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FINRA fines Charles Schwab $350,000 over disclosure failures on ETNs

On Behalf of | Jun 21, 2023 | FINRA Compliance

Charles Schwab & Co. Inc has been hit with a $350,000 fine for rule violations involving the disclosure of information to its clients, InvestmentNews reports.

The fine was levied by the Financial Industry Regulatory Authority, which found that Schwab failed to fully disclose information about exchange-traded notes (ETNs) to 765,000 customers from January 2016 to December 2020. According to FINRA, the transaction confirmations sent by Schwab after purchases of certain ETNs did not disclose that the ETNs were callable and that early redemption could affect the notes’ yield. As a result, Schwab was found to have violated Exchange Act Rule 10b-10(a)(4), promulgated under Section 10(b) of the Securities Exchange Act of 1934, and FINRA Rules 2232 and 2010.

During the same period, FINRA said Schwab failed to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with the rules regarding transaction confirmations for callable ETNs, in violation of FINRA Rules 3110 and 2010. According to the findings, Schwab relied on a third-party vendor to provide it with redemption information about securities and used that information in the confirmations sent to customers. But for 183 ETNs, the vendor provided inaccurate or incomplete information about redeemable ETNs.

“The firm had no procedures to review the accuracy of the redemption features of ETNs identified in the confirmations other than to compare the information to the data provided by the firm’s third-party vendor,” the authority said.

The company self-reported the issues pursuant to FINRA Rule 4530. In a letter of acceptance, waiver and consent, Schwab accepted and consented to FINRA’s findings without admitting or denying them.

A Schwab spokesperson was quoted as saying the matter resulted from “an unintentional oversight about the placement of certain information on trade confirmations for a few securities.” The spokesperson said the firm promptly notified FINRA of the oversight and immediately corrected the issue.

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