses that wound up costing the firm.

The San Francisco-based broker/dealer made exceptions and allowed customers to change their order when their original order, submitted prior to 4 p.m. ET, was not accepted either because the fund in question was closed to new investors or the customer was banned for purchasing shares in a particular fund.

Schwab would then allow the customer to submit a substitute order for a different mutual fund after the market close had passed, yet still receive that days price. The Commission contends that this practice took place hundreds of times between January 2001 and October 2003, when Schwab halted the practice.

"Schwab management failed to ensure that their personnel knew and understood the mutual fund pricing rules," said Marc Fagel, assistant district administrator for the SECs San Francisco office.