New York Stock Exchange Regulation today censured and fined Charles Schwab & Co., Inc. of San Francisco, a former member firm, US$1 million for supervisory and control violations.

The supervisory violation involved client accounts that were managed by non-employee investment advisors, and for failure to protect customer assets.

The NYSE says that from 1998 through the first quarter of 2003, Schwab failed to establish and maintain appropriate procedures for supervision and control. These failures include maintaining a separate system of follow-up and review concerning the disbursement of customer assets from accounts carried by the firm that were managed by non-employee investment advisors, and failure to protect the assets in those accounts.

Schwab currently offers services to about 5,000 non-employee investment advisors who manage approximately 1.3 million client accounts with the Firm. As of May 30, these accounts represented roughly US$350 billion in assets. The customer-account assets managed by these non-employee investment advisors are held in custody by the firm, and Schwab charges commissions for trading in the customer accounts and/or other fees. Schwab provides these investment advisors and their clients with clearing and related support.

During 1998 to the first quarter of 2003, some investment advisors misappropriated customer assets using, for example, forged letters of authorization and forged checks. Neither the firm nor any of its employees were involved in these misappropriations. However, during this period, the firm’s procedures relating to the transfer of assets from these accounts, and its system of follow-up and review, were not reasonable to supervise and control money movements, and to adequately protect the assets in such accounts, the NYSE says.

The hearing panel noted that the firm compensated customers who were harmed by the conduct and instituted corrective measures to prevent future violations. In settling the charges, Schwab neither admitted nor denied the charges.

Schwab also agreed to retain an outside consultant to review its policies and procedures concerning disbursement of customer assets and detection of potential misappropriations.

“This case is a stern reminder that firms must have adequate procedures to supervise and control transfers of assets from customer accounts,” said Susan Merrill, chief of enforcement, NYSE Regulation, in a release. “It goes to the heart of customers’ expectations that their money is safe.”