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The $1.4 million sanction represents the largest fine imposed to date by NASD against a single firm for fixed income trade reporting violations.
"Investors and dealers in municipal and corporate bonds rely upon TRACE and MSRB trade reporting to provide much-needed price transparency in these markets," said NASD Vice Chairman Mary L. Schapiro. "State Street Global's reporting failures deprived the markets, investors and regulators of critical information, and impaired the integrity of bond trading data that market participants rely upon to make informed investment decisions."
Since July 2002, brokerage firms have been required to report price and volume data on all corporate bond transactions to TRACE, initially within 75 minutes, and today within 15 minutes. NASD publicly disseminates that transaction data immediately on virtually 100 percent of over-the-counter corporate bond activity - approximately 22,000 transactions and $18 billion in volume every day. That transaction data is available free of charge at www.nasdbondinfo.com.
Before Jan. 31, 2005, MSRB rules required all dealers to report municipal trades to the MSRB by midnight of the day of the trade, for public dissemination the following day. As of January 31, MSRB rules require that those transactions be reported within 15 minutes of trade execution. The MSRB now disseminates trade data about all reported municipal securities transactions almost immediately at www.investinginbonds.com. NASD is responsible for enforcing MSRB rules.
NASD found that from July 2003 through December 2004, State Street Global failed to report 14,073, or 89 percent, of its self-cleared corporate bond transactions to TRACE. The firm failed to report 380, or 79 percent, of its self-cleared municipal bond transactions to the MSRB during the same period. The total dollar amount of the unreported corporate and municipal bond transactions exceeded $5 billion.
The trade reporting violations resulted from the failure of State Street Global personnel, when establishing new accounts, to take steps to ensure that all TRACE-eligible transactions would be automatically and electronically reported to the third party agency retained by the firm to report the transactions to TRACE. The trade reporting failures were also due in part to the departure from the firm of several key operations and fixed income trading employees. Thereafter, State Street Global lacked adequate institutional knowledge and internal controls to ensure proper trade reporting. Moreover, State Street Global failed to provide sufficient training for its remaining staff to ensure that the firm's TRACE and MSRB reporting requirements were met.
NASD also found that State Street Global lacked adequate written procedures to ensure proper TRACE and MSRB trade reporting. The firm failed to provide for effective follow-up and review or otherwise monitor its trade reporting to ensure compliance. Additionally, the firm's internal inspections, which are required under NASD rules to be comprehensive and conducted annually, were found to be deficient. State Street Global's parent bank personnel, who were generally not registered as securities professionals, conducted the inspections. The internal inspections were also not comprehensive in that they did not cover all the businesses that State Street Global engaged in, as required by NASD rules.
In connection with these settlements, State Street Global neither admitted nor denied the charges, but consented to the entry of NASD's findings.
TRACE is the only regulated intra-day price dissemination service in the over-the-counter corporate bond market. Real-time transaction data, along with aggregate end-of-day summary statistics and two unique, new corporate bond indices derived from TRACE transaction data - the NASD-Bloomberg Active Investment Grade US Corporate Bond Index and the NASD-Bloomberg Active High Yield US Corporate Bond Index - are available free of charge on NASD's Web site at www.nasdbondinfo.com.
To help close retail investors' knowledge gap about how bonds and bond markets work, NASD earlier this year created a comprehensive on-line learning center called Smart Bond Investing (www.nasd.com/smartbonds). In addition to covering the basics of bond maturity, yield and pricing, Smart Bond Investing offers sections on dealing with risk; how bonds are bought and sold; an overview of the corporate, municipal and government bond markets, and a look at the various types of individual bonds and bond mutual funds. It includes an interactive Accrued Interest Calculator and a Top 10 List of things to consider before investing in bonds or bond funds. In coming weeks, NASD will add to its bonds-focused online educational resources with an Investor Alert examining the risks and rewards of bond mutual fund investing.
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 2004, members of the public used this service to conduct more than 3.8 million searches for existing brokers or firms and requested more than 190,000 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 (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.
("Copyright 2005 National Association of Securities Dealers, Inc.")
