Schwab also agreed to retain an outside consultant to review its policies and procedures concerning disbursement of customer assets and detection of potential misappropriations.
“This case is a stern reminder that firms must have adequate procedures to supervise and control transfers of assets from customer accounts,” said Susan L. Merrill, chief of enforcement, NYSE Regulation. “It goes to the heart of customers’ expectations that their money is safe.”
In violating NYSE Rules 342(a) and (b), from 1998 through the first quarter of 2003, Schwab failed to establish and maintain appropriate procedures for supervision and control. These failures include maintaining a separate system of follow-up and review concerning the disbursement of customer assets from accounts carried by the Firm that were managed by non-employee investment advisors, and failure to protect the assets in those accounts.
The Firm also violated Section 17(a) of the Securities and Exchange Act of 1934 and SEC Rules 17a-4(b)(4) and 17a-4(f) and NYSE Rule 440 by failing to preserve and maintain, at various times from June 2002 to December 2003, electronic communications in the required format and for the required retention periods.
Schwab currently offers services to about 5,000 non-employee investment advisors who manage approximately 1.3 million client accounts with the Firm. As of May 30, 2005, these accounts represented roughly $350 billion in assets. The customer-account assets managed by these non-employee investment advisors are held in custody by the Firm, and Schwab charges commissions for trading in the customer accounts and/or other fees. Schwab provides these investment advisors and their clients with clearing and related support.
During 1998 to the first quarter of 2003, some investment advisors misappropriated customer assets using, for example, forged letters of authorization and forged checks. Neither the Firm nor any of its employees were involved in these misappropriations. However, during this period, the Firm’s procedures relating to the transfer of assets from these accounts, and its system of follow-up and review, were not reasonable to supervise and control money movements, and to adequately protect the assets in such accounts.
For example, the Firm lacked adequate procedures for transfer of funds from customer accounts to third parties. Such procedures include comparison of signatures to original account documents on letters of authorization and wire requests for third-party transfers, and sending confirmations directly to the customer when assets are transferred to parties other than the person on the account.
The Hearing Panel noted that the Firm compensated customers who were harmed by the violative conduct and instituted corrective measures to prevent future violations. In settling these charges brought by NYSE Regulation, Charles Schwab & Co., Inc. neither admitted nor denied the charges.
About NYSE Regulation
On December 17, 2003, the SEC approved a new governance structure for the NYSE. Under the new design, the NYSE Board of Directors is comprised solely of independent directors, except for the chief executive officer, who have no affiliation with any regulated member firm. A new position of chief regulatory officer was created and reports directly to the board of directors through a new Regulatory Oversight Committee. As a result, NYSE Regulation is insulated from potential influence from NYSE members and member firms, operates separately from the business side and is independent in its decision-making.
NYSE Regulation plays a critical role in monitoring and regulating the activities of its members, member firms and listed companies, as well as enforcing compliance with NYSE rules and federal securities laws. Nearly 400 of the largest securities firms in America are members of the New York Stock Exchange. These firms service 98 million customer accounts, or 84 percent of the total public customer accounts handled by broker-dealers, with total assets of over $4 trillion. They operate from 20,000 branch offices around the world and employ 144,000 registered personnel. Over 700 employees, or more than 40 percent of the Exchange’s staff, work for NYSE Regulation, which consists of four divisions: Market Surveillance, Member Firm Regulation, Enforcement and Listed Company Compliance, as well as a Risk Assessment Unit and Dispute Resolution/Arbitration.
