Don't stray from your investment strategy. Don't chase
yields. Make sure your investment strategy follows your marketing materials.
According to SEC charges, Charles Schwab failed to do
this with its YieldPlus Fund in 2007. The fund was marketed as a Short Term
Bond fund and described the Fund as a cash "alternative" that generated a
higher yield with slightly higher risk than a money market fund.
The Fund was not "slightly riskier" than money market
funds, CDs and other cash alternatives to which it was compared. CDs are
insured. Investments in the Fund were not insured. The maturity and credit
quality of the Fund's securities were significantly different than those of a
money market fund.
The big problem was that the fund was mostly invested in
mortgage-back securities. That means its investments got hammered in late 2007.
That was coupled with widespread redemptions. Only 6% of the funds assets were
scheduled to expire in those six months meaning they also had a liquidity
The SEC claims that executives made misstatements about
the fund's performance and the amount of redemptions. That makes the problem
They made it even worse, according to the SEC by allowing
insiders and other Schwab funds to redeem their shares in the Fund before the
extent of the decline was disclosed to the public. Essentially, they had
inadequate procedures to prevent insider trading.
There are some good lessons in this case for CCOs.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.