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Schwab Yield Plus Update

Recently the Charles Schwab Corporation received a Wells notice from the Securities and Exchange Commission (SEC) relating to the Schwab Yield Plus Bond Fund and another bond fund under its fund company management. A Wells notice signifies it is the SEC’s intent to recommend civil enforcement action for possible violations of securities laws at these mutual funds. Charles Schwab has the opportunity to respond to the notice and has said it believes enforcement is unwarranted.

We believe this notice increases the likelihood that Charles Schwab Corporation will settle the class action suit regarding Schwab Yield Plus Fund in the near future. All investors in the fund during recent years are automatically included in the class action suit and no action is necessary unless an investor chooses to go directly to FINRA arbitration, which involves additional time and cost, and not all cases have been successful to date.

We used the Schwab Yield Plus Fund for a few years but became concerned with its performance and the erosion of its asset value in late 2007. Our concern, like that of many investors in the fund, was that Schwab misrepresented the safety and soundness of the underlying investments in the fund. We eventually sold it when Schwab refused to release details of its holdings and even refused to directly answer questions regarding the fund on advisor conference calls. This raised a red flag, violated our transparency requirements, and we sold the fund before the severe losses occurred. Over the past two years the fund has lost 45% of its value.

Some of the losses were no doubt due to the credit crisis, but we also believe the fund management failed to fully understand the investments they made and misrepresented the safety of the fund. We think recent developments make it likely that investors will be entitled to a settlement amount in the near future. This will be a good test for the stronger investor protection we are often promised from Washington.

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