"Deceptive market timing - by hedge funds or any other market participant - is both unfair and harmful to other mutual fund shareholders," said Barry Goldsmith, NASD Executive Vice President and Head of Enforcement. "In this case, Chase's failure to have systems and controls in place to enforce trading limits set by the mutual funds themselves resulted in a hedge fund gaining an impermissible advantage over other fund shareholders."
NASD found that Chase failed to maintain, update and enforce effective internal policies, systems and procedures with respect to preventing deceptive mutual fund market timing activity by one of its customers, which operated a hedge fund. From at least February 2002 through August 2003, Chase received notice of trading restrictions or "block letters" from 19 mutual funds - with each fund restricting the hedge fund customer from effecting future transactions within the fund. Chase did not have adequate supervisory systems or controls designed to ensure that the block letters would be enforced.
Further, Chase failed to conduct any follow-up and review of the hedge fund customer's accounts to ensure that it enforced the terms of the block letters it received and/or detected and prevented the hedge fund's attempts to circumvent the block letter restrictions. The firm permitted the hedge fund customer to evade fund restrictions by establishing new accounts through which it continued to trade in funds that had previously issued block letters. As a result, in 81 instances, Chase failed to prevent its customer from effecting further trades in contravention of the restrictions imposed by the funds. The customer earned profits in 13 of those funds totaling $140,262.
In resolving this action, Chase has agreed to pay restitution totaling $140,262 to various mutual funds within families of funds including, but not limited to, American Funds, Vanguard Funds and TIAA-CREFChase settled the action without admitting or denying the allegations, but consented to the entry of NASD's findings.
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.")
