NASD Slams Broker-Dealer With Fine For VA Market Timing

By

Washington

The National Association of Securities Dealers has fined a Richmond, Va.-based broker-dealer $450,000 in what the NASD calls its first ever case involving alleged market timing abuses in variable annuities.

The broker-dealer, Davenport & Co., LLC, is charged with facilitating deceptive market timing. In addition to the fine, Davenport was ordered to pay $288,000 in restitution to the affected funds.

“Deceptive market timing in variable annuity subaccounts can dilute the value of those shares, raise transaction costs and thus harm other annuity investors,” says Mary L. Schapiro, vice chairman of the NASD, in a statement.

“This is an improper and objectionable trading practice that rises to a higher level of abuse when the firm not only knows that its clients intend to deceive variable annuity companies, but is complicit in carrying out that deception,” Schapiro says.

But in a statement, Davenport & Co. says that at the time the alleged market timing occurred, it believed the particular trades were appropriate.

The market timing at issue, the company says, involved a small number of trades made by 2 of its sophisticated institutional customers.

“As part of our own internal review, Davenport has determined that it will no longer accept accounts of market timers, and has terminated its relationship with the 2 institutional customers in question,” the company says.

Davenport adds that from the outset of the NASDs review, it cooperated fully, Indeed, the company says, it was Davenport that called the NASDs attention to these particular issues and the related transactions.

As part of an agreement with the NASD, Davenport does not either admit or deny the allegations.

According to the NASD, from at least April 2002 through September 2003, Davenport helped 2 hedge funds carry out deceptive market timing in the subaccounts of variable annuities.

The brokers handling the accounts and the managers at the firm were aware that the clients were engaging in market timing techniques, the NASD charges.

Nonetheless, the NASD says, Davenport enabled these clients to carry out frequent transfers among variable annuity subaccounts without being detected by the affected insurance companies and mutual fund managers, who were attempting to enforce restrictions on market timing to protect the interests of long-term investors.

Moreover, the NASD charges, Davenport continued to sell variable annuity policies to the investment partnerships of these clients even after receiving notices that some of the variable annuity companies considered the trading strategy to be disruptive and contrary to the interests of long-term investors.

According to the NASD, after April 2002 Davenport received at least 10 letters from insurance companies expressing concern about excessive trading in the subaccounts.

But the NASD charges that Davenport management did not take effective steps to stop market timing activity on the part of its representatives or clients.

“Davenport, in fact, had no clear procedure to ensure that designated departments or personnel would receive copies of these letters from insurance companies,” the NASD charges.

In addition, the NASD says, Davenports supervisors also failed to respond to clear “red flags” that would have alerted them to the alleged improper practices.

The NASD says its investigation of individual brokers and other entities involved in this market timing activity is continuing.


Reproduced from National Underwriter Edition, June 4, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.