Stay on Target

Stay on Target

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 crunch.

The SEC claims that executives made misstatements about the fund's performance and the amount of redemptions. That makes the problem worse.

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.


For additional commentary on developments in compliance and ethics, visit Compliance Building, a blog hosted by Doug Cornelius.