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NASD fines State Street Global Markets $1.4m for trade reporting failures

22 November 2005  |  1499 views  |  0 Source: NASD

NASD announced today that it has fined State Street Global Markets, LLC of Boston, MA, $1.4 million for violations relating to the reporting of corporate and municipal bond trades.

State Street Global, which is a subsidiary of Boston-based State Street Corporation, was cited for failing to report thousands of corporate bond trades to NASD's Trade Reporting and Compliance Engine (TRACE) and hundreds of municipal bond trades to the Municipal Securities Rulemaking Board (MSRB) over a 17-month period. NASD also cited State Street Global for supervisory deficiencies relating to corporate and municipal bond trade reporting.

The $1.4 million sanction represents the largest fine imposed to date by NASD against a single firm for fixed income trade reporting violations.

"Investors and dealers in municipal and corporate bonds rely upon TRACE and MSRB trade reporting to provide much-needed price transparency in these markets," said NASD Vice Chairman Mary L. Schapiro. "State Street Global's reporting failures deprived the markets, investors and regulators of critical information, and impaired the integrity of bond trading data that market participants rely upon to make informed investment decisions."

Since July 2002, brokerage firms have been required to report price and volume data on all corporate bond transactions to TRACE, initially within 75 minutes, and today within 15 minutes. NASD publicly disseminates that transaction data immediately on virtually 100 percent of over-the-counter corporate bond activity - approximately 22,000 transactions and $18 billion in volume every day.

Before Jan. 31, 2005, MSRB rules required all dealers to report municipal trades to the MSRB by midnight of the day of the trade, for public dissemination the following day. As of January 31, MSRB rules require that those transactions be reported within 15 minutes of trade execution.

NASD is responsible for enforcing MSRB rules.

NASD found that from July 2003 through December 2004, State Street Global failed to report 14,073, or 89 percent, of its self-cleared corporate bond transactions to TRACE. The firm failed to report 380, or 79 percent, of its self-cleared municipal bond transactions to the MSRB during the same period. The total dollar amount of the unreported corporate and municipal bond transactions exceeded $5 billion.

The trade reporting violations resulted from the failure of State Street Global personnel, when establishing new accounts, to take steps to ensure that all TRACE-eligible transactions would be automatically and electronically reported to the third party agency retained by the firm to report the transactions to TRACE. The trade reporting failures were also due in part to the departure from the firm of several key operations and fixed income trading employees. Thereafter, State Street Global lacked adequate institutional knowledge and internal controls to ensure proper trade reporting. Moreover, State Street Global failed to provide sufficient training for its remaining staff to ensure that the firm's TRACE and MSRB reporting requirements were met.

NASD also found that State Street Global lacked adequate written procedures to ensure proper TRACE and MSRB trade reporting. The firm failed to provide for effective follow-up and review or otherwise monitor its trade reporting to ensure compliance. Additionally, the firm's internal inspections, which are required under NASD rules to be comprehensive and conducted annually, were found to be deficient. State Street Global's parent bank personnel, who were generally not registered as securities professionals, conducted the inspections. The internal inspections were also not comprehensive in that they did not cover all the businesses that State Street Global engaged in, as required by NASD rules.

In connection with these settlements, State Street Global neither admitted nor denied the charges, but consented to the entry of NASD's findings.

TRACE is the only regulated intra-day price dissemination service in the over-the-counter corporate bond market.

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