The National Association of Securities Dealers, in a new disciplinary effort, has fined three firms and a broker at each of them for market timing transactions and other violations.
The three firms–ING Funds Distributor LLC, First Allied Securities Inc., and PennMutual Life Insurance Company’s Janney Montgomery Scott LLC–were fined a total of $3.1 million and ordered to pay restitution totaling $2.7 million.
Market timing transactions use rapid trading strategies to profit from the uneven flow of information on price and other data as it moves through worldwide markets. The practice itself is not necessarily illegal, but regulators have said it is improper when it violates a fund’s policies.
All three companies have consented to the NASD’s findings on the issue but neither admit or deny the allegations, according to the NASD.
The largest fine was levied against ING, totaling $1.5 million with an additional $1.4 million in restitution to the affected funds. Janney Montgomery Scott will pay a fine of $1.2 million and pay approximately $1 million in restitution to the affected funds, and First Allied Securities will pay a fine of $408,000 and restitution of $326,500 to reimburse funds affected by the market timing transactions.
In addition, the NASD also took action against individuals at the companies it deemed responsible for the transactions. William Sessions, an ING supervisor, was suspended for 30 days and will pay a fine of $25,000. Sessions was responsible for the implementation of ING Funds Distributor’s market timing controls and had issued numerous letters barring other brokers from engaging in the practice. However, the NASD found that he and the firm allowed one client to engage in excessive trading until 2001 and two other clients to engage in excessive trading until September 2003.
At First Allied, the NASD found that Gary Ferraro, a former salesman for the firm located in Chicago, negotiated or authorized “sticky asset” deals, in which two clients agreed to invest millions of dollars on a long-term basis in one mutual fund complex in exchange for the chance to market time millions in other funds in the same fund family. These deals allowed hedge fund customers to execute more mutual fund trades than allowed in those funds’ prospectuses. Ferraro has been fined $136,700 and suspended for nine months.
Kenneth Rosato of Janney’s Brooklyn, N.Y., office was suspended for one year and fined $370,000, including the disgorgement of $185,000 in commissions he received, for permitting two hedge fund customers to evade attempts by mutual fund companies to block their market timing activities. The NASD said Rosato opened 19 different accounts for the two hedge funds and allowed them to conduct roughly 1,600 exchange transactions despite receiving almost 200 notices from those funds to halt trading. In addition, the NASD also barred Linda Rosato, Rosato’s sister-in-law and former branch operations manager for the Brooklyn office, for her refusal to testify in the investigation.