FINRA Orders Rafferty Capital Markets to Pay Over $400,000 for Supervisory Failures Involving Late Trading, Deceptive Market Timing By Firm's Hedge Fund Customers
Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has sanctioned Rafferty Capital Markets, LLC, of Garden City, NY for facilitating improper market timing practices and for failing to have an adequate supervisory system to prevent deceptive market timing and late trading, among other violations.
FINRA ordered Rafferty Capital to refrain for 90 days from opening new mutual fund brokerage accounts for any new or existing customers. The firm was also fined $350,000 and ordered to pay $59,605 in restitution to two mutual fund families in connection with customer profits derived from improper market timing. In addition, Rafferty Capital was ordered to review its procedures and certify that it has established systems and procedures to prevent late trading and deceptive market timing, to retain electronic communications, and to record the times of receipt and entry of mutual fund orders.
"Firms must implement systems to ensure that mutual fund orders processed after the market close reflect orders received from customers during regular trading hours if those customers are to receive the current day's prices — otherwise, they can gain an unfair advantage with these late trades" said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. "In this case, Rafferty's personnel not only facilitated hedge fund customers' impermissible market timing but, in the case of one of the hedge funds, late trading by a hedge fund customer."
FINRA found that from about January 2001 through August 2003, the firm assisted six hedge fund customers in circumventing market timing restrictions and escaping detection by opening and using multiple related customer accounts, as well as by using different broker branch codes for market timing, among other methods.
From April 2001 through April 2002, the firm, acting through two brokers, permitted two hedge fund clients to continue market timing while circumventing attempts by mutual fund companies to block or restrict such trading. This misconduct resulted in approximately 118 additional mutual fund exchanges, yielding a net profit of about $59,605 at the expense of long-term investors in the mutual funds.
According to FINRA, Rafferty Capital lacked procedures designed to ensure that brokers who received notices of restricted or rejected mutual fund trades would notify their supervisors or the compliance department. Additionally, there were no systems or procedures regarding how the firm should respond when receiving such notices.
FINRA also found that the firm failed to respond to warning signals that its brokers were engaged in improper market timing. Such warning signals included the number of rejected mutual fund trades, and the use of multiple customer account numbers and branch codes to facilitate market timing for the same customer.
The firm also failed to establish, maintain or enforce supervisory systems and written procedures reasonably designed to prevent and detect late trading. From April 2001 through June 2003, the firm allowed its brokers to enter approximately 859 mutual fund transactions after the 4 p.m. market close while the firm's records contained no indication that the orders were received before 4 p.m. Those trades processed after 4 p.m. received the current day's NAV. In one instance, one of the firm's brokers facilitated 20 late trades by one of the hedge fund customers over two separate days.
During its investigation, FINRA also found that during the period January 2001 through July 2003, Rafferty Capital failed to preserve and maintain copies of all e-mail communications relating to the firm's business, as required by the federal securities laws and FINRA rules. FINRA also found that the firm failed to create records accurately reflecting time of entry of 948 mutual fund orders during the period April 2001 through June 2003; create and preserve records of time of receipt of 26 mutual fund orders during the period May 2003 through June 2003; and maintain records of preliminary mutual fund orders from customers and originals of mutual fund orders that were changed or cancelled, including records relating to the cancellation of the orders. FINRA further found that the firm's written supervisory procedures failed to provide adequate guidance regarding order ticket memoranda to ensure compliance with regulatory requirements.
In concluding this settlement, Rafferty Capital neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA BrokerCheck (formerly known as NASD BrokerCheck). FINRA makes BrokerCheck available at no charge. In 2006, members of the public used this service to conduct more than 4.7 million searches for existing brokers or firms and requested more than 207,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.finra.org/brokercheck. Investors can also access this service by calling (800) 289-9999.
FINRA, the Financial Industry Regulatory Authority, is the largest non-governmental regulator for all securities firms doing business in the United States. Created in 2007 through the consolidation of NASD and NYSE Member Regulation, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business-from registering and educating all industry participants to examining securities firms; writing and enforcing rules and the federal securities laws; informing and educating the investing public; providing trade reporting and other industry utilities; and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.finra.org.