The settlement announced today - the latest in a series of NASD enforcement actions involving impermissible market timing - also resolves related charges regarding email retention failures and supervisory breaches.
"What is troubling in this case is that, after the fund's prospectus was amended to put new restrictions in place specifically to discourage market timing, Diversified selectively permitted certain customers to carry out hundreds of market timing exchanges," said James Shorris, NASD Senior Vice President and Acting Head of Enforcement. "That special privilege was never disclosed to the fund's other shareholders, who were restricted from making frequent share exchanges."
Diversified is the principal underwriter and distributor of the Diversified Investors family of mutual funds, which are designed for retirement investing. Prior to June 2003, certain registered representatives at Diversified were aware that two groups of accounts had been opened for the purpose of market timing and had entered into agreements with Diversified Investment Advisors, Inc., the funds' investment advisor and Diversified's parent company. The agreements permitted the accounts to market time, subject to certain restrictions.
While these market timing agreements were in place, language was added to the fund's prospectus informing investors that the fund had established new procedures designed to discourage large volume exchange activity that had the potential to affect negatively the fund and its other shareholders. The prospectus further stated that, effective June 30, 2003, if a shareholder sold fund shares, the shareholder may not be permitted to exchange shares back into the fund for 90 days. NASD found that despite these new prospectus restrictions, Diversified permitted the two groups of accounts with market timing agreements to continue their market timing activity. These accounts engaged in approximately 400 market timing round trip exchanges, purchasing and selling shares valued at over $160 million from July through October 2003 - disregarding the new prospectus trading restrictions, and in certain instances exceeding the trading limitations in their original market timing agreements.
NASD also found that while the prospectus limitations were not applied to the two groups of accounts with market timing agreements, approximately 80 letters were sent by a Diversified registered representative to other identified market timers, including investors who purchased and sold as little as $5,000 per trade. Those investors were warned to cease market timing activity and were informed of the new prospectus language restricting an investor who sold interests in the fund from exchanging shares back into the fund for 90 days. However, these investors were not told that the new exchange restrictions were not being applied to the two groups of accounts with market timing agreements.
NASD also found that from November 2000 to December 2003, Diversified did not have an adequate system for retaining e-mail communications and failed to ensure that e-mails were retained in accordance with record-keeping rules.
In settling with NASD, Diversified neither admitted nor denied 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
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