NASD fined three firms — and expelled a fourth — for violations relating to trading in corporate high yield bonds. All four firms were cited for charging excessive markups or markdowns in bond trades, as well as for supervision violations. The four firms will also pay restitution to customers totaling more than $1.1 million.
SG Americas Securities, LLC, of New York, will pay a $3.75 million fine and more than $728,000 in restitution. New York’s RBC Capital Markets Corporation was fined $2 million and ordered to pay more than $108,000 in restitution. Its affiliate, RBC Dain Rauscher, Inc., of Minneapolis, was fined $1 million and will make more than $158,000 in restitution payments. DebtTraders, Inc., of New York, was expelled from the industry and ordered to pay nearly $120,000 in restitution. DebtTraders ceased doing business on July 31.
In addition, SG Americas Securities, RBC Capital Markets and RBC Dain Rauscher were ordered to revise their written supervisory procedures for high yield bond sales and purchases within 60 days.
NASD rules require that firms sell all securities, including corporate high yield debt, at fair prices. According to NASD markup policy, markups and markdowns generally should not exceed five percent and, for most debt transactions, that figure should be lower. Numerous SEC and court rulings have upheld those principles.
NASD found that from 2002 through 2003, SG Cowen Securities Corporation’s high yield bond desk, which is now part of SG Americas, charged markups and markdowns ranging from 6.7% to as much as 40% on 13 pairs of trades. During 2003, RBC Capital Markets charged markups that ranged from 5.3% to 14.3% on five pairs of trades. During 2004, RBC Dain Rauscher charged markups ranging from 5.5 to 8 % on six pairs of trades. In 2003 and 2004, DebtTraders charged markups and markdowns that ranged from 5.3 to 25% on 12 pairs of trades.
NASD’s findings also include books and records violations by three of the firms — SG Americas, RBC Dain Rauscher and DebtTraders — and the failure by DebtTraders to correctly report bond transaction information to NASD’s Trade Reporting and Compliance Engine (TRACE).
Firms have been required to report price and volume data since July 2002 on all corporate bond transactions to TRACE, initially within 75 minutes, but now within 15 minutes. NASD publicly disseminates the transaction data immediately, on virtually all of over-the-counter activity — approximately 22,000 transactions every day, representing approximately $18 billion in volume every day.
“TRACE data not only brings much-needed transparency to the corporate bond market for investors and dealers alike, it enhances NASD’s surveillance of the over-the-counter bond market, giving regulators the ability to identify transactions where customers have been charged excessive markups and markdowns,” said Stephen Luparello, NASD’s executive vice president for market regulation. “The nearly $7.9 million in fines and restitution ordered in these cases illustrates the value of TRACE, both to effective regulatory enforcement and to investor protection.”
NASD also found that supervision at all four firms was deficient. Although the firms had written supervisory procedures in place, in each case the supervisory systems were not adequate — they were not designed so that the firms could comply with the legal requirements and guidelines set forth in NASD’s Markup Policy.
None of the firms neither admitted nor denied the charges, but consented to the entry of NASD’s findings.