Imagine working for a broker/dealer which isn’t allowed to open new mutual fund accounts for a month.
In a first, the NASD has punished a small, Seattle-based b/d for market-timing abuses by prohibiting it from opening mutual fund accounts for new clients for 30 days. But some observers wonder why larger, better-known firms—who were punished and forced to pay millions in fines for similar infractions—didn’t also receive a prohibition on new fund account openings too.
The National Securities Corporation, which neither denies nor admits guilt, was also fined $300,000. Two executives were also fined and suspended for the trading abuses that took place more than two years ago. Firm officials say that personnel and compliance systems have been significantly improved since then.
“This all started before most of the current management was even here,” says John Wilson, co-director of National’s compliance department in its Manhattan office. He says the firm has since hired a new CEO and increased its compliance staff by 40 percent, as well as revamping the email archival system, which the NASD found to be insufficient.
“This is an example of a firm whose management totally ignored repeated red flags that its brokers were facilitating deceptive and improper market-timing in mutual funds by hedge fund clients,” said NASD Vice Chairman Mary Schapiro in an NASD release. Management’s failure to supervise the activity and the subsequent injury to investors, said Schapiro, warranted “the extraordinary remedy of temporarily prohibiting the firm from opening new mutual fund accounts.”
This first-ever 30-day suspension for a member firm has some in the industry concerned for how fairly the punishment will be administered. “It’s an interesting development, but what I’ll be watching for is if they apply this measure evenly to large and small firms alike,” says Bill Singer, a lawyer with Gusrae, Kaplan & Bruno, in New York. “It’s a day late and a penny short,” says Singer, adding that the NASD should have been handing out these sanctions long ago when the bodies were still warm, not flipping through “toe-tags at the morgue.”
In its investigation of the firm, the regulator found that from January 2001 through August 2002, National helped four hedge fund clients conduct market-timing in 13 funds that prohibited or restricted such activity. The affected mutual funds repeatedly sent notices to National executives and other supervisors, protesting the activity, but they were ignored. In the meantime, according to the NASD, the hedge funds made over 1,000 transactions totaling more than $400 million, netting profits of roughly $300,000 at the expense of long-term investors.
The investigation of individual brokers and others involved in the misconduct is continuing.