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Schwab Uncovers Improper Mutual Fund Trading

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Nov. 14, 2003 — Schwab(Charles)Corp (SCH) said it has uncovered improper trading in mutual funds run by the company and its affiliates.

An internal investigation has identified instances of market timing and late trading, the company said today in its third quarter report to the Securities and Exchange Commission.

Schwab said the review found “circumstances in which a small number of parties were permitted to engage in short-term trading” of the Excelsior Funds run by the company’s U.S. Trust Corp. unit.

The company said it also identified “a limited number of instances at Schwab in which fund orders may have been entered or processed after” stock trading ends at 4 p.m. New York time “in a manner contrary to Schwab policies.”

Schwab said it has previously responded to inquiries from state and federal regulators as part of the authorities’ review of mutual fund trading practices.

The inquiries included “examinations” by the Securities and Exchange Commission and subpoenas issued to Schwab and U.S. Trust by New York Attorney General Eliot Spitzer, according to the regulatory filing. Schwab said it is cooperating with securities regulators.

Schwab said its review is continuing and it is “taking steps to ensure compliance with its policies on market timing and late trading.”

The company could not immediately be reached for comment. A Schwab spokesman told Dow Jones Newswires today that other than the market timing activities in the Excelsior funds, potentially improper fund trading took place in third party funds that aren’t run by Schwab.

The spokesman, Greg Gable, said the instances of market timing and late trading the in-house investigation turned up is “extremely limited,” but that until the review is completed, Schwab “can’t report an actual number.”

In addition to selling mutual funds under the Schwab name, the company also offers funds from other companies through its OneSource fund supermarket.


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