NASD Fines Five Firms $625,000 for Supervisory System Failures Relating to Late Trading of Mutual Funds
Washington, D.C.—NASD announced today that it has censured and fined five brokerage firms a total of $625,000 for failing to implement adequate supervisory systems and written procedures reasonably designed to detect and prevent "late trading" of mutual funds.
The firms and their respective fines are:
- D.A. Davidson & Co. ($150,000)
- TD Waterhouse Investor Services, Inc. ($150,000)
- Stifel Nicolaus & Company ($125,000)
- National Planning Corp. ($100,000)
- SII Investments, Inc. ($100,000)
"Late trading" refers to the practice of placing mutual fund orders after the fund has calculated its daily net asset value - typically 4 p.m. EST - but receiving the price based upon that earlier, 4 p.m. calculation. Firms that permit late trades can provide customers with an information advantage, allowing them to trade based on news that breaks after the market close that could affect the value of the mutual fund's holdings, but which is not reflected in the NAV for that day. SEC and NASD rules prohibit late trading to ensure that all purchasers of mutual fund shares are on equal footing as to price and information on any given day.
"To help ensure that illegal late trading does not occur firms must implement systems to guarantee that all mutual fund orders processed after the close of the market were received during normal trading hours," said NASD Vice Chairman Mary L. Schapiro. "NASD will be vigilant about sanctioning firms for failing to have adequate supervisory systems in place designed to prevent manipulative late trading, regardless of whether such trading in fact occurs."
Each of the firms sanctioned today permitted its registered representatives to process mutual fund orders after the close of the market, but none of the firms had adequate systems in place to ensure that only orders received prior to that day's market's close received that day's NAV. One firm, D.A. Davidson & Co., was also cited for failing to comply with a new record-keeping rule that went into effect in May 2003 requiring firms to record the time of receipt of orders to buy or sell mutual fund shares.
NASD reminded firms last year that, while there may be situations where firms legitimately receive orders prior to the close of trading but enter such orders after the market's close, firms bear the burden of demonstrating that they have procedures designed to prevent the occurrence of late trading. See September 2003's Special Notice to Members 03-50 at http://www.nasdr.com/pdf-text/0350ntm.pdf.
In settling with NASD, the firms neither admitted nor denied NASD's findings.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm through NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.9 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to the program by going online to http://www.nasdbrokercheck.com/. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business—from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web Site at www.nasd.com.