Big Board to settle floor broker regulation case

`They clearly failed in their responsibility'

Securities industry

June 30, 1999|By BLOOMBERG NEWS

WASHINGTON -- The New York Stock Exchange will settle a Securities and Exchange Commission case in which the world's biggest stock exchange was accused of failing to adequately monitor and enforce securities rules that apply to floor brokers who illegally profited on trades.

The settlement of the SEC's administrative proceeding is the first involving regulatory shortcomings at the Big Board. But the NYSE was not censured or fined.

The settlement says the NYSE, headed by Chairman Richard Grasso, failed to routinely monitor floor brokers at various times between 1993 and 1998, including a 28-month period from August 1995 to December 1997. "They clearly failed in their responsibility to adequately regulate their floor brokers," said Carmen Lawrence, the SEC's New York regional director.

The NYSE also failed to monitor profit-sharing or other performance-based compensation of independent floor brokers, the SEC found. NYSE staff should have routinely checked customer payments to floor brokers so they would have been in a position to identify possible profit-sharing arrangements, the commission said.

The settlement caps a 16-month investigation that began after federal prosecutors in New York filed charges against eight independent floor brokers, the defunct Oakford Corp. brokerage and two of Oakford's principals. Thirteen defendants have pleaded guilty in that investigation, which led to charges that the floor brokers received $11.1 million in illegal profits.

Federal prosecutors are looking into trading by as many as 64 NYSE floor brokers -- 13 percent of the 500 independent floor brokers -- raising the prospect that more brokers could face charges.

Grasso acknowledged oversight "failures" at the NYSE, though he traced them to "a redirection of resources."

"This was not necessarily an intent to in any way compromise the quality of our regulatory program," Grasso said yesterday. "While it was a dark moment for us last year when the indictments were announced, we've learned a lot since about what we can do for the investing public." The SEC's most pointed criticism of the NYSE was that it used staff to follow up complaints and tips about floor traders, but often did not conduct routine surveillance of them or inspect their records. When the NYSE did inspect floor brokers' records, it only sampled them rather than examining all of them, the commission said.

Some of the illegal trading in the Oakford scheme occurred while the NYSE had suspended routine surveillance of floor brokers between 1995 and 1997, the SEC said. The NYSE agreed to tighten surveillance within a year by increasing its regulatory staff, toughening audit procedures and providing an electronic audit trail. It also agreed to hire an independent consultant to review its practices, and to educate all floor brokers about their obligations.

Many of the changes called for in the settlement already have been initiated by the Big Board at the SEC's request.

The NYSE's cooperation in improving its procedures and assisting with a criminal investigation of floor-broker activities was instrumental in avoiding a censure, the SEC's Lawrence said.

"Their attitude from Day One has been to say, `What do we need to do to make things better?' " he said.

The NYSE is the first self-regulatory organization in at least two decades to be investigated by the SEC without a censure being brought.

Pub Date: 6/30/99

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