The National Association of Securities Dealers Inc. has fined 3 securities firms for market-timing transactions and other violations.
ING Funds Distributor L.L.C., First Allied Securities Inc. and PennMutual Life Insurance Co.’s Janney Montgomery Scott LLC were fined a total of $3.1 million and ordered to pay restitution totaling $2.7 million.
Marketing-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 3 companies have consented to the NASD’s findings on the issue, but they neither admit nor deny the allegations, according to the NASD. It levied the largest fine 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.
In addition, the NASD took action against individuals at the companies it deemed responsible for the transactions. William Sessions, an ING supervisor, was suspended for 30 days and fined $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, the NASD said. However, the NASD found he and his firm allowed 1 client to engage in excessive trading until 2001 and the other 2 clients to engage in excessive trading until September 2003.
At First Allied, the NASD found Gary Ferraro, a former salesman for the firm located in Chicago, negotiated or authorized “sticky asset” deals, in which 2 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 to hedge fund customers to execute more mutual fund trades than allowed in those funds’ prospectuses, and Ferraro has been fined $136,700 and suspended for nine months.
Kenneth Rosato of Janney’s Brooklyn, New York office was suspended for 1 year and fined $370,000, including the disgorgement of $185,000 in commissions he received, for permitting 2 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 2 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 barred Linda Rosato, Rosato’s sister-in-law and former branch operations manager for the Brooklyn office, for refusing to testify in the investigation.