Charles Schwab Agrees to $187M Settlement with SEC

UTC by Godfrey Benjamin · 3 min read
Charles Schwab Agrees to $187M Settlement with SEC
Photo: Depositphotos

With a milestone settlement lifted off, Charles Schwab said it will focus on regaining its client’s trust.

American multinational financial services company, bank, and stockbroker, Charles Schwab Corporation (NYSE: SCHW) has agreed to pay the United States Securities and Exchange Commission (SEC) the sum of $187 million for alleged misconduct pertaining to the firm’s Robo-adviser.

The SEC has been investigating the firm for charging a hidden fee on its Robo-adviser service from March 2015 to November 2018. According to the regulator, Charles Schwab did not disclose to its clients that its Robo-advisor allocated funds “in a manner that their own internal analyses showed would be less profitable for their clients under most market conditions.”

Rather than allocate funds to portfolios that have a good potential of returning profit, the SEC accused Schwab of injecting the capital into cash which is then loaned out. The SEC said the firm profited off of the difference between the interest paid to the clients and that made by the debtors. The SEC believes the company subjected the clients to the same level of risk but not a commensurate interest allocation.

“Schwab claimed that the amount of cash in its robo-adviser portfolios was decided by sophisticated economic algorithms meant to optimize its clients’ returns when in reality it was decided by how much money the company wanted to make,” said Gurbir S. Grewal, Director of the SEC’s Division of Enforcement. “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.”

Charles Schwab to Seek Restitution with Clients

Despite the allegations and the length of the investigations as well as the agreement to settle, Charles Schwab neither admitted to any wrongdoing nor denied the claims. The firm just said it is pleasing to get this entire episode off its shoulders and move forward.

“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,” according to the statement shared by the firm. “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 organization.”

Per the details of the settlement, three of Charles Schwab’s subsidiaries including Charles Schwab & Co., Charles Schwab Investment Advisory, and Schwab Wealth Investment Advisory all agreed to pay $135 million in civil penalty while the sum of $52 million will be paid out as disgorgement and interest to all affected clients.

With a milestone settlement lifted off of its shoulders, Charles Schwab said it will focus on regaining its client’s trust. The company’s shares showed an uptick in the pre-market as it is up 0.60% to $60.60 per share.

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