“The deceptive market timing practices found in this investigation do more than just violate securities regulations – they have a profoundly negative impact on investor confidence” said Mary Schapiro, NASD Vice Chairman. “The enforcement action announced today, and similar cases we have brought in recent months, make clear that NASD expects firms to have enhanced procedures, systems and practices to ensure that illicit market timing activities like these do not occur.”
NASD found that from October 2002 to July 2003, H&R Block, through the actions of two brokers in its Orlando office and the Orlando branch office manager, enabled one of the brokers’ customers to evade mutual fund attempts to block or restrict the client’s market timing transactions. H&R Block recruited and hired the two brokers in September 2002 knowing the brokers were going to open accounts for hedge funds that intended to actively trade or market time in mutual funds that discouraged or limited such trading. Each of these clients was permitted to open fee-based accounts, even though the firm acknowledged that these accounts were not meant for investors primarily intending to market time. Because these customers were going to engage in market timing, H&R Block charged them a flat fee of 1%, which was higher than the customary fee for fee-based accounts of the same size.
NASD also found that the two Orlando brokers opened a total of 19 accounts for seven clients. The accounts held approximately $32 million in assets. One of those hedge fund clients used seven different accounts to engage in deceptive market timing practices.
Through the Orlando brokers and the Orlando branch office manager, H&R Block enabled the Orlando customer, whose trading exceeded funds’ prospectus limitations, to evade fund restrictions. H&R Block received 44 restriction letters designed to block this hedge fund customer’s market timing activities. After H&R Block received these letters, the firm, through the Orlando brokers and branch office manager, enabled the hedge fund to use related accounts to continue trading in restricted funds. In addition, H&R Block allowed the customer to open two new accounts with funds from existing H&R Block accounts or from common bank accounts, and this customer used the new accounts to continue to market time funds that had restricted its related accounts. H&R Block also allowed the customer to open a related account with one of the firm’s brokers in New York City, and that account also market timed some mutual funds that had already restricted the customer’s other H&R Block accounts.
Through its deceptive conduct, the customer executed 64 fund purchases and sales that violated fund restrictions and made approximately $325,000 from these violative trades. NASD found that the Orlando brokers also attempted to help their clients avoid restriction letters by requesting that the firm change the broker of record on nine accounts from one of the two brokers to the other. One of the brokers also requested that the broker of record for one account be changed an Orlando branch house account. The Orlando branch office manager approved, and the firm processed, the requested transfers.
NASD also found that H&R Block failed to have adequate policies and procedures in place to prevent its brokers and clients from market timing mutual funds in violation of fund restrictions, and failed to adequately respond on a timely basis to the red flags that would have alerted it to the efforts of the Orlando hedge fund customer and Orlando brokers to evade fund restrictions.
In settling with NASD, H&R Block neither admitted nor denied the allegations, but consented to the entry of NASD’s findings.
NASD’s investigation into the activities of particular individuals involved in this market timing scheme is continuing.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using 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 BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
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 member firms. For more information, please visit our Web Site at www.nasd.com.
