SG Americas Securities, LLC, of New York, will pay a $3.75 million fine and more than $728,000 in restitution. New York's RBC Capital Markets Corporation was fined $2 million and ordered to pay more than $108,000 in restitution. Its affiliate, RBC Dain Rauscher, Inc., of Minneapolis, was fined $1 million and will make more than $158,000 in restitution payments. DebtTraders, Inc., of New York, was expelled from the industry and ordered to pay nearly $120,000 in restitution. DebtTraders ceased doing business on July 31.
In addition, SG Americas Securities, RBC Capital Markets and RBC Dain Rauscher were ordered to revise their written supervisory procedures for high yield bond sales and purchases within 60 days.
NASD rules require that firms sell all securities, including corporate high yield debt, at fair prices. According to NASD markup policy, markups and markdowns generally should not exceed five percent and, for most debt transactions, that figure should be lower. Numerous SEC and court rulings have upheld those principles.
NASD found that from 2002 through 2003, SG Cowen Securities Corporation's high yield bond desk, which is now part of SG Americas, charged markups and markdowns ranging from 6.7 percent to as much as 40 percent on 13 pairs of trades. During 2003, RBC Capital Markets charged markups that ranged from 5.3 percent to 14.3 percent on five pairs of trades. During 2004, RBC Dain Rauscher charged markups ranging from 5.5 percent to 8 percent on six pairs of trades. In 2003 and 2004, DebtTraders charged markups and markdowns that ranged from 5.3 percent to 25 percent on 12 pairs of trades.
NASD's findings also include books and records violations by three of the firms - SG Americas, RBC Dain Rauscher and DebtTraders - and the failure by DebtTraders to correctly report bond transaction information to NASD's Trade Reporting and Compliance Engine (TRACE). Since July 2002, firms have been required to report price and volume data on all corporate bond transactions to TRACE, initially within 75 minutes, today within 15 minutes. NASD publicly disseminates that transaction data immediately, on virtually 100 percent of over-the-counter activity - approximately 22,000 transactions every day, representing approximately $18 billion in volume every day. TRACE's transaction information is available free of charge at www.nasdbondinfo.com and at www.investinginbonds.com.
"TRACE data not only brings much-needed transparency to the corporate bond market for investors and dealers alike, it enhances NASD's surveillance of the over-the-counter bond market, giving regulators the ability to identify transactions where customers have been charged excessive markups and markdowns," said Stephen Luparello, NASD's Executive Vice President for Market Regulation. "The nearly $7.9 million in fines and restitution ordered in these cases illustrates the value of TRACE, both to effective regulatory enforcement and to investor protection."
NASD also found that supervision at all four firms was deficient. Although the firms had written supervisory procedures in place, in each case the supervisory systems were not adequate - they were not designed so that the firms could comply with the legal requirements and guidelines set forth in NASD's markup policy. Additionally, NASD found that DebtTrader's written supervisory procedures regarding books and records were also deficient.
In concluding these settlements, the firms 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 and request almost 190,000 reports for existing brokers or firms. 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.
("Copyright 2005 National Association of Securities Dealers, Inc.")
