NASD Orders ING Funds Distributor to Pay $1.5 Million Fine, $1.4 Million in Restitution for Permitting Improper Market Timing
Washington, DC — NASD announced today that it has ordered ING Funds Distributor (IFD) to pay a fine of $1.5 million for permitting improper market timing in ING funds and related violations - the largest fine NASD has imposed in a market timing case. NASD also ordered IFD to pay more than $1.4 million in restitution to the affected mutual funds, and imposed a $25,000 fine and 30-day supervisory suspension on IFD supervisor William L. Sessions.
IFD is the wholesale distributor of ING mutual funds and is owned by ING Group. In 2000, ING Group acquired Pilgrim Funds, which had entered into agreements with three different clients - two registered representatives and an independent investment advisor - to allow them to engage in market timing in their accounts. After the acquisition, language was added to ING fund prospectuses stating that the funds were not short-term trading vehicles and that excessive trading, or market timing, could harm ING funds. The new prospectus language also alerted investors that IFD could prohibit excessive exchanges of more than four per fund per year.
At about the same time, IFD adopted procedures for identifying accounts that effected more than four exchanges in a fund year and prohibiting them from making further exchanges. But NASD found that despite the fund prospectus language and IFD's own internal procedures, IFD and Sessions permitted one client to engage in excessive trading until 2001 and the other two clients to engage in excessive trading until September 2003.
Sessions was a registered principal of IFD responsible for overseeing the implementation of IFD's market timing procedures and was heavily involved in the firm's efforts to detect and prevent market timing. NASD found that Sessions sent numerous restriction letters to other brokers stating that excessive market timing activity had been detected, that such trading activity was "detrimental to the overall effectiveness of the investment objectives of the ING Funds," and that the identified accounts were prohibited from engaging in further exchanges. Sessions also placed stop transfer and stop purchase orders on identified accounts. Nevertheless, he permitted extensive market timing activity by the three clients - far in excess of the limits set by IFD and described in the prospectuses for ING funds, and through numerous accounts - to continue.
By permitting market timing activities contrary to the firm's procedures and the funds' prospectuses, IFD and Sessions violated NASD's rule requiring adherence to just and equitable principles of trade and high standards of commercial honor. NASD also found that IFD failed to implement and enforce its own internal procedures intended to detect and prevent market timing. As a result, a large number of excessive trades by customers other than the three receiving favorable treatment were allowed to occur because they went undetected.
NASD also found that, prior to August 2003, IFD did not have an adequate system for retaining e-mail communications and failed to ensure that e-mails were kept for the requisite time periods, in violation of recordkeeping rules. As a result of those deficiencies, IFD was unable to produce all of its e-mails to NASD investigators.
In settling with NASD, IFD and Sessions neither admitted nor denied the allegations, but consented to the entry of NASD's findings.
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