WASHINGTON (HedgeWorld.com)–The NASD barred Seattle-based brokerage National Securities Corp. from opening new mutual fund accounts for 30 days as punishment for the firm’s role in helping hedge fund clients market time mutual funds.
It marks the first time the NASD, formerly known as the National Association of Securities Dealers, has suspended a regulated firm from opening mutual fund accounts for new clients, according to a statement from the NASD.
As part of the action, in which National Securities did not admit or deny guilt, the brokerage must also pay US$600,000 in fines and restitution and make changes to its supervisory and email retention systems, according to a statement from the NASD.
Additionally, National Securities’ president, Michael A. Bresner, was fined US$25,000 and suspended for 30 days in connection with what NASD officials called the firm’s “supervisory failures.” David M. Williams, National Securities’ former chief operating officer, was also fined US$25,000 and will serve a four-month supervisory suspension, according to the statement from the NASD.
NASD officials said that between January 2001 and August 2002, National Securities helped four unnamed hedge fund clients deceptively market time 13 mutual funds that had specific restrictions on and prohibitions against market timing. Those hedge funds made at least 1,000 trades involving nearly US$400 million in shares of those mutual funds.
The trading continued even after the affected mutual fund companies notified National Securities that the trades were “disruptive” and “contrary to the interests of long-term investors,” according to the NASD. Rather than heeding these complaints, National Securities instead helped the hedge funds conceal their identities by shifting the market timing activity to different brokerage accounts.
NASD officials said Messrs. Bresner and Williams “failed to ensure that the firm had an adequate supervisory system designed to prevent and detect deceptive market timing practices” and also did not take any action despite various indications–including notices from the affected funds–that National Securities was helping hedge funds market time mutual funds.
“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,” NASD Vice Chairman Mary L. Schapiro said in a statement.
Market timing involves rapid trades in and out of mutual funds to take advantage of short-term price movements.
NASD officials also charged that National Securities did not have, and failed to develop, adequate systems to detect and prevent late trading–the practice of submitting trades after the 4 p.m. ET market close–and that it did not have the means to preserve and maintain internal email communications as required by federal securities laws and NASD rules.
The NASD’s investigation into other brokers connected to market timing and late trading is continuing, officials said in a statement.
Contact Bob Keane with questions or comments at: [email protected].