WASHINGTON (Dow Jones/AP) - The National Association of Securities Dealers for the first time prohibited a regulated firm from opening mutual-fund accounts for new clients for 30 days - for allegedly facilitating deceptive market-timing practices.
Seattle-based National Securities Corp. also failed to have an adequate supervisory system to prevent deceptive market timing and late trading, the NASD said in a release Thursday.
National was also fined $300,000 and ordered to pay almost $300,000 in restitution to the funds that were affected by the deceptive market timing.
In addition, National was ordered to revise its systems to correct supervisory and e-mail retention deficiencies.
National President Michael A. Bresner was fined $25,000 and received a one-month supervisory suspension for the firm's supervisory failures. Bresner wasn't immediately available Thursday for comment.
David M. Williams, the firm's former chief operating officer, also was fined $25,000 and received a four-month supervisory suspension.
In settling these matters, National Securities, Bresner and Williams neither admitted nor denied the allegations or findings, the NASD said. The investigation of individual brokers and others involved in the alleged misconduct is continuing.
Market-timing abuses came to light after New York Attorney General Eliot Spitzer announced last fall that an investigation found the practice was widespread.
"This is an example of a firm whose management totally ignored repeated red flags that its brokers were facilitating deceptive and improper market timing in mutual funds by hedge fund clients," said NASD Vice Chairman Mary L. Schapiro in Thursday's release.
The NASD found that from January 2001 through August 2002, the Seattle brokerage firm helped four hedge-fund clients engage in deceptive market timing practices aimed at 13 mutual funds that had restrictions and prohibitions against these practices.
The hedge-fund clients completed at least 1,000 mutual-fund trades, totaling nearly $400 million, after National had received notices that the fund companies considered the timing strategy of the clients to be disruptive and contrary to the interests of long-term investors. These notices were ignored as the hedge fund clients reaped profits of about $300,000, at the expense of long-term investors, the NASD said.
Market timing is rapid trading of fund shares designed to take advantage of short-term discrepancies between a fund's share price and its underlying holdings. Such trading isn't necessarily illegal, but regulators say that if mutual fund companies with antitiming rules permitted such trades while profiting from those arrangements, that could be a violation of securities laws.
Late trading is prohibited by law as it allows preferred investors to buy fund shares at the 4 p.m. Eastern time closing price after the market closes, while other investors can receive that price only if they buy before the close.