According to FINRA, Charles Schwab & Co., Inc. was censured and fined $350,000 for sending customers transaction confirmations that omitted required disclosures regarding exchange traded notes (ETNs).

The confirmations failed to disclose that certain ETNs were callable and that early redemption could affect the ETNs' yield—both material pieces of information for investors. The firm relied on a third-party vendor to provide redemption information about securities, which was then used in transaction confirmations sent to customers. For some ETNs, the vendor provided inaccurate or incomplete information, while for others, the firm received accurate information but still inaccurately stated on confirmations that the ETNs were not redeemable.

The firm's supervisory system was inadequate to prevent these failures. Schwab had no procedures to review the accuracy of redemption features beyond comparing information to the data provided by its vendor, and did not verify the vendor's information concerning callability or redemption features. This represented a failure to establish, maintain, and enforce a supervisory system reasonably designed to achieve compliance with transaction confirmation rules.

After identifying the issue, Schwab self-reported to FINRA, notified customers of the correct redemption information, and revised its procedures to require personnel to validate ETN redemption data and review confirmation data for accuracy. For investors, this case highlights the importance of understanding the terms and risks of complex products like ETNs. Investors should review offering documents directly rather than relying solely on transaction confirmations, and should be aware that even major firms can have gaps in their supervisory systems.