## Facts

- Charles Schwab Investment Management, Inc. (CSIM) served as investment adviser to the Schwab YieldPlus Fund, a fixed-income mutual fund series within Schwab Investments.
- Charles Schwab & Co., Inc. (CS&Co.) marketed and distributed the YieldPlus Fund.
- The YieldPlus Fund was promoted as a “cash alternative,” implying modestly higher yield and only slightly higher risk than money market or other cash-like investments.
- During the 2007–2008 credit crisis, the fund suffered significant losses and experienced substantial investor redemptions, which required asset sales to meet liquidity needs.
- The SEC found that communications to investors and intermediaries understated the fund’s risk, including by understating weighted-average maturity and by making misleading statements about the extent of redemptions and the fund’s condition.
- The fund’s registration statement included a fundamental concentration policy limiting investments to no more than 25% of assets in any one industry; non-agency mortgage-backed securities (MBS) were treated as a separate industry for this purpose.
- The SEC found the fund exceeded the 25% concentration limit in non-agency MBS without obtaining required shareholder approval.
- The SEC found deficiencies in CSIM’s and CS&Co.’s policies and procedures that allowed some Schwab-related persons to redeem fund shares while aware of material nonpublic information about the fund’s deteriorating condition.
- The proceeding was resolved through offers of settlement, accepted by the SEC, without admissions or denials (except as to jurisdiction).

## Issues

1. Whether marketing and communications describing the YieldPlus Fund as a “cash alternative,” and statements about risk metrics and redemptions, were materially misleading in violation of federal antifraud provisions.
2. Whether the fund unlawfully deviated from a fundamental concentration policy by exceeding a 25% industry concentration limit without prior shareholder approval under Investment Company Act § 13(a)(3).
3. Whether the adviser and distributor failed to adopt and implement policies and procedures reasonably designed to prevent violations, including controls for concentration monitoring and the handling of material nonpublic information.

## Decision

- The SEC instituted administrative and cease-and-desist proceedings and, based on the settlements, made findings of violations of the Securities Act, Exchange Act, Investment Advisers Act, and Investment Company Act.
- The SEC found respondents offered and sold the fund as a cash alternative without adequate disclosure of differences from cash-like comparators, misleading investors about risk.
- The SEC found the fund exceeded its stated concentration limit in non-agency MBS without required shareholder approval, violating Investment Company Act § 13(a)(3).
- The SEC found respondents’ policies and procedures were insufficient to prevent misuse of material nonpublic information and other compliance failures.
- The SEC imposed cease-and-desist relief, monetary sanctions, and undertakings to improve compliance controls and disclosures.

## Legal Principles

- A registered investment company may not deviate from a fundamental investment policy (including a concentration policy) without prior shareholder approval; exceeding a stated concentration limit can violate Investment Company Act § 13(a)(3).
- Describing a fund as a “cash alternative” can be materially misleading when the fund’s portfolio structure and risk profile differ meaningfully from the cash-like products used for comparison, absent clear disclosure of those differences.
- Misstatements or omissions regarding risk indicators (including weighted-average maturity), portfolio risk, liquidity conditions, or redemption activity can violate antifraud provisions when material to investors’ decision-making.
- Advisers and related entities must maintain and implement policies and procedures reasonably designed to prevent violations, including controls to monitor adherence to stated investment restrictions and to restrict use of material nonpublic information.

## Conclusion

The SEC concluded that Schwab-related entities misled investors about an ultra-short bond fund’s risk and condition, violated the Investment Company Act by exceeding a fundamental concentration limit without shareholder approval, and failed to maintain adequate compliance controls, and it ordered cease-and-desist relief, sanctions, and remedial undertakings.


In re Charles Schwab Inv. Mgmt., Inc., Investment Company Act Release No. 29552 (S.E.C. Jan. 11, 2011)