The National Association of Securities Dealers today imposed a fine of US$350,000 against Sanford C. Bernstein & Co. LLC of New York and a fine of US$200,000 against one of the firm’s research analysts, for violations of NASD’s research analyst conflict of interest rules.

In its investigation, the NASD found that Sanford Bernstein, a subsidiary of Alliance Capital Management L.P., had favorable ratings on Morgan Stanley and Lehman Brothers securities that remained in effect while its research analyst on those stocks was selling his own shares in the two companies, a violation of NASD rules prohibiting trading contrary to an analyst’s recommendation. It said he also engaged in transactions in six securities held in a discretionary personal account that were contrary to his then-current recommendations.

The fines represent the largest NASD has imposed to date for violations of its new research analyst conflict of interest rules, which were first approved by the SEC on May 10, 2002 and went into effect beginning July 9, 2002. In connection with these settlements, Sanford Bernstein and the analyst neither admitted nor denied the charges, but consented to the entry of NASD’s findings.

“NASD’s research analyst conflict of interest rules are designed to give customers confidence that analysts’ stock recommendations are not biased due to any financial self-interest of the analyst,” said James Shorris, acting head of enforcement. “Inconvenience or expense does not excuse non-compliance with NASD’s rules against analysts trading contrary to their research recommendations.”

The NASD found that Brad Hintz, a high profile analyst covering financial services companies, held a substantial amount of stock in Lehman Brothers and options to purchase stock in Morgan Stanley that he received as compensation when he served as the chief financial officer and treasurer, respectively, at those firms. Hintz’s Morgan Stanley options were set to expire in January 2005. The NASD found that Hintz wanted to sell his holdings in both companies to realize the substantial gain in the value of the securities and to diversify his portfolio. However, NASD rules, prohibit an analyst from effecting stock transactions contrary to the analyst’s current recommendations; Hintz had favorable ratings on both companies at the time.

In 2004, Sanford Bernstein – at Hintz’s request – unsuccessfully sought an exemption from the rule prohibiting the sales, arguing that Hintz’s circumstances constituted a “hardship” and that he should be allowed to sell his holdings. After that, the firm developed a plan – approved by its legal and compliance department and senior management – that it believed would allow Hintz to sell his holdings in Morgan Stanley and Lehman Brothers without violating NASD rules. Under this plan, Hintz issued what were purported to be his “final” reports on Morgan Stanley and Lehman, terminating coverage, while indicating that he intended to resume coverage in February 2005 after selling all of his holdings in both companies.

The NASD said the plan didn’t comply with its rules. “Hintz did not have to sell his holdings and could have continued to hold his Morgan Stanley and Lehman Brothers securities, using other funds to pay for the costs of exercising his Morgan Stanley options,” it said.

It found, “There was no bona fide termination of coverage because the firm intended to resume coverage of both stocks shortly after Hintz’s stock sales were complete.”