The National Association of Securities Dealers today sanctioned four firms, including two RBC subsidiaries, for charging excessive markups in corporate high yield bond trades, as well as for supervision violations.

The four firms will pay restitution to customers totaling more than US$1.1 million. It also fined three of the firms, and expelled a fourth.

RBC Capital Markets was fined US$2 million and ordered to pay more than US$108,000 in restitution. Its affiliate, RBC Dain Rauscher Inc., of Minneapolis, was fined US$1 million and will make more than US$158,000 in restitution payments.

Also, SG Americas Securities LLC will pay a US$3.75 million fine and more than US$728,000 in restitution. And, DebtTraders Inc. was expelled from the industry and ordered to pay nearly US$120,000 in restitution. DebtTraders ceased doing business on July 31.

In concluding these settlements, the firms neither admitted nor denied the charges, but consented to the entry of the NASD’s findings.

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.

According to NASD policy, markups and markdowns generally should not exceed 5% and, for most debt transactions, that figure should be lower. However, the NASD said that it found that from 2002 through 2003, SG Cowen Securities’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.

The 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.

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, it says.