NASD LETTER OF ACCEPTANCE, WAIVER AND CONSENT NO. ###-###-####

Exhibit 10.4

NASD

LETTER OF ACCEPTANCE, WAIVER AND CONSENT

NO. ###-###-####

Pursuant to Rule 9216 of NASD Code of Procedure, we submit this Letter of Acceptance, Waiver and Consent (“AWC”) for the purpose of proposing a settlement of the alleged rule violations described in Part II below. This AWC is submitted on the condition that, if accepted, NASD will not bring any future actions against us alleging violations based on the same factual findings.

We understand that:

We also understand that our experience in the securities industry and disciplinary history may be factors that will be considered in deciding whether to accept this AWC. That experience and history are as follows:

Prudential Securities, Incorporated (“PSI”), n/k/a Prudential Equity Group, LLC (“PEG”) (BD No. 7471), is a registered broker/dealer under the Securities Exchange Act of 1934 (the “Exchange Act”) and has been a member of this Association since November 2, 1939. PEG is wholly owned by Prudential Financial, Inc. (“Prudential Financial”). Prudential Financial is a publicly-owned holding company, traded on the New York Stock Exchange, whose operating subsidiaries provide a wide range of insurance, investment management and other financial products and services to retail and institutional customers including insurance brokers and investment managers. From at least 1998 through July 2003, PSI engaged in retail securities brokerage operations and maintained branch offices in Boston, Massachusetts and elsewhere. On July 1, 2003, Prudential Financial caused PSI to transfer the assets relating to its domestic retail securities brokerage operations to a holding company controlled by an unaffiliated entity. Following this asset transfer, PSI converted from a stock corporation into a limited liability company and was renamed PEG. PEG provides equity research, sales and trading to domestic and international institutional customers.¹ PSI has a prior NASD disciplinary history, including several NASD actions alleging supervisory deficiencies.

I.

WAIVER OF PROCEDURAL RIGHTS

We specifically and voluntarily waive the following rights granted under NASD’s Code of Procedure:

Further, we specifically and voluntarily waive any right to claim bias or prejudgment of the General Counsel, the NAC, or any member of the NAC, in connection with such

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person’s or body’s participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including acceptance or rejection of this AWC.

We further specifically and voluntarily waive any right to claim that a person violated the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144, in connection with such person’s or body’s participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including its acceptance or rejection.

II.

ACCEPTANCE AND CONSENT

Summary

From at least January 1, 2001 to July 1, 2003 (the “relevant period”), certain of PSI’s registered representatives engaged in deceptive activities in order to make improper market timing transactions in mutual funds on behalf of their clients. The registered representatives used multiple customer account numbers and/or representative numbers (also referred to as “FA numbers” at PSI) to evade the trading restrictions (“blocks”) that certain mutual funds imposed on market timing transactions. For example, following the imposition of a block, the representatives just placed the market timing trades in another account or, if an FA number had been restricted, the representatives placed trades using another FA number. PSI failed to prevent this activity. As a result, representatives defrauded mutual funds and their shareholders by misrepresenting their identities (through the use of multiple FA numbers) and the identities of their brokerage clients (through the use of multiple customer account numbers) to engage in market timing after the mutual funds had placed blocks attempting to prohibit such trading.

As a result of the violative conduct, at least 1,600 PSI customer accounts were collectively able to purchase and sell mutual fund shares worth more than $116 billion, earning those clients more than $162 million in net profits. Those market timing transactions also earned PSI nearly $50 million in gross commissions.

During the relevant period, PSI failed to maintain accurate books and records related to mutual fund transactions. Certain PSI representatives, despite time being material to the transaction, routinely failed to document the time the customer order was received. For example, there was an absence of time stamps on numerous order tickets in the Boston branch office, making it difficult to determine whether the order was received before the 4:00 p.m. market close on the trade date. As a result, PSI would not have been able to prevent and detect any late trading in mutual fund shares. Indeed, the volume of market timing business in the Boston branch office created significant risk of late trading. Mutual fund orders were often transmitted to PSI’s Mutual Fund Operations department after 4:00 p.m. for processing.

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Since at least 1998, PSI was aware that its Boston and three of its New York branch offices, among others, had representatives that primarily engaged in market timing transactions. Indeed, beginning in 2002, the firm’s Risk Management Department had numerous meetings on the activities of those registered representatives. PSI, however, failed to have an adequate supervisory system and written supervisory procedures relating to market timing activities, mutual fund exchanges, and detecting and preventing any late trading of mutual fund shares.

Background

During the relevant period, PSI maintained branch office locations throughout the United States. Some of those branch office locations, including those located in Boston, Massachusetts, Garden City, New York, and New York, New York, maintained relationships with certain clients, including hedge funds, which engaged in “market timing” of mutual funds. Market timing is essentially the frequent trading of mutual fund shares in order to take advantage of pricing inefficiencies or market movements. Market timing can dilute the value of shares and raise fund transaction costs.

During the relevant period, PSI generally processed hundreds of separate mutual fund transactions weekly for its market timing hedge fund clients. In many instances, the hedge fund clients sent facsimiles to the PSI representative in the morning, which identified hundreds of potential mutual fund trades that the hedge fund clients might want to transact on that day or in the days ahead. Thereafter, typically in the late afternoon, the hedge fund clients would contact the PSI representatives to execute some or all of the trades on the list. The PSI registered representatives would then, often frantically, attempt to enter the trades into PSI’s order entry system before the system shut down at the close of the market at 4:00 p.m. Given the number of trades requested by the hedge fund clients, the representatives were often not able to enter all those trades before the close. In that event, the representatives would often fax the remaining orders to PSI’s mutual funds operations desk in New York to process the trade as of that day.

Many mutual funds maintain policies and procedures to detect and prevent market timing transactions. Typically, these policies include prohibiting future transactions after a customer has already placed a certain number of trades. To enforce these limits, the funds and/or their distributors track activity by customer account number and/or FA number. Once a customer reaches the limit, the mutual funds and/or their distributors typically send “block letters” to the brokerage firm, indicating that the mutual fund company will no longer accept exchange transactions from that customer and/or the representative. For example, a block letter received by PSI during the relevant period noted that:

[T]he heightened level of exchange activity in the accounts raises concerns for the funds involved … [i]n light of the amount of recent exchange activity and the funds’ concerns, no more exchanges will be allowed on these accounts. Should future exchange requests be submitted, [mutual fund distributor] will not accept them.

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During the relevant period, PSI received thousands of communications from various mutual fund companies continually placing blocks on a limited number of representatives and their clients. As further detailed below, those PSI registered representatives engaged in a relatively straightforward scheme to evade the restrictions and continue the market timing activity.

Fraudulent Activities Relating to Mutual Fund Market Timing

During the relevant period, PSI knew, or was reckless in not knowing, that certain of its representatives were engaged in deceptive and manipulative practices in order to continue to make market timing trades for their clients. The firm, however, failed to prevent this misconduct. Those representatives, among other things, obtained successive customer account numbers and multiple FA numbers from PSI in order to evade or circumvent block letter restrictions and otherwise exceed the mutual fund exchange limits. If restrictions were imposed on one account, the representatives would continue market timing by transferring customer funds and placing the prohibited trades in another account. While the use of multiple accounts and FA numbers are not per se improper, these techniques were abused at PSI. For example, one group of three representatives in PSI’s Boston branch office used 183 accounts for just seven different hedge fund clients engaged in market timing.

The Boston branch representatives also obtained multiple FA numbers in order to continue the market timing strategy. If a mutual fund imposed a block on a representative, the representatives would continue market timing by placing the prohibited trades using another FA number. As a result, clients that were blocked from additional mutual fund transactions were able to continue market timing because of the representatives’ ability to obtain a new FA number to circumvent the block.

PSI knew, or was reckless in not knowing, of the following fraudulent activity:

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This conduct constitutes separate and distinct violations of Section 10(b) of the Exchange Act, Rule 10b-5 promulgated thereunder, and NASD Conduct Rules 2120 and 2110, and IM-2310-2.

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PSI Failed To Maintain Accurate Books and Records

From at least January 2001 through August 2003, PSI failed to make, maintain and preserve accurate books and records related to mutual fund transactions. PSI, among other things, failed in numerous instances to make and preserve order tickets, and make, maintain and preserve adequate trade blotters, relating to mutual fund transactions. Moreover, where order tickets had been prepared, PSI failed in numerous instances to document the time the customer order was received by the firm and the time certain orders were executed.² For example, there was an absence of time stamps on numerous order tickets, making it difficult to determine whether the order was received before 4:00 p.m. on the trade date or whether the representative engaged in late trading by accepting and processing an order “after hours” in mutual funds. Moreover, certain orders that had time stamps had inaccurate times relating to when they were received at the firm. This conduct constitutes separate and distinct violations of Section 17 of the Exchange Act, Rules 17a-3 and 17a-4 thereunder, and NASD Conduct Rules 3110 and 2110.

Supervisory Violations

Since at least 1998, PSI was aware that its Boston branch office had certain representatives whose primary business was to service clients that engaged in market timing activities. Indeed, the firm’s Risk Management Department had numerous meetings on the activities of those representatives. Nevertheless, PSI failed to maintain a reasonable and adequate supervisory system and written supervisory procedures relating to market timing, mutual fund exchanges, and detecting and preventing late trading of mutual fund shares. PSI failed to ensure in those areas that its written supervisory procedures were updated, maintained and enforced; and that they were reasonably designed to achieve compliance with the applicable rules and regulations. The deficiencies in PSI’s system and procedures included the following areas:

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the transfer of money between the client’s accounts. The establishment of multiple accounts, the widespread use of LOAs by market timing clients, and the frequent transfer of funds among market timing clients’ accounts, were indications to PSI of potential misconduct. The firm, however, failed to establish policies and procedures that were reasonably designed to prevent and detect the misuse of new accounts and LOAs for market timing.

This conduct constitutes separate and distinct violations of NASD Conduct Rules 3010 and 2110.

A censure and $270,000,000 in monetary sanctions. Within ten days of the issuance of this AWC, PSI shall pay the $270,000,000 into an account, not unacceptable to NASD staff, which shall be disbursed in accordance with the independent consultant plan, as further detailed below, to compensate the affected mutual funds and/or shareholders for losses sustained from at least January 1, 2001 to July 1, 2003 as a result of the improper market timing activity in PSI customer accounts and other misconduct described above. Those funds shall be disbursed only pursuant to the undertakings set forth below.

In addition, we shall comply with the following undertakings within the time periods specified (unless otherwise extended by NASD staff):

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Retention of an Independent Consultant,

Disbursement of Funds and Certification of Payment

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The sanctions imposed herein shall be effective on a date set by NASD staff.

III.

OTHER MATTERS

We certify that we have read and understand all of the provisions of this AWC and have been given a full opportunity to ask questions about it, and that no offer, threat,

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inducement, or promise of any kind, other than the terms set forth herein, has been made to induce us to submit it.

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