Schwab to take $200 million charge on SEC investigation
The company said the SEC is looking at disclosures around the Schwab Intelligent Portfolios product, which had $64 billion in client assets at the end of March.
Charles Schwab Corp. said it will take a $200 million charge in the second quarter related to a Securities and Exchange Commission probe of its robo-adviser platform.
The compliance inquiry relates to past disclosures around the firm’s Schwab Intelligent Portfolios product, according to a regulatory filing Friday. The company said it’s been cooperating with the SEC and its ultimate liability may differ from the amount it’s earmarking now.
The SEC filed its first enforcement actions against robo-advisers in December 2018, accusing Wealthfront Advisers and another firm of making false statements about investment products and publishing misleading advertisements.
Wealthfront, which had more than $11 billion in client assets under management at the time, agreed to pay a $250,000 penalty without admitting or denying the findings.
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Robo-advisers, which typically select low-cost exchange-traded funds for investors based on their risk tolerance and automatically rebalance the portfolios, have become increasingly popular across Wall Street, with Goldman Sachs Group Inc. rolling out such a product earlier this year. On its website, Schwab predicts assets managed by robo-advisers will grow to $460 billion next year, from $47.3 billion in 2015.
While the SEC has signaled it’s more focused on cases against robo-advisers, it’s brought relatively few cases. In one last month, the agency said it settled claims against a Canadian robo-adviser, Emperor Investments Inc., after the firm agreed to pay $25,000 over allegations it posted misleading performance data on its website.
The SEC didn’t immediately respond to an email about the Schwab case sent to its press office outside of normal business hours.
Shares of the company, which have gained 36% this year, fell 1.7% to $72.34 at 9:44 a.m. in New York.
SEC GUIDANCE
Schwab said it had $64 billion in client assets in its robo-adviser product at the end of March. The firm has more than $7 trillion in client assets across 32 million active brokerage accounts.
Under U.S. securities rules, firms that offer advice to clients digitally through algorithms are required to make the same kind of disclosures as those whose representatives make suggestions to clients over the phone or in person. The agency put out guidance in February 2017 that detailed how its rules apply to the fast-growing industry, reminding firms to be careful not to mislead clients and ensure their disclosures are accurate and internal compliance programs are effective.
SEC Chair Gary Gensler, who took over the regulator in April, has signaled that he wants the agency to hold robo-advisers to the same standards as other investment firms.
“Technology is always changing the face of finance,” Gensler said last month during City & Financial Global’s London City Week event. “But our core principles stay the same: protecting investors, facilitating capital formation for individuals and companies and maintaining fair, orderly and efficient markets between them.”
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