Source: National Association of Securities Dealers
NASD today announced that it has imposed a $5 million fine against MetLife Securities, Inc. (MSI) of New York, New England Securities, Inc. (NES) of Boston and Walnut Street Securities, Inc. (WSS) of St. Louis - all owned by MetLife, Inc. - for providing inaccurate and misleading information to NASD, allowing late trading of mutual funds, failing to produce e-mails in a timely fashion and other conduct that violates NASD's rules.
NASD found that in response to an NASD inquiry in September 2003 concerning late trading of mutual funds, MSI, NES, and WSS (the MetLife Securities Firms) provided inaccurate and misleading responses despite having learned information raising serious questions about the accuracy of those responses. The responses were coordinated by a working group consisting of employees from the three firms, staff from various departments of MetLife Group, Inc., and an outside law firm. Further, the MetLife Securities Firms learned additional facts over the next several months that contradicted their original responses, but failed until December 2004 - 14 months after they had originally responded - to provide NASD with corrected information.
"NASD relies on firms to respond accurately and promptly to requests for information on matters of regulatory concern," said James S. Shorris, Executive Vice President and Head of Enforcement. "Part of the problem in this case stemmed from the decision by the MetLife firms to respond to a regulatory inquiry by relying upon a committee without clear lines of authority or specifically identified individuals responsible for the adequacy and accuracy of information that was provided. The MetLife Securities Firms' subsequent failure to correct the inaccurate information about the firms' mutual fund trading practices and procedures - a failure that lasted for more than a year - compounded an already unacceptable situation. Ultimately, this case should send a strong message that NASD expects firms to provide accurate information to regulatory inquiries in a timely manner - and that failures to provide accurate information will draw severe sanctions."
In October 2003, each of the MetLife Securities Firms responded to the NASD requests by stating that upon reasonable inquiry, the firms were not aware of any late trading transactions; that each firm had policies and procedures in place that required all orders placed by customers after 4 p.m. Eastern Time to be executed the following day, and that each firm's policies and procedures included "safeguards built-in to the computerized order-taking system utilized by [the firm] and its representatives."
While the firms made these affirmative statements, the group had information that each of these statements was inaccurate or misleading.
NASD found that while the specially created working group was preparing the original responses, there was internal disagreement within the group about the level of inquiry that needed to be undertaken to respond to the regulatory inquiry. For instance, statements by the MetLife firms that upon reasonable inquiry they were not aware of any late trades were made even though the group had decided against obtaining a list of mutual fund transactions from the firm's clearing firm.
Although the MetLife Securities Firms did not know at the time they sent their responses whether late trading transactions had actually occurred, in April 2004, the firms' internal auditors learned of 19,000 potential late trades. Examining a subset of these trades, the auditors determined in June 2004 that some of the orders were in fact received and the trades executed after 4 p.m. with that day's closing price, a finding that was conveyed to the firms' legal department in mid-July. Rather than advise NASD, however, the MetLife Securities Firms retained an outside law firm and conducted a second audit. It was only after this second audit, in December 2004, that NASD was advised that the prior responses were inaccurate. NASD investigators determined that approximately 800 late trades were allowed to take place.
The working group also learned that contrary to its original responses, the MetLife Securities Firms did not have procedures that would require all orders placed after 4 p.m. to be executed at the next day's closing price. In fact, the working group also knew that the firms did not have adequate procedures to monitor, detect or prevent late trading.
NASD also found that the MetLife Securities Firms failed to produce responsive e-mails in a timely fashion during NASD's investigation of this case. NASD found that the MetLife Securities Firms violated federal securities laws, Securities and Exchange Commission rules and NASD regulations by executing approximately 800 late trades; submitting inaccurate and misleading responses to regulatory inquiries; failing for many months to update, supplement or correct those responses; failing to establish and maintain adequate supervisory systems and written procedures to prevent or detect late trading; failing to capture the time of customer mutual fund orders; failing to produce responsive emails in a timely fashion, and failing to retain emails for the required three-year period. In settling these matters, the MetLife Securities Firms neither admitted nor denied the charges, but consented to the entry of NASD's findings.