## Facts

- TD Ameritrade, Inc. was a registered broker-dealer and FINRA member that offered and sold shares of the Reserve Yield Plus Fund (RYP Fund) to customers from January 18, 2007 through September 16, 2008 through multiple sales channels.
- RYP Fund was marketed to some customers as a higher-yield alternative to money market funds, but it was not a money market fund and could lose principal; it held, among other instruments, Lehman Brothers commercial paper.
- Following Lehman’s September 2008 bankruptcy, the RYP Fund “broke the buck,” was liquidated, and investors incurred losses.
- TD Ameritrade created training materials stating RYP was not a money market fund and describing associated risks, but training distribution and implementation varied across channels.
- ISG managers received training materials on an ad hoc basis without specific instructions to train representatives; many ISG representatives were unfamiliar with procedures for offering RYP.
- TD Ameritrade did not provide refresher training, and many new hires received no training on RYP.
- Some materials used in a FIGG training session misdescribed RYP as a money market fund.
- In communications with customers, some registered representatives mischaracterized RYP as a money market fund or “as safe as cash,” represented guaranteed liquidity, suggested FDIC or SIPC insurance, and/or failed to disclose the fund’s nature and risks.
- TD Ameritrade had supervisory structures and suitability review procedures for RYP transactions, but lacked procedures designed to prevent or detect misleading sales descriptions and omissions about RYP’s risks and liquidity.

## Issues

1. Whether TD Ameritrade failed reasonably to supervise its registered representatives, within the meaning of Exchange Act § 15(b), with a view to preventing violations of Securities Act § 17(a)(2) arising from material misstatements or omissions in the offer and sale of RYP Fund shares.
2. Whether having written training materials and suitability review processes, without consistent implementation and controls over sales communications, satisfies a broker-dealer’s duty of reasonable supervision.

## Decision

- In an administrative proceeding resolved by an accepted offer of settlement (without admitting or denying the findings other than jurisdiction), the SEC found TD Ameritrade failed reasonably to supervise its registered representatives with a view to preventing their violations of Securities Act § 17(a)(2).
- The SEC imposed remedial sanctions under Exchange Act § 15(b), including measures described as involving restitution and monetary penalties as part of the settlement.

## Legal Principles

- Exchange Act § 15(b) permits the SEC to sanction a broker-dealer that fails reasonably to supervise persons subject to its supervision, with a view to preventing violations of the federal securities laws.
- Securities Act § 17(a)(2) prohibits obtaining money or property in the offer or sale of securities by means of untrue statements of material fact or material omissions.
- Reasonable supervision requires not only written policies and training materials, but also an implemented system expected to prevent and detect violative conduct, including follow-up and review.
- Supervisory systems addressing transaction suitability do not, by themselves, satisfy supervisory obligations where the misconduct involves inaccurate product descriptions and inadequate risk disclosures in customer communications.
- Repeated mischaracterizations across channels may evidence that supervision and training were not reasonably designed or effectively implemented for the product’s sales risks.

## Conclusion

The SEC determined that TD Ameritrade’s inconsistent training, lack of effective controls over how representatives described the RYP Fund, and absence of procedures aimed at detecting misleading sales statements amounted to a failure reasonably to supervise, enabling material misstatements and omissions prohibited by Securities Act § 17(a)(2), and imposed settlement-based remedial sanctions under Exchange Act § 15(b).


In re TD Ameritrade, Inc., Exchange Act Release No. 63,829 (SEC Feb. 3, 2011)