Chase Investment Services of Chicago has been ordered to pay more than US$290,000 for failing to have an adequate supervisory system and controls in place to prevent deceptive market timing by one of its hedge fund clients, the National Association of Securieties Delears announced Tuesday.

The firm was fined US$150,000 and ordered to pay a total of US$140,262 to the affected mutual funds.

NASD, the primary private-sector regulator of the U.S. securities industry, found that Chase failed to maintain, update and enforce effective internal policies, systems and procedures with respect to preventing deceptive mutual fund market timing activity by one of its customers, which operated a hedge fund. From at least February 2002 through August 2003, Chase received notice of trading restrictions or “block letters” from 19 mutual funds — with each fund restricting the hedge fund customer from effecting future transactions within the fund. However, Chase did not have adequate supervisory systems or the controls to ensure the block letters would be enforced.

Further, Chase failed to conduct any follow-up and review of the hedge fund customer’s accounts to ensure that it enforced the terms of the block letters it received and/or detected and prevented the hedge fund’s attempts to circumvent the block letter restrictions. The firm permitted the hedge fund customer to evade fund restrictions by establishing new accounts through which it continued to trade in funds that had previously issued block letters. As a result, in 81 instances, Chase failed to prevent its customer from effecting further trades in contravention of the restrictions imposed by the funds. The customer earned a total of US$140,262 profit in 13 of those funds.

In resolving this action, Chase agreed to pay restitution totalling US$140,262 to various mutual funds within families of funds including, but not limited to, American Funds, Vanguard Funds and TIAA-CREF. Chase settled the action without admitting or denying the allegations, but consented to the entry of NASD’s findings.

“Deceptive market timing — by hedge funds or any other market participant — is both unfair and harmful to other mutual fund shareholders,” said Barry Goldsmith, NASD executive vice president and head of enforcement. “In this case, Chase’s failure to have systems and controls in place to enforce trading limits set by the mutual funds themselves resulted in a hedge fund gaining an impermissible advantage over other fund shareholders.”