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.

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