Schwab Faces Failure-To-Monitor Scrutiny in Massachusetts

The firm is accused of failing to take sufficient steps to monitor customer accounts for further payments to a former adviser—himself accused of substantial wrongdoing—whose registration last lapsed in 2014.

The Securities Division within the office of William Galvin, secretary of the commonwealth of Massachusetts, brought charges Wednesday against Charles Schwab over alleged unethical and deceptive practices that allowed a third-party investment adviser to continue to collect advisory fees from Schwab customers’ accounts for years after his registration had lapsed.

According to an administrative complaint filed by the Securities Division, James Patrick O’Connell of Gloucester, Massachusetts, a former investment adviser representative, has collected at least $125,000 in investment advisory fees since his registration last lapsed in 2014. The Securities Division says it discovered the illegal activities while investigating a complaint of O’Connell allegedly exploiting senior citizens.

Asked for comment about the matter, a spokesperson for Charles Schwab provided the following statement: “We are dedicated to giving our clients the highest level of confidence when doing business with us and take our obligations to them extremely seriously. We are committed to earning our clients’ trust and work diligently to fulfill our compliance responsibilities.”

According to the Massachusetts regulators, O’Connell was removed from Schwab’s platform in 2012 for allowing his registration to lapse for nearly two years, which also resulted in a reprimand from the Securities Division. Despite this removal, Schwab allegedly took no steps to monitor customer accounts for further payments to O’Connell, who collected at least $46,000 in investment fees from Schwab brokerage accounts over a period of more than six years while remaining unregistered, the complaint states.

Though O’Connell continued to make recommendations to clients and collect fees from their accounts, the complaint states that he made recommendations that were unsuitable. O’Connell issued blanket recommendations without respect to individual client needs and over-concentrated portfolios in global communication infrastructure companies.

“Such over-concentration of a portfolio in one specific market sector poses a substantial risk to any investor, but the risk of such over-concentration is especially acute here, given that most of O’Connell’s clients are seniors,” the complaint states.

With the complaint, the Securities Division office is seeking an order requiring Schwab to reimburse investors for all fees paid to O’Connell while he was unregistered. The regulator is also asking that O’Connell and Schwab be fined and that Schwab be required to undergo an independent compliance review to establish policies and procedures to prevent similar illegal activities in the future.