A NASD news release said the firm was fined $150,000 and ordered to pay a total of $140,262 to the affected mutual funds.
NASD found that Chase failed to maintain, update and enforce effective internal policies, systems and procedures for 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 supervision or controls designed to make sure that the block letters would be enforced, the regulator said.
Further, Chase never conducted any follow-up and review of the hedge fund customer’s accounts to make sure 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 stood by while the hedge fund skirted fund restrictions by establishing new accounts through which it continued to trade in funds that had previously issued block letters, NASD said. 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-CREF.
The continuing state/federal mutual fund industry probe has focused on market timing, late trading and certain sales practices.