TD Ameritrade has agreed to distribute approximately $10 million to customers who continue to hold shares of the Reserve Yield Plus Fund, a mutual fund which famously "broke the buck" on the net value of its assets in September 2008.
The $10 million is part of a settlement announced Thursday with the Securities and Exchange Commission, The SEC charged TD Ameritrade with "failing to reasonably supervise its registered representatives" when the Reserve Yield Plus Fund saw the value of its shares fall below $1 in the midst of the credit crisis erupting at the time.
"Breaking the buck" -- where the value of shares that were supposed to be fixed at $1 went below that -- was virtually unprecedented at the time.
The SEC order found that a number of the representatives violated the securities laws when they mischaracterized the fund as a money market fund, as safe as cash. Money market mutual funds carry no insurance by the Federal Deposit Insurance Corporation and is simply a collection of short-term debt investments held by that mutual fund.
In its own marketing materials, the Reserve Funds carried a Moody's Aaa rating medal and made it clear that it the fund would maintain a $1 net asset value -- and had "guaranteed liqudity."
The Reserve Yield Plus Fund is designed to generate an income advantage over traditional money market funds and other similar short-term investments. A diversified mutual fund that seeks to maintain a $1.00 NAV, or as an investment with guaranteed liquidity.
The SEC said TD Ameritrade "failed to disclose the nature or risks of the fund when offering the investment to customers."
TD Ameritrade did not establish adequate supervisory policies and procedures or a system to implement them that kept the representative from misrepresenting the fund, the SEC said.
"It is critical that customers get accurate information about investment products, and broker-dealers must provide the training and supervision that enables their representatives to deliver this important guidance," said Julie Lutz, Associate Director of the SEC's Denver Regional Office.
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, which was failing at the time.
Without admitting or denying the SEC's allegations, TD Ameritrade consented to the SEC's order, which censures the firm. As part of the order, TD Ameritrade also agrees to:
A spokeswoman for TD Ameritrade Holding was not immediately available for comment on the charges in the SEC order.
Thousands of TD Ameritrade's customers continue to hold a majority of the fund's shares, the SEC said. Before this settlement, the SEC said those holders have received approximately 95 percent of their original principal investments when the fund's assets were liquidated.
Last year, Pennsylvania regulators filed civil complaints against TD Ameritrade, the broker-dealer unit of TD Ameritrade Holding, over its sale of the Reserve Yield Plus fund.
In late 2008, TD Ameritrade was also named in a federal class-action lawsuit in the case.