Although it neither admits nor denies wrongdoing, an internal review that began last fall found instances of employees allowing clients to place substitute fund orders after the 4:00 pm market closing time after their original orders were rejected by the company’s electronic order system, Schwab said in an announcment . All of the orders were originally placed before the closing time. However, the SEC determined that the number of order substitutions was not allowed under regulations.
In the news release, Schwab insisted that the number of trades that it was fined for represented only a few hundred of the over 34 million mutual fund trades it executed over the three-year time period in question. Also, Schwab stated that the SEC agreed that there was no formal or informal agreement to allow late trading, and there was no “scheme to exploit” Schwab’s order entry process. It also asserts that its senior management was not aware of the practice of substitution orders, and that no Schwab employee received extra compensation for these actions. Also, Schwab states that the SEC found no instance in which trades were made based on post-close market information.
Since these abuses were discovered, Schwab has implemented a number of controls in order to avoid future infractions, including improved oversight of order processing, the company said.
The SEC announcement of the Schwab agreement is at http://www.sec.gov/news/press/2004-128.htm .