Securities regulators are leaning toward disciplinary action against McDonald Investments for failing to stop some of its brokers, including a group in Chicago, from engaging in improper mutual fund trading.

KeyCorp

(KEY) - Get Report

, the parent company of McDonald, disclosed the possible regulatory action by the NASD in a corporate filing on Friday. The Cleveland-based bank said regulators contend the brokerage failed to "establish and maintain supervisory procedures reasonably designed" to deter market timing and late trading.

Regulators also cited the firm for its failure to properly supervise "the market-timing activities" of a group of brokers in McDonald's Chicago office, which was shuttered in December 2003.

TheStreet.com

was the first to report the closing of the Chicago office amid allegations of abusive market timing by some of the office's 10 brokers.

Regulators contend market timing, or the frequent trading of fund shares, is unethical and harmful to long-term investors because it increases the administrative costs for the fund. Late trading, meanwhile, is an illegal practice in which someone buys shares of a mutual fund after their 4 p.m. closing price in order to take advantage of late-breaking, market-moving news.

Key said an internal review did not reveal any "systemic late-trading arrangements,'' although it did find four instances of late trades being placed in mutual fund shares.

The bank says its brokerage arm intends to submit a reply to the NASD's preliminary determination that disciplinary action is warranted.