H&R Block Financial Advisors, the investment arm of the tax prep giant, agreed to pay a $500,000 fine and to return $325,000 in clients' mutual fund trading profits to settle charges brought against it by the National Association of Securities Dealers related to the market-timing of mutual fund shares by two of its former financial advisors.
The company, which did not admit or deny the NASD's allegations, said that the settlement won't have a material effect on its operations.
The NASD said that between October 2002 and July 2003, two brokers in the company's Orlando office allowed a client, a New York-based hedge fund, "to engage in deceptive practices to market-time mutual funds."
Brian Nygaard, president and chief executive of HRBFA, said that the trading in question "was isolated to two former financial advisors who executed unsolicited trades requested by one client," and that the fund transactions "did not involve any late trading or any special arrangements with mutual funds."
Nygaard also said that once the firm learned of the client's trading activity, it moved to restrict trading and closed the client's accounts "months before the NASD issued industry guidance on market timing in November of 2003."
The NASD said that the two brokers opened fee-based accounts charging a flat fee of 1 percent, higher than customary for their size, that allowed customers to engage in market timing. The NASD said that the brokers opened 19 accounts, which held roughly $32 million in assets, for seven clients.
According to the NASD, HRBFA received 44 restriction letters trying to stop the hedge fund client from market timing, but the brokers helped the hedge fund get around the restrictions by opening related accounts to continue trading. The NASD said that the hedge fund collected $325,000 in profits from 64 transactions that violated the fund restrictions.
The NASD said that Block didn't have adequate policies and procedures in place "to prevent its brokers and clients from market-timing mutual funds in violation of fund restrictions," and that the company failed to "adequately respond on a timely basis" to the red flags that would have alerted it to the efforts of the Orlando hedge fund customer and Orlando brokers to evade fund restrictions.
The NASD said that its investigation into the activities of "particular individuals" involved in the scheme is continuing.
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