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June 14, 2022

Charles Schwab agrees to pay $187m to settle SEC charges

Charles Schwab has agreed to pay $187m to settle a regulatory investigation into disclosures related to Schwab Intelligent Portfolios (SIP) advisory solution.

The firm agreed to settle charges following an investigation by the US Securities and Exchange Commission (SEC) that accused three of its subsidiaries of misleading their clients about hidden charges.

Charles Schwab said in a statement: “In entering the settlement, Schwab neither admits nor denies the allegations in the SEC’s Order. We believe resolving the matter in this way is in the best interests of our clients, company, and stockholders as it allows us to remain focused on helping our clients invest for the future.

“As always, we are committed to earning our clients’ trust every day and work diligently to maintain the highest standards for professional conduct throughout our organisation.”

According to SEC, Charles Schwab’s told the customers of its robo-advisory platform that they were not charged for the service. However, the firm managed money in a way that allowed it to squeeze out hidden profits from high cash balances.

From March 2015 to November 2018, the firm did not disclose to its customers that the decision to keep a majority of robo-advised assets in cash was costing them money because cash holdings would underperform assets such as equities.

The investigation found that Charles Schwab made money from the cash allocations in the robo-adviser portfolios by loaning it out via its affiliate bank. The firm then did not pay its clients the full interest it earned on the loans.  

SEC director of enforcement Gurbir Grewal said: “Schwab’s conduct was egregious and today’s action sends a clear message to advisers that they need to be transparent with clients about hidden fees and how such fees affect clients’ returns.”

As part of the settlement, Schwab agreed to appoint an independent compliance consultant to review policies and procedures related to client disclosures.

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