The NASD has fined State Street Research Investment Services Inc. (SSR) US$1 million for failing to prevent market timing in its mutual funds due to its inadequate supervisory systems.

NASD is a private-sector provider of financial regulatory services in the United States.

NASD says SSR also agreed to pay more than US$500,000 in restitution to the individual State Street Research mutual funds to compensate the for losses attributed to the market timing activity.

The NASD found that, from 2001 through August 2003, SSR’s inadequate supervisory system improperly permitted the customers of at least one other securities firm, Prudential Equity Group Inc. to trade shares of SSR funds beyond the annual limits set forth in the prospectuses. The annual limits, typically six trades per year, were designed to limit market timing in the funds.

In its investigation, NASD found that by November 2001, SSR’s operations personnel had reason to believe that the Boston office of Prudential Securities was engaged in market timing activities, and that certain Prudential Securities customers had been able to exchange shares of SSR funds beyond the annual limits described in the applicable prospectus. SSR was aware that a number of Prudential Securities’ registered representatives engaged in deceptive conduct so that their customers could exchange funds in excess of prospectus limits, it said.

In addition to fining the firm, NASD also required SSR to certify that it has disclosed all instances of fund trading that was inconsistent with the prospectus exchange limits and that it has implemented appropriate systems and controls with respect to market timing.

In settling this matter, SSR neither admitted nor denied the charges.

“Market timing, in violation of prospectus limits, can dilute the value of fund shares, raise transaction costs and thus harm other fund shareholders,” said Mary Schapiro, vice chairman of NASD. “When a firm is on notice, as SSR was, that its funds are being timed, the firm must respond quickly and effectively.”