SAN FRANCISCO—At an open forum during Charles Schwab & Co.’s annual conference, one Schwab advisor asked Randy Merck, the firm’s president of investment management, for assurance that the firm would not end up in the headlines for mutual fund improprieties.
“You won’t see that,” Merck said, flatly. “We don’t anticipate any problems.”
About 36 hours later, he was proven wrong.
In the wake of Friday morning’s news that late-trading and market-timing had been occurring in one of Schwab’s funds, through its U.S. Trust subsidiary, Schwab senior executives on Friday back-pedaled a bit.
“I was speaking specifically of the funds that Schwab manages,” Merck said on Friday. “It’s an ongoing process, but we haven’t found anything in those.”
Added Deborah McWhinney, president of Schwab Institutional, “There is no incentive for any advisor or rep at Schwab to do this. We have no compensation for any of our advisors that would encourage this in any way.”
Schwab’s stock fell nearly 5 percent after the news of the impropriety was disclosed, via a third-quarter earnings report.
The firm’s continuing internal investigation revolves around U.S. Trust’s Excelsior Funds. According to the quarterly report, both late-trading and market-timing occurred, “contrary to Schwab policies,” between January 2001 and June 2003, a Schwab spokesperson said.
Jeff Lyons, Schwab’s executive vice president of mutual funds, made it clear that Schwab had found these improprieties long before the SEC or New York State Attorney General Eliot Spitzer did, and that the firm reported them promptly.
“It has been a limited number of incidents, and we’re still searching for problems” he said, adding that the search could be a protracted one. “We’ve done more than 33 million mutual fund transactions over the last two-and-a-half years. We’re not through everything yet. But we’re hopeful we’re towards the end.”
Many Schwab advisors have been wary of U.S. Trust since the firm bought it. The move was aimed at bolstering Schwab’s high-net-worth business, but many advisors feared losing some of their top accounts to what they perceive as an outside proprietor. The news that U.S. Trust is responsible for Schwab’s name being splashed across the news is unlikely to help matters much.
At a conference press briefing originally designed for other purposes, Schwab executives fielded question after question about the mutual fund issues. McWhinney implored gathered journalists to keep the news in perspective. “This is a minor thing, and it’s important not to blow it out of proportion.”
She added, “We’re working with regulators, and we feel everything is under control.”
