NASD Nails Daytrading Firms as Senate Hearings Open

Adding to the noise surrounding Senate subcommittee hearings on daytrading, the regulatory arm of the National Association of Securities Dealers announced disciplinary actions Thursday against six companies and seven individuals it says violated securities rules involving daytrading.

Its activities in the area, however, likely won't end with this week's Washington hoopla. Barry Goldsmith, the head of enforcement at NASD Regulation, says the NASD investigation of daytrading is continuing. "These are significant cases," he says. "We have other ongoing investigations in the area."

This time around, though, the infractions included misleading advertising, allowing customers to continue trading after they failed to meet margin requirements, and misuse of investments to provide loans to daytraders, according to the NASD.

"While we do not intend to discourage daytrading by individuals who understand and knowingly assume the risks," Goldsmith says, "it is a highly risky form of trading that requires new regulatory initiatives and close attention by securities regulators."

The NASD announced the enforcement actions on the first of two days of congressional hearings on daytrading, a practice that involves taking positions in securities for short periods of time in an attempt to capitalize on price changes.

Earlier this week, the Securities and Exchange Commission charged two companies and nine individuals with illegally providing loans to daytrading clients, and with failing to properly disclose terms of the loans.

Goldsmith, scheduled to testify before the Senate Subcommittee on Investigations which was formed last May, says the NASD has spent eight months looking into daytrading and that the timing of the NASD enforcement actions Thursday was unrelated to the hearings.

The NASD enforcement actions stem from an investigation of 22 daytrading companies the agency began last year, Goldsmith says.

The enforcement group found numerous rules violations, including exaggerated advertising that failed to disclose risks of daytrading. One ad promised customers could "control (their) own destiny through electronic daytrading," without mentioning a possible downside to the practice.

The NASD also found cases of daytrading-firm employees and their customers executing trades without proper registrations. And it found violations of rules regarding short-selling.

The NASD announced settlements with five firms in Texas and Chicago, in which the companies neither admitted nor denied rules violations, but agreed to censures, suspensions and fines of $13,000 to $37,500.

The companies were: 1 800DAYTRADE.COM of Richardson, Texas; Donnelly & Co. of Midland, Texas; LaSalle St. Securities of Chicago; Addison Securities of Dallas; and Choice Investments of Austin, Texas. The NASD also filed a complaint against Self Trading Securities of Austin, Texas.

Three individuals were named as part of the companies' settlements. The NASD also filed disciplinary complaints against four other individuals.