"As the distributor for a family of mutual funds, Sentinel was uniquely situated to enforce prospectus limits and fund policies designed to limit market timing, which can dilute the value of fund shares, raise transaction costs and thus harm other fund shareholders," said NASD Vice Chairman Mary L. Schapiro. "But the absence of effective supervisory systems enabled certain shareholders to engage in impermissible market timing for years."
After NASD completed its investigation, Sentinel paid $659,674 in restitution to the three affected funds - Sentinel International Equity Fund ($645,631), Sentinel Bond Fund ($10,098) and Sentinel High Yield Bond Fund ($3,945).
NASD found that despite Sentinel's adoption of an "Excessive Trading Policy" in October 2000 - specifically designed to monitor and restrict market timing - Sentinel's inadequate supervisory system enabled some customers of broker-dealers to continue to trade shares of Sentinel mutual funds more frequently than the policy, and fund prospectuses, allowed.
Sentinel's supervisory procedures and systems were not sufficient to detect and prevent market timing and excessive mutual fund exchanges, and lacked sufficient checks and balances. Sentinel left primary review of the firm's excessive trading surveillance data and reports to its wholesalers and non-compliance personnel, and relied on those individuals to monitor and prevent excessive trading in the funds.
NASD's investigation, which covered the period from October 2000 to October 2003, found that Sentinel could only detect market timing after customers had already engaged in excessive transactions. Even after Sentinel restricted their accounts, some customers were able to establish new accounts and continue trading in Sentinel mutual funds. Sentinel also did not have an effective system to monitor fund exchange activity by accounts under common ownership.
NASD also found that prior to adopting its Excessive Trading Policy in October 2000, Sentinel had entered into understandings with two brokers permitting them to engage in limited market timing of Sentinel funds. Sentinel not only allowed the two brokers to continue their market timing activities after the new policy was adopted, but was unable to enforce the trading limitations spelled out in those understandings.
During its investigation, NASD also found that Sentinel failed to maintain and preserve internal e-mail communications relating to the firm's business as required by the federal securities laws and NASD rules. For example, the firm failed to retain all e-mails that were deleted by its registered employees.
In addition to fining the firm and requiring restitution, NASD required Sentinel to certify that it has disclosed all instances of fund trading that was inconsistent with the fund prospectuses and Sentinel's Excessive Trading Policy, and that it has implemented appropriate systems and controls with respect to market timing.
In settling this matter, Sentinel neither admitted nor denied the charges.
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 http://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 bringing integrity to the markets and confidence to investors 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.
