The NASD said on Thursday that is has fined Boston-based State Street Research (SSR) $1 million and will receive an additional $533,000 in restitution from the firm for not doing enough to prevent market timing in its funds.
The NASD has also required that SSR, a subsidiary of MetLife, disclose all instances of mutual fund exchanges that exceed limits outlined in the prospectuses. "For this particular situation, their review spans from 2001 to August of 2003," said Robyn Tice, a spokeswoman for SSR, in a telephone interview. "It involved less than 130 shareholder accounts, out of a base of more than 800,000 shareholder accounts," Tice said. In addition to the fine and restitution, SSR is required to certify that it has put in appropriate market-timing systems and controls.
The firm had inadequate supervisory systems in place, which allowed timers to circumvent the rules, according to the regulator. Because of these shortcomings, between 2001 and August 2003, at least one firm, Prudential Equity Group, formerly Prudential Securities, was able to market time SSR funds.
To prevent timing in its funds, SSR had typically limited exchanges in and out of a fund to six times per year. According to the NASD, SSR had knowledge that Boston-based Prudential employees were using deceptive methods in order to time its funds. To get around the rules, Prudentials registered reps would use more than one account for the same client to circumvent "block letters," which barred an investor from making any further trades in an account because he or she had already reached the exchange limit specified in the prospectus.
The NASD found that SSRs systems were not able to detect customers circumventing the blocks, and the procedures in place were not set up to follow up on those block letters appropriately.
"Market timing, in violation of prospectus limits, can dilute the value of fund shares, raise transaction costs and thus harm other fund shareholders," said Mary L. Schapiro, vice chairman of NASD, in a statement. "When a firm is on notice, as SSR was, that its funds are being timed, the firm must respond quickly and effectively."
Blocks were not set up quickly enough, the regulatory agency claims, as customers had already passed the exchange limit before they were sent a block letter in some cases. Additionally, the firm failed to keep e-mails relating to its business, as required by federal law.
The NASD said the fine and restitution promise resolves the matter with SSR, but it is continuing to investigate conduct relating to the case and other market timing violations. However, Tice said that the regulator is satisfied with the SSR resolution. "Theyre done here," Tice said. "They have competed their investigation. The settlement and reason for the settlement was so we close this investigation and move on."
As for the Securities and Exchange Commission, Tice said the regulatory body is aware of the allegations relating to the NASD settlement, but doesnt expect further disciplinary action. "The SEC is aware of the allegations and have already made inquiries, but I cant speculate as to what their intentions are. Its difficult to predict what other regulators may do."