The U.S. Securities and Exchange Commission has settled a case against TD Ameritrade Inc. concerning allegations that it failed to reasonably supervise registered reps.

According to the SEC’s order, TD Ameritrade’s reps violated securities laws when they mischaracterized a prominent mutual fund, the Reserve Yield Plus Fund, as a money market fund, as safe as cash, or as an investment with guaranteed liquidity. The fund “broke the buck” in September 2008 when its net asset value fell to 97¢, after the fund wrote down its investments in commercial paper issued by Lehman Brothers Holdings Inc.

The SEC says the firm’s reps also failed to disclose the nature or risks of the fund when offering the investment to customers.

The regulator also alleges that TD Ameritrade failed to prevent the misconduct by its reps 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.

To settle the SEC’s charges, TD Ameritrade has agreed to distribute approximately US$10 million to eligible customers who continue to hold shares of the fund. Without admitting or denying the allegations, the firm consented to the SEC’s order, which also censures the firm.

“It is critical that customers get accurate information about investment products, and broker-dealers must provide the training and supervision that enables their representatives to deliver this important guidance,” said Julie Lutz, associate director of the SEC’s Denver office. “TD Ameritrade failed to establish the policies and procedures necessary to reasonably supervise its employees and prevent these misrepresentations to investors.”

IE