A NASD news release said the Banc One fine was the largest imposed by NASD or any other regulator for a supervisory failure prompting late trading abuses.
“Late trading is illegal and to prevent it, firms must implement systems to guarantee that all mutual fund orders processed after the close of the market were received during normal trading hours,” said NASD Vice Chairman Mary Schapiro, in the statement. “NASD will be vigilant about sanctioning firms that fail to put adequate systems and procedures in place – regardless of whether late trading in fact occurs.”
According to the announcement, NASD found that because of Banc One’s deficient supervisory systems and procedures from November 1, 2002 through November 11, 2003, customers were able to place mutual fund orders after the close of the market and still receive the current day’s NAV. The firm failed to prevent its brokers from entering orders after 4 p.m. and failed to detect and prevent certain trades that were entered after 4 p.m. that received the current day’s NAV, regulators charged.
As a result, Banc One processed approximately 5,400 mutual fund orders during the relevant period after market close at the current day’s NAV. Those 5,400 mutual fund orders represent 1.75% of the approximately 306,000 non-systematic mutual fund orders handled by Banc One during the period under investigation, NASD said.
Banc One also violated Securities and Exchange Commission and NASD Rules by failing to accurately record the time it received orders from customers, the statement said. According to the NASD, the recorded receipt time often actually reflected the time the broker entered the order or, if the broker sent the order to a trader, the time the trader entered the order. This made it impossible for NASD investigators to determine whether the recorded receipt times for thousands of mutual fund orders received by Banc One between May 2, 2003 and November 11, 2003 were accurate.
Federal and state regulators have been involved in a sweeping mutual fund industry investigation focusing on market timing, late trading, and certain fund sales practices.