The NASD may have initiated fewer disciplinary actions last year, but the size of its fines got a lot bigger, it pressed a record number of cases against improper fund sales and trading, and its interest in mutual fund sales practices will continue to be a priority in the coming year. The agency collected $102 million in fines, up from $33.3 million in 2003.
"The fact that the amount of disciplinary fines collected more than tripled compared to 2003 is an indication of the significance of the enforcement cases," said Barry Goldsmith, the NASD's enforcement chief.
Goldsmith added that the NASD's regulatory focus this year will continue to be on mutual funds and variable annuities. In particular, the agency will look at sales of mutual fund class B shares, which are more expensive than A shares. It will also investigate gifts and gratuities paid by broker/dealers to mutual fund investment advisors. "We are looking at gifts and entertainment activities of about a dozen firms," said NASD spokesman Herb Perone, declining to be more specific.
The agency will also continue to scrutinize 529 plans, the college-savings programs whose tax rules have proved confusing for many consumers, as well as hedge funds. While the NASD doesn't regulate hedge funds directly, it does look at how broker/dealers sell the products.
In addition, officials on the regulatory side of the New York Stock Exchange said they'll have a broad enforcement agenda this year, defending retirees from fraudulent schemes, scrutinizing firms' internal control procedures and continuing to investigate the actions of specialist firms on its trading floor.
NYSE will also look for brokers who are "defrauding or disadvantaging investors," said enforcement chief Susan Merrill. "They think of different ways to do that every year."
Among the more dramatic fines NASD recently issued involving mutual funds was the $12 million assessed against First Command Financial Planning in December. The Fort Worth, Texas-based company, which sells investment plans to soldiers, agreed to the fine to settle allegations of misleading sales practices.
NASD also levied its largest fine ever for failing to supervise mutual fund trades last month with its $400,000 fine against Banc One Securities. NASD charged the firm with falling short of its responsibilities to crack down on repeated late trades for mutual funds and maintain adequate records of trading times. In levying such a large fine, NASD said it intended to send a clear message that sloppy compliance procedures are fair game for securities regulators.
"Late trading is illegal, and to prevent it, 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 that fail to put adequate systems and procedures in place, regardless of whether late trading, in fact, occurs," she added.
NASD investigators discovered that Banc One permitted investors to make late trades between Nov. 1, 2002 and Nov. 11, 2003 and backdate mutual fund prices to net asset values before the standard 4 p.m. market cutoff time.
Emma Trincal is a senior editor for On Wall Street.