NASD slaps fine on dealers


The National Association of Securities Dealers (NASD), the self-regulatory organisation for brokerage firms, has reached a settlement with four Wall Street banks on 18 separate instances of taking an excessively large cut when trading high-yield bonds.

Citigroup, Goldman Sachs, Deutsche Bank and Miller Tabak Roberts Securities will each pay $5 million in fines for trading violations that occurred between 2000 and 2002. The NASD is now raking through data since 2002 to look for other instances of excessive mark-ups on corporate bonds.

The NASD has also charged three of the firms – Goldman Sachs, Deutsche Bank and Citigroup – with trade reporting violations, and two of the firms – Deutsche Bank and Miller Tabak Roberts – with failure to register one or more supervisors on the firms’ high-yield desks.

In all 18 of the trades covered by the settlement, the NASD found that brokerage firms charged investors mark-ups or markdowns of more than 5% even though the firms took no risks on the trades. A 5% margin has long been considered the rule of thumb for bond sales and purchases, and yet the NASD found that between 2000 and 2002, the four firms charged mark-ups on bonds of as much as 32.2%.

NASD vice chairman Mary Schapiro said in a statement: “NASD rules require that firms sell all securities, including corporate high-yield debt, at fair prices. NASD mark-up policy has been clear that mark-ups and markdowns generally should not exceed 5% and, for most debt transactions, that figure should be lower. Numerous SEC and court rulings have reiterated these principles throughout the years.”

Some Wall Street firms maintain that mark-up spreads greater than 5% may be appropriate for trades in distressed debt because of the added volatility risk for such speculative securities. All the trades covered by the settlement involved distressed debt but the mark-ups were judged to be inappropriate because the transactions bore little or no risk for the firms involved.

Each firm’s $5 million penalty includes restitution payments for the mark-up violations: nearly $344,000 for Goldman Sachs, $486,000 for Citigroup, $422,000 for Deutsche Bank and $182,000 for Miller Tabak Roberts.

The four Wall Street firms, which did not admit or deny the allegations, agreed to pay the fines and improve their supervisory procedures.

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