Compliance February 3, 2011

TD Ameritrade Settles with SEC over Reserve Fund Charges

The Securities and Exchange Commission (SEC) has charged TD Ameritrade for failing to reasonably supervise its registered representatives, some of whom misled customers when selling shares of the Reserve Yield Plus Fund.
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To settle the SEC’s charges, TD Ameritrade has agreed to distribute approximately $10 million to eligible customers who continue to hold shares of the fund.  

According to the SEC’s order, TD Ameritrade’s representatives offered and sold the fund through the firm’s various sales channels prior to September 16, 2008. The order finds that a number of the representatives violated the securities laws when they mischaracterized the fund as a money market fund, as safe as cash, or as an investment with guaranteed liquidity. They also failed to disclose the nature or risks of the fund when offering the investment to customers.   

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TD Ameritrade failed to prevent the misconduct by its representatives because it did not establish adequate supervisory policies and procedures or a system to implement them with respect to the offers and sales of the fund, according to the announcement.  

The SEC’s administrative order finds that the Reserve Yield Plus Fund sought to provide higher returns than a money market fund while seeking to maintain a net asset value (NAV) of $1.00. The fund’s NAV fell to 97 cents on September 16, 2008, after the Reserve wrote down the fund’s investments in commercial paper issued by Lehman Brothers Holdings Inc. (see “TD Ameritrade Accused in Reserve Yield Plus Fund Suit“). 

The SEC’s order finds that thousands of TD Ameritrade’s customers continue to hold a majority of the fund’s shares. They have received approximately 95% of their original principal investments in the fund following distribution of most of the fund’s liquidated assets to all of its shareholders.  

Without admitting or denying the SEC’s allegations, TD Ameritrade consented to the SEC’s order, which censures the firm. As part of the order, TD Ameritrade also agrees to: 

  • Distribute $0.012 per share of the fund to eligible customers who hold such shares within 30 days of the order’s issuance.  
  • Provide notice of the terms of the SEC’s order to all eligible customers and display information concerning the terms of the order on the firm’s Web site.
Compliance February 3, 2011

SEC Charges AXA Rosenberg Units with Securities Fraud

The Securities and Exchange Commission (SEC) has charged three AXA Rosenberg entities with securities fraud that led to $217 million in investor losses. 
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The SEC accused AXA Rosenberg for concealing a significant error in the computer code of the quantitative investment model used to manage client assets.

AXA Rosenberg Group LLC (ARG), AXA Rosenberg Investment Management LLC (ARIM), and Barr Rosenberg Research Center LLC (BRRC) have agreed to settle the SEC’s charges by paying $217 million to harmed clients plus a $25 million penalty, and hiring an independent consultant with expertise in quantitative investment techniques who will review disclosures and enhance the role of compliance personnel, the SEC said.

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The SEC’s order instituting administrative proceedings against the firms found that senior management at BRRC and ARG learned in June 2009 of a material error in the model’s code that disabled one of the key components for managing risk. Instead of disclosing and fixing the error immediately, a senior ARG and BRRC official directed others to keep quiet about the error and declined to fix the error at that time, the SEC alleged.

“To protect trade secrets, quantitative investment managers often isolate their complex computer models from the firm’s compliance and risk management functions and leave oversight to a few sophisticated programmers,” said Robert Khuzami, Director of the SEC’s Division of Enforcement, in the news release. “The secretive structure and lack of oversight of quantitative investment models, as this case demonstrates, cannot be used to conceal errors and betray investors.”

The SEC additionally charged BRRC with failing to adopt and implement compliance policies and procedures to ensure that the model would work as intended.

According to the SEC’s order, ARG is the holding company of BRRC and ARIM, which are Orinda, California-based investment advisers registered with the SEC. BRRC developed and maintains the computer code for the quantitative investment model and ARIM uses the model to manage client portfolios.

The SEC’s order further found that ARG, BRRC, and ARIM made material misrepresentations and omissions about the error to ARIM’s clients. The firms failed to disclose the error and its impact on client performance, attributed the model’s underperformance to market volatility rather than the error, and misrepresented the model’s ability to control risks. BRRC did not have reasonable compliance procedures in place to ensure that the model would assess certain risk factors as intended. The coding process for the model represented a serious compliance risk for BRRC and its clients because accurate coding is required for the model to function properly and in the manner represented to clients, the agency said.

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