The National Association of Securities Dealers (NASD), the regulatory body that handed down the punishment, also announced that SSR would be ordered to pay restitution of more than $500,000 to the State Street Research funds to compensate for losses resulting from the prohibited market timing. The restitution payment will be apportioned among the affected State Street Research Funds, according to a news release.
In addition to fining the firm, NASD also required SSR to certify that it has disclosed all instances of fund trading that was inconsistent with the prospectus exchange limits and that it has implemented appropriate systems and controls with respect to market timing. SSR neither admitted nor denied charges in reaching the settlement with the NASD.
The settlement comes after NASD conducted an investigation into possible market-timing activities in SSR’s mutual funds. In the course of the investigation, NASD found that by November 2001, SSR’s operations personnel had reason to believe that the Boston office of Prudential Securities was engaged in market-timing activities on behalf of its clients and that, among others, certain Prudential Securities customers had been able to exchange shares of State Street Research funds beyond the annual limits – limits placed on funds to limit potential market timing – described in the applicable prospectus.
Yet, with this knowledge, NASD determined SSR’s supervisory system was “inadequate.” Turning to the results of its investigation, NASD found SSR’s written supervisory procedures and systems failed to provide for adequate follow-up to the “block letters” it sent to brokerage firms. Some customers of these firms were able, through the establishment of new customer accounts, to continue trading in SSR funds even after one of their accounts had been blocked. Additionally, NASD found inadequacy in the supervisory system since SSR failed to preserve and maintain internal e-mail communications relating to the firm’s business as required by the federal securities laws and NASD rules.
“Market timing, in violation of prospectus limits, can dilute the value of fund shares, raise transaction costs and thus harm other fund shareholders,” Mary Schapiro, Vice Chairman of NASD said in the release. “When a firm is on notice, as SSR was, that its funds are being timed, the firm must respond quickly and effectively.”