Most regulators have settled with the brokerages and mutual fund firms that facilitated market timing and late trading. Now they’re settling scores, especially when it comes to impeding their investigations.

The NASD has imposed a $5 million fine against MetLife subsidiaries MetLife Securities, New England Securities and Walnut Street Securities for giving the regulator inaccurate and misleading information. The fines are also for allowing the late trading of mutual funds and failing to promptly produce emails, among other violations.

“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,” said James S. Shorris, Executive Vice President and Head of Enforcement.

In May, regulators fined Morgan Stanley $15 million for it destroying or failing to produce tens of thousands of emails during a previous investigation.

The NASD first approached the MetLife firms in September 2003, at the outset of the fund trading scandal, about their possibly allowing clients to late trade mutual funds. According to the regulator, the firms knowingly responded with inaccurate and misleading information.

When they responded in October 2003, the MetLife firms told the NASD that they were not aware of any late trading transactions, and that each firm had policies and procedures that required all orders placed after 4 p.m. to be executed the following day. In addition, they told the regulator that each firm also had safeguards built in to their computerized order-taking systems to prevent any such trades.

A working group of employees from the three firms, staff from various departments of MetLife Group, as well as an outside law firm, formulated the firms’ answers. And as the firms learned new facts over the next few months that contradicted their original responses, they neglected to give the NASD the correct information. That went on until December 2004, a full 14 months after their original responses.

"NASD relies on firms to respond accurately and promptly to requests for information on matters of regulatory concern," said Shorris. "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.”

That structure contributed to the group’s failure to provide accurate and truthful information. The NASD claims that the specially created working group often disagreed about how thoroughly it should investigate the three firms before responding to the regulator’s questions. In the end, the group’s internal inquiry wound up being fairly shallow. For instance, it decided against reviewing a list of mutual fund transactions from its clearing firm.

As a result, the MetLife firms didn’t know whether mutual fund late trading had actually occurred, at the time they sent their responses. But in April of 2004, the firms’ internal auditors discovered a whopping 19,000 potential late trades. After further examining those trades, the auditors determined that some of those orders were received after 4 p.m. and the trades executed with that day's closing price. They told the firms' legal departments of their findings in mid-July 2004.

Upon learning of the late trades, the MetLife firms hired an outside law firm and conducted a second audit. It completed the second audit in December 2004. At that point, the firms called the NASD to tell it that their prior responses were inaccurate. According to NASD investigators, the firms allowed approximately 800 late trades.

The working group also learned that the MetLife firms lacked procedures or systems requiring that all orders placed after 4 p.m. be executed at the next day's closing price. That was the opposite of what it had told the NASD in its original responses.

The firms also failed to produce emails in a timely fashion during NASD's investigation of this case.

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