The NASD has censured and fined five brokerage firms, including TD Waterhouse Investor Services Inc., a total of US$625,000 for failing to prevent “late trading” in mutual funds.

TD Waterhouse received the biggest fine of US$150,000, as did D.A. Davidson & Co. Also, Stifel Nicolaus & Company was fined US$125,000, and US$100,000 fines were levied against each of National Planning Corp. and SII Investments Inc.

The firms were sanctioned for failing to implement adequate supervisory systems and written procedures to detect and prevent “late trading”. Each of the firms permitted its reps to process mutual fund orders after the market close, but none of them had adequate systems in place to ensure that only orders received prior to that day’s market’s close received that day’s net asset value. In settling with NASD, the firms neither admitted nor denied NASD’s findings.

“Late trading” refers to the practice of placing mutual fund orders after the fund has calculated its daily net asset value. The NASD notes that firms that permit late trades can provide customers with an information advantage, allowing them to trade based on news that breaks after the market close that could affect the value of the mutual fund’s holdings, but which is not reflected in the NAV for that day. SEC and NASD rules prohibit late trading to ensure that all purchasers of mutual fund shares are on equal footing as to price and information on any given day.

“To help ensure that illegal late trading does not occur firms must implement systems to guarantee that all mutual fund orders processed after the close of the market were received during normal trading hours,” said NASD vice chairman Mary Schapiro. “NASD will be vigilant about sanctioning firms for failing to have adequate supervisory systems in place designed to prevent manipulative late trading, regardless of whether such trading in fact occurs.”