NEW YORK – The New York Stock Exchange (search) said on Tuesday that it fined Merrill Lynch & Co. (MER) $13.5 million to resolve allegations it failed to supervise employees who made improper mutual fund trades.
New Jersey and Connecticut, which cooperated with the NYSE in the probe, will divide the fine and receive $10 million and $3.5 million, respectively, the Exchange said in a statement.
Merrill Lynch (search), the No. 1 U.S. brokerage with over 14,000 financial advisers, also said on Tuesday that it had fired three financial advisers who market timed mutual funds and had sanctioned three supervisors over the matter.
Merrill Lynch said in a statement it resolved regulatory inquiries of New Jersey, Connecticut and the NYSE into activities of financial advisers in connection with short-term trading.
While New Jersey officials confirmed the settlement, Connecticut state officials were not immediately available to comment. The NYSE release said the Connecticut $3.5 million settlement was "pending."
Market timing involves the short-term buying and selling of mutual fund shares to exploit inefficiencies in the pricing of the shares. While not illegal, a fund's prospectus can limit the number of trades that can be conducted by a single investor.
Market timing harms mutual fund shareholders because the heightened trading activity requires a fund to set aside more money in liquid assets. Setting that money aside can limit the types of investments a fund can make, limiting its profits.
Tuesday's agreement with the New Jersey attorney general settled allegations by the New Jersey Bureau of Securities concerning trades made by a hedge fund, Millennium Partners L.P.
The allegations focus on market timing by three financial advisers who joined Merrill Lynch's Fort Lee, New Jersey, office in January 2002.
According to New Jersey Attorney General Peter Harvey, Millennium was a prior client of the three Merrill Lynch employees and they continued market timing for Millennium at Merrill Lynch. Over a third of the trades involved mutual funds held as sub-accounts of variable annuity contracts purchased for Millennium.
Despite warnings from supervisors they were violating Merrill Lynch policies the advisers continued to market time until they were fired in October 2003, the New Jersey attorney general said. A Merrill Lynch spokesman said the brokerage has had a policy in place against market timing since 1999.
According to the state's attorney general, the advisers used multiple accounts, undisclosed agreements and other ploys to conduct and disguise their trading. Also, the advisers did not keep records of trades placed through non-Merrill Lynch variable annuity contracts or placed directly in mutual fund accounts held outside of Merrill Lynch.