Nasdaq parent faces SEC case on practices


NEW YORK -- The Securities and Exchange Commission has found evidence of widespread violations of trading regulations in the Nasdaq stock market and is working toward filing a major, highly unusual disciplinary case against Nasdaq's parent organization, according to sources familiar with the SEC investigation.

Civil charges are expected to be filed as early as September against the Washington-based National Association of Securities Dealers, an organization of most of the nation's securities firms, sources said in interviews over the past two weeks. The NASD owns and operates Nasdaq, the fast-growing electronically linked network of dealers who trade over-the-counter stocks.

The charges expected to be filed will stem from findings that the NASD failed to take steps to halt illegal practices, many of which increased small investors' costs for buying and selling Nasdaq stocks, the sources said. Such illegal practices include manipulation of stock prices, refusing to honor quoted prices, agreeing to illegally delay the reporting of big trades, and harassing fellow dealers who break ranks to narrow "spreads." Spreads are essentially dealers' profit margins on Nasdaq stocks.

The NASD says that deliberate violations of its rules are rare and that the market is fair to small investors.

In an interview, Richard G. Ketchum, the NASD's chief operating officer, said he wasn't aware that the SEC planned to bring a case against the organization. "If they're going to bring a case they haven't told us," he said.

NASD spokesman Marc Beauchamp told Bloomberg Business News that, "We have received no indication from the SEC about any action they may or may not take. We believe we do a highly effective job of regulating the Nasdaq stock market, and we believe the SEC will find that."

The prospect of a legal challenge against the NASD comes as the organization confirmed Thursday that it has experienced serious computer problems as a result of a recent surge in trading volume, causing the public "tape" displaying stock prices to be up to four minutes late during the first 20 minutes of the trading day. A spokesman said the NASD hadn't publicly disclosed the delay but had notified the SEC. While such delays are in effect, investors have no way of knowing current prices.

The SEC's probe of trading practices has singled out the NASD for disciplinary action because investigators now are convinced that rule violations have been endemic, rather than isolated instances, and that the NASD hasn't fulfilled its legal duty to police the market, the sources said.

The SEC also may file charges against firms that deal in Nasdaq stocks and against individual traders, but, the sources said, no decision on that has been made yet.

The SEC is likely to seek a formal censure of the NASD, as well as an order requiring numerous specific reforms, including closer supervision of Nasdaq dealers, the sources said. It also could seek a fine.

Sources said the SEC investigation is still in progress and hasn't yet been formally presented to SEC commissioners for approval.

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