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“Blue sheets are an essential component of NYSE investigations into insider trading, market manipulation and other potential violations. Firms must get their operations in order, then periodically test their internal systems to be sure this vital information is accurate,” said Susan L. Merrill, chief of enforcement, NYSE Regulation. “We cannot allow the failure of firms to respond accurately and completely to regulatory requests for information to impede our investigations.”
NYSE Regulation also announced the commencement of disciplinary actions against Wedbush Morgan Securities, Inc. of Los Angeles, California and Schon-EX LLC of Jericho, New York, two other Member Firms, for failing to submit accurate blue sheet data and supervisory violations. In the action against Wedbush, the NYSE has also included charges that the firm made material misstatements and failed to cooperate in the blue sheet investigation. The charges against Wedbush detail instances of the firm making false written statements to the NYSE concerning the extent of the blue sheet system deficiencies and representing that these deficiencies had been corrected even though the firm continued to submit inaccurate blue sheets to the NYSE. The charges also allege that the firm failed to exercise due diligence and make sufficient inquiry in order to ensure that complete and accurate information was provided in response to NYSE requests.
Blue sheets are documents that are generated by firms at the request of regulators in connection with investigations of questionable trading. The blue sheets provide information such as the identity of an account holder for whom specific trades were executed and whether a transaction was a buy or a sell and long or short. Since 1989, firms have submitted blue sheets in an electronic format to all regulators including the NYSE.
Inaccuracies and systemic problems were first detected at the Firms by the Market Surveillance division of NYSE Regulation and then referred to the Division of Enforcement for prosecution.
These actions concern submissions by the Firms of inaccurate electronic blue sheets in violation of the requirements of NYSE Rules 410(A) and 401, and the failure of the Firms to properly supervise the preparation of their blue sheet submissions in violation of NYSE Rule 342. The Firms also failed to establish a separate system of follow-up and review to reasonably ensure compliance with NYSE rules relating to the preparation and submission of electronic blue sheets.
The inaccurate blue sheets were submitted over a significant period of time and resulted from deficiencies that were systemic in nature. Inaccuracies included the reporting of short equity sales as long sales. Additionally, some Firms continued to have ongoing deficiencies in blue sheet reporting even though NYSE Regulation alerted them to these problems.
As referenced in the Hearing Panel Decisions, many of the firms contracted with outside vendors to generate and submit electronic blue sheets on their behalf. Similarly, some of the firms acted as clearing firms and relied upon transactional data supplied by executing firms. Nevertheless, it is ultimately the responsibility of firms to reasonably ensure that the information submitted to regulators is accurate and in compliance with federal securities laws and NYSE Rules. This responsibility may not be assigned or delegated to others.
The 20 settling firms consented to the imposition of fines of $150,000, $300,000 or $500,000 depending upon each firm's level of responsibility. Firms that had systemic deficiencies for extended periods of time, more than one type of problem and/or waited for an unreasonable period of time before correcting problems were subject to higher fines than firms that experienced a fewer number of problems and remediated those problems quickly.
Additionally, Goldman, Sachs & Co. was credited with providing an extraordinary level of cooperation by being the first to self-report systemic blue sheet problems to the NYSE, thereby contributing to an industry awareness of the technological problems relating to blue sheet reporting, sharing with the NYSE the results of its comprehensive review and expending significant resources to remediate the problem. (See NYSE Information Memo 05-65 for a discussion of the standards of cooperation.)
The settling Firms also agreed to conduct a validation of all required blue sheet data elements in accordance with the Intermarket Surveillance Group (“ISG”) Regulatory Memorandum ISG 2005-01, issued September 7, 2005 (see also NYSE Information Memo 05-64). Issued by the self-regulatory organizations (including the NYSE) who are members of the ISG, this Memorandum requires Firms to validate all required electronic blue sheet data elements by March 31, 2006 to ensure that electronic blue sheet transmissions are consistent with current standards and accurately reflect Firms’ books and records.
NYSE Regulation worked cooperatively with the NASD Amex Regulation Division, on behalf of the American Stock Exchange, in the action against Merrill Lynch, Pierce, Fenner & Smith Incorporated. The American Stock Exchange will receive one-half of the $500,000 fine in connection with its own settlement with this Firm.
In settling these charges brought by NYSE Regulation, the Firms neither admitted nor denied the charges.
Fines:
|
1 |
$500,000 |
|
|
2 |
Merrill
Lynch, Pierce, Fenner & Smith Incorporated of New York, New York
|
$500,000 |
|
3 |
$500,000 |
|
|
4 |
NF
Clearing, Inc. f/k/a Fiserv Securities, Inc. of New York, New York |
$500,000 |
|
5 |
$500,000 |
|
|
6 |
$500,000 |
|
|
7 |
$300,000 |
|
|
8 |
$300,000 |
|
|
9 |
$300,000 |
|
|
10 |
$300,000 |
|
|
11 |
$300,000 |
|
|
12 |
$150,000 |
|
|
13 |
$150,000 |
|
|
14 |
$150,000 |
|
|
15 |
$150,000 |
|
|
16 |
$150,000 |
|
|
17 |
$150,000 |
|
|
18 |
$150,000 |
|
|
19 |
$150,000 |
|
|
20 |
$150,000 |
|
|
|
|
$5,850,000 |
About NYSE Regulation
On December 17, 2003, the SEC approved a new governance structure for the NYSE. Under the new design, the NYSE Board of Directors is comprised solely of independent directors, except for the chief executive officer, who have no affiliation with any regulated member firm. A new position of chief regulatory officer was created and reports directly to the board of directors through a new Regulatory Oversight Committee. As a result, NYSE Regulation is insulated from potential influence from NYSE members and member firms, operates separately from the business side and is independent in its decision-making.
NYSE Regulation plays a critical role in monitoring and regulating the activities of its members, member firms and listed companies, as well as enforcing compliance with NYSE rules and federal securities laws. Nearly 400 of the largest securities firms in America are members of the New York Stock Exchange. These firms service 98 million customer accounts, or 84 percent of the total public customer accounts handled by broker-dealers, with total assets of over $4 trillion. They operate from 20,000 branch offices around the world and employ 144,000 registered personnel.
Nearly 700 employees, or more than 40 percent of the Exchange’s staff, work for NYSE Regulation, which consists of four divisions: Market Surveillance, Member Firm Regulation, Enforcement and Listed Company Compliance, as well as a Risk Assessment Unit and Dispute Resolution/Arbitration.
