Sep. 11–Facing separate mutual fund investigations, Charlotte’s big banks are making sure employees know they will not tolerate questionable trading practices.
Wachovia Securities, the brokerage arm of Wachovia Corp., sent a bulletin this week to its 12,000 brokers reiterating the company’s policy prohibiting improper trading known as market timing.
And two Bank of America Corp. employees allegedly involved in improper mutual fund trading are no longer working in their New York offices, according to employees at the company.
Both banks, neither of which has been charged with wrongdoing, are trying to address growing concerns about protecting long-term investors.
New York Attorney General Eliot Spitzer last week launched an investigation into the $7 trillion mutual fund industry, saying that improper trading was hurting ordinary investors. Federal regulators are also reviewing the industry.
At the heart of the investigations are the practices of late trading and market timing.
Late trading is when a firm, such as a hedge fund, buys or sells mutual fund shares after the 4p.m. close of the market, then turns the shares over the next day if profitable. Such access, which allows the firm to capitalize on after-market news that changes mutual fund prices, is illegal.
Market timing is typically the practice of trading in and out of international funds to make quick profits on after-hours trading. It is not illegal, but is typically restricted by mutual funds to protect long-term investors.
Massachusetts regulators said last week they were investigating mutual fund trading by brokers in the Boston office of Prudential Securities, now part of Wachovia Securities after a July 1 merger.
The U.S. Securities and Exchange Commission, Spitzer and the National Association of Securities Dealers also have launched probes, according to the Boston Globe. The three regulators and Prudential declined to comment Wednesday.
Wachovia’s bulletin notes that “the securities industry is undergoing increased scrutiny of mutual fund market timing practices.” Violators of the policy face disciplinary action, including firing, the bulletin states.
The bulletin, obtained by the Observer, extends Wachovia’s long-standing policy prohibiting market timing to the firm’s new Prudential brokers, a company spokesman said. Prudential’s practice had been to follow the rules of mutual fund companies, which may or may not restrict the practice, a spokesman said.
The regulatory inquiries come as Wachovia and Prudential are forming the nation’s third largest brokerage with $537 billion in client assets. Wachovia has a 62 percent stake in the joint venture, Prudential 38 percent ownership. The Wachovia Securities name will go up on Prudential offices next month.
Wachovia will probably not feel a financial impact from the market timing allegations because the merger agreement says pre-existing legal liabilities are the responsibility of the parent companies, said Denis LaPlante, bank analyst with Keefe Bruyette & Woods.
But he notes, “Whenever these sort of things happen there is a reputational problem that comes up.”
LaPlante expects the scrutiny of the mutual fund industry to remain heavy. “This has more than a half-life of a week,” he said. “This will last for a while.”
Bank of America is snared in allegations made last week by Spitzer that its brokers allowed Canary Capital Partners LLC, a New Jersey hedge fund, to engage in late trading and market timing.
Bank employees named by Spitzer in the complaint include Theodore Sihpol, a broker; Charles Bryceland, a branch manager; Robert Gordon, chief executive of Banc of America Capital Management; and Richard DeMartini, president of the bank’s asset management businesses, which include mutual funds.
Sihpol, who brought in Canary as a client in 2001 according to the complaint, was on administrative leave, according to people who answered his direct line in New York on Wednesday afternoon.
Bryceland’s New York office was telling callers Wednesday that he was no longer with the bank. The bank declined to comment on Sihpol and Bryceland.
Canary, whose relationship with Bank of America lasted between 2001 and this year, paid management and advisory fees as well as invested in other funds within the bank.
Spitzer says Bryceland commended Sihpol for the Canary relationship.
Gordon, who Spitzer said checked the Canary relationship with other bank executives, did not respond to phone calls Wednesday afternoon. DeMartini did not return a call left with his assistant.
Bank of America spokesman Bob Stickler said he could not confirm the information regarding employees.
“We will announce any significant actions in relation to the mutual fund trading as soon as we can,” Stickler said. “We’re committed to acting swiftly but also committed to acting thoroughly and fairly.”
Bank of America Chief Executive Ken Lewis said last week that any employees involved in improper trading would be punished.
The bank also announced an internal and external investigation into the alleged improper trading, and it promised restitution to investors who lost money.
Industry experts have said the best way for the banks to respond to any investigation is to move quickly.
“They have to put in place practices that show they have reformed their way of doing business and also hold people accountable,” said banking analyst Craig Woker of Morningstar Inc., a research firm that does not do business with the bank. “Let the heads roll if that’s the best course of action.”
Bank of America’s stock dipped $1.24 Wednesday to $74.87, down nearly 6 percent in the past week.
Wachovia shares fell $1.13, or 2.7 percent, to $40.60, on a day on which the Philadelphia Bank Index slipped 1.8 percent. Version edited by News Service:
By Sarah Jane Tribble and Rick Rothacker
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