The National Association of Securities Dealers today fined New York’s HSBC Brokerage US$250,000 for failure to have adequate systems in place to supervise government securities transactions to ensure best execution.

In addition, the NASD said that the firm routed orders to HSBC Securities, an affiliated firm, without taking adequate steps to ensure that customers would not be harmed in the pricing of these securities. HBI’s inability to provide documentary evidence of its supervisory review for best execution of trades inhibited NASD’s ability to review transactions for best execution, it added.

HBI settled this action without admitting or denying the charges, but consented to the entry of NASD’s findings.

“All firms have a fundamental obligation to provide their clients with best execution of their securities orders” said James Shorris, the NASD’s executive vice president and head of enforcement. “HBI put its customers’ orders at risk by failing to monitor these orders to ensure that it was getting best execution. That risk was heightened when the firm began routing orders internally to its affiliated broker-dealer, without being able to demonstrate any supervisory review to evaluate whether its affiliate provided the best execution.”

Toward the end of 2003, there were discussions between HBI and HSI about increasing business between the two affiliated firms and efforts were undertaken by HBI to increase its order flow to its institutional affiliate. In late 2003, HBI began to increase its order flow to HSI, and in May 2004, HBI directed its fixed income traders to route all government securities orders to HSI for execution. As a result, the dollar volume of U.S. Treasury transactions that HBI sent to HSI rose from approximately 24% in October 2003 to approximately 79% in April 2004, and to close to 100% from June through December 2004 (In April 2005, HBI merged with HSI). While its traders were required to “shop” an order for a government securities transaction before placing it with the affiliate, HBI had inadequate systems to monitor this process by its traders, the NASD said.

The NASD also found that while several HBI officers recognized the increased risk associated with directing all government securities orders to a single, affiliated broker-dealer, the firm failed to put reasonable policies and procedures in place to ensure that clients received best execution for these orders. The firm had minimal systems in place to supervise for best execution prior to May 2004, and no further steps were taken to monitor for best execution after the directive to send all customer orders to the affiliated firm, it said.

HBI was unable to provide documentary evidence of supervisory review for best execution for any of the trades requested by NASD as part of its review. This, combined with the fact that the firm did not have a system for recording competitive bids, severely limited NASD’s ability to review transactions for best execution. NASD identified several transactions in which the firm violated its best execution obligations, but the firm lacked the records needed for a thorough best execution review.