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NASD Issues First Fine For Annuity Market Timing


Davenport & Co., a Richmond, Va.-based brokerage firm, market timed variable annuity sub-accounts on behalf of two of its hedge fund clients, the National Association of Securities Dealers charged last week, ordering Davenport to pay $450,000 for improper trading.

The NASD fine includes an order for Davenport to pay $228,000 in restitution to variable annuity shareholders who suffered as a result of the firm's rapid-fire trading. The fine also cites Davenport for failing to establish an adequate supervisory system and its inability to document a policy aimed at preventing late trading of mutual funds.

"Deceptive market timing in variable annuity sub-accounts can dilute the value of those shares, raise transaction costs and thus harm other annuity investors," said NASD Vice Chairman Mary L. Schapiro "This is an improper and objectionable trading practice that rises to a higher level of abuse when the firm not only knows that its clients intend to deceive the variable annuity companies, but is complicit in carrying out that deception."

After conducting an investigation between April 2002 and Sept. 2003, the NASD found that Davenport assisted two hedge funds in the market timing of sub-accounts within two variable annuities. NASD did not name the hedge funds in its complaint.

Morgan Stanley is Sued For Sale of Class B Shares

By recommending Class B mutual fund shares when Class A shares "would have been clearly superior," a Morgan Stanley Dean Witter broker violated the Securities Exchange Act, a class-action lawsuit filed last week in Tennessee contends. The suit, filed by the law firm of Falls & Veach, was filed by investors who took the advice of a Morgan Stanley broker to buy Class B shares. Saying that Morgan Stanley "engaged in fraudulent and deceptive practices resulting in class members paying excessive fees and/or loads with respect to such shares," the suit says that since Feb. 24, 1998, "class members must have invested as a result of the recommendation of a MSDW broker." The lawsuit was filed on May 21 in the United States District Court for the Western District of Tennessee.

NASD Names 20 Execs to Mutual Fund Task Force

The National Association of Securities Dealers announced the 20 people it has named to its mutual fund task force. The 20 people, representing a cross-section of the broker/dealer and mutual fund communities, are scheduled to meet for the first time on June 23.

Among those on the task force are: Paul Haaga, executive vice president of Capital Research and Management Co.; Martin Flanagan, president and co-CEO of Franklin Resources; David B. Jones, senior vice president of product strategy and communications for Fidelity Management & Research Co.; and Bob Pozen, chairman, MFS Investment Management.