Charles Schwab Co. Inc., a securities broker dealer headquartered in Westlake, Texas, has been censured and fined $350,000.00 by Financial Industry Regulatory Authority (FINRA) because it omitted important information concerning customers’ purchases of exchange traded notes. Letter of Acceptance, Waiver, and Consent No. 2020068047101 (June 8, 2023).
According to the AWC, between January of 2016 and December of 2020, Charles Schwab sent 765,248 notifications to customers who bought certain exchange traded notes. These notifications did not reveal that the securities could be redeemed before maturity and that redemptions could affect the yields of the securities.
Charles Schwab depended on a third-party to disclose information about the redemption of securities, including exchange traded notes. However, that vendor provided incomplete or incorrect information for 183 exchange traded notes, and Charles Schwab mistakenly stated on 15 additional ETN notifications that the products could not be redeemed.
By failing to disclose that that early redemption could impact ENT yields and that the ETNs were callable, FINRA found that Charles Schwab violated FINRA Rules 2010 and 2232 as well as SEC Rule 10b-10(a)(4).
The AWC also stated that from January of 2016 to December of 2020, Charles Schwab’s supervision system, including its written supervisory procedures, was not adequately designed to comply with the rules regarding disclosures within transaction notifications. The securities broker dealer had no process in place to verify the correctness of redemption features of ETNs mentioned in the notifications, except for comparing details to data obtained from the vendor. FINRA stated that Charles Schwab also lacked procedures to verify the accuracy of the vendor’s information regarding the ETNs’ redemption features or callability.
According to the AWC, in June of 2020, Charles Schwab realized that transaction notifications failed to include redemption disclosures. FINRA found that by not having an adequately designed supervision system, including written supervisory procedures, Charles Schwab violated FINRA Rules 2010 and 3110(a) and (b).
