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This is the largest fine imposed to date by NASD or any other regulator against a firm for supervisory failures relating to potential late trading.
“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.”
Late trading is the unlawful practice of placing mutual fund orders after the fund has calculated its daily net asset value (NAV) – typically at 4 p.m. EST – but receiving the price based upon that earlier, 4 p.m. calculation. Firms accepting mutual fund orders after the 4 p.m. NAV calculation are supposed to execute them at the following day’s NAV.
Firms that permit late trades can provide select customers with an information advantage, allowing them to trade based on news that breaks after the markets close that could affect the value of the mutual fund’s holdings, but which is not reflected in the NAV for that day. Securities and Exchange Commission (SEC) and NASD rules prohibit late trading to ensure that all purchasers of mutual fund shares are on equal footing as to price and information on any given day. Firms executing mutual fund orders must establish and maintain supervisory systems and procedures reasonably designed to detect and prevent the occurrence of late trading.
NASD found that because of Banc One’s deficient supervisory systems and procedures, from Nov. 1, 2002 through Nov. 11, 2003, customers were able to place mutual fund orders after the close of the market and still receive the current day’s NAV. The firm failed to prevent its brokers from entering orders after 4 p.m. and failed to detect and prevent certain trades that were entered after 4 p.m. that received the current day’s NAV. As a result, Banc One processed approximately 5,400 mutual fund orders during the relevant period after market close at the current day’s NAV. For some of those orders, available evidence was inconclusive as to whether the order was received before or after 4 p.m. For others, the evidence provided indicated that the order was received after the close of the market. Those 5,400 mutual fund orders represent 1.75 percent of the approximately 306,000 non-systematic mutual fund orders handled by Banc One during the period under investigation.
Banc One also violated SEC and NASD Rules by failing to accurately record the time it received orders from customers. Often, the recorded receipt time actually reflected the time the broker entered the order or, if the broker sent the order to a trader, the time the trader entered the order. This deficiency made it impossible for NASD investigators to determine whether the recorded receipt times for thousands of mutual fund orders received by Banc One between May 2, 2003 and Nov. 11, 2003 were accurate.
In settling with NASD, Banc One neither admitted nor denied the allegations, but consented to the entry of NASD's findings.
Investors can obtain more information and the disciplinary record of any NASD-registered broker or brokerage firm through NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2003, members of the public used this service to conduct more than 2.8 million searches for existing brokers or firms and requested almost 180,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to the program by going online to www.nasdbrokercheck.com. Investors can also access this service by calling (800) 289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business-from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and registered firms. For more information, please visit our Web site at www.nasd.com.
