U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

Securities Exchange Act of 1934
Release No. 41574 / June 29, 1999

Administrative Proceeding
File No. 3-9925

In the Matter of

New York Stock Exchange, Inc.,
Respondent.

ORDER INSTITUTING PUBLIC
PROCEEDINGS PURSUANT TO
SECTION 19(h)(1) OF THE
SECURITIES EXCHANGE ACT
OF 1934, MAKING FINDINGS
AND ORDERING COMPLIANCE
WITH UNDERTAKINGS

I.

The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be instituted pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934 ("Exchange Act")1 against the New York Stock Exchange, Inc. ("NYSE") to determine whether the NYSE violated Section 19(g)(1) of the Exchange Act.2 In anticipation of this proceeding, the NYSE has submitted an Offer of Settlement which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, the NYSE, without admitting or denying the Commission's findings except those contained in Section III. A. below, which are admitted, consents to the entry of this Order Instituting Public Proceedings Pursuant to Section 19(h)(1) of the Securities Exchange Act of 1934, Making Findings and Ordering Compliance With Undertakings.

II.

Accordingly, IT IS HEREBY ORDERED, that proceedings pursuant to Section 19(h) of the Exchange Act be, and they hereby are, instituted.

III.

On the basis of this Order and the Offer of Settlement submitted by the NYSE, the Commission finds3 that:

A. RESPONDENT

The NYSE is a New York not-for-profit corporation which is and at all relevant times was registered with the Commission as a national securities exchange pursuant to Section 6 of the Exchange Act.

B. INTRODUCTION

In the manner described below, the NYSE, without reasonable justification or excuse, failed to enforce compliance with Section 11(a) of the Exchange Act ("Section 11(a)"), Rule 11a-1 thereunder ("Rule 11a-1"), and NYSE Rules 90, 95 and 111. Those provisions are aimed at preventing independent floor brokers, who are members of the NYSE, from exploiting their advantageous position on the NYSE floor for personal gain to the detriment of the investing public. Section 19(g) of the Exchange Act requires self-regulatory organizations ("SROs") to enforce compliance with the Exchange Act and the rules and regulations thereunder, as well as the SROs' own rules. "Enforcing compliance" includes developing and maintaining inspection and disciplinary programs. See Enforcement Obligations of Exchanges and Associations, 10 S.E.C. Docket 998, Release No. 34-12994, 1976 WL 19312, at *5 (Nov. 18, 1976). The Commission has stated that "[t]he obligation to enforce imposed by Section 19(g) on an exchange necessarily includes an obligation to monitor and maintain surveillance over its members." Boston Stock Exch., Inc., 21 S.E.C. Docket 22, Release No. 34-17183, 1980 WL 25454, at *3 (Oct. 1, 1980). Exchanges violate Section 19(g) when they fail "to be vigilant in surveilling for, evaluating, and effectively addressing issues that could involve violations" of the securities laws. National Ass'n of Sec. Dealers, Inc., 62 S.E.C. Docket 1346, Release No. 34-37538, 1996 WL 447193, at *2 (Aug. 8, 1996).

Between approximately 1993 and early 1998, groups of independent floor brokers violated Section 11(a), Rule 11a-1, and NYSE Rules 90, 95, and 111, by engaging in illegal schemes of trading on the NYSE floor while sharing in the profits or losses generated from those trades. The NYSE failed for several years to uncover and halt these illegal schemes. In February 1998, the Commission and Office of the United States Attorney for the Southern District of New York ("USAO") charged eight independent floor brokers with perpetrating one such trading scheme with The Oakford Corporation, a former broker-dealer member of the National Association of Securities Dealers and the American Stock Exchange ("Oakford" cases) and the NYSE, having learned of the scheme from the USAO in late 1997, suspended those independent floor brokers.

The NYSE's floor broker regulatory program suffered from two major deficiencies: (1) the NYSE failed to take appropriate action to police for profit-sharing or other performance-based compensation of independent floor brokers; and (2) the NYSE suspended its routine independent floor broker surveillance for extensive periods of time, the longest of which lasted over two-years. In those respects, the NYSE knew or, in view of all of the facts and circumstances, should have known that its system of reports, examinations and inspections was in material respects inadequate in relation to resources reasonably available to the NYSE for the purpose of detecting securities law violations and enforcing compliance by its members.

C. REGULATION OF INDEPENDENT FLOOR BROKERS
AND NYSE OVERSIGHT

1. Independent Floor Brokers As Agents of Customers

About 500 of the NYSE's members serve either part time or full time as "independent" floor brokers ("Independent Floor Brokers"). Independent Floor Brokers are agents who execute orders on the exchange floor typically for other members or other brokerage firms. For their services, Independent Floor Brokers receive a negotiated commission, which typically is based on the share volume of the trade. The Independent Floor Broker has a fiduciary responsibility to hold the interests of those placing such orders above the Independent Floor Broker's own interests and to ensure the timely and best execution of such orders in compliance with federal securities laws and NYSE rules. From their position on the trading floor and their immediate awareness of market movements, Independent Floor Brokers enjoy time and place advantages over public investors. Accordingly, Congress enacted Section 11(a) to address trading advantages available to exchange members and conflicts of interest. Securities Acts Amendments of 1975, S. Rep. No. 94-75, at 60-69 (1975); Securities Reform Act of 1975, H.R. Rep. No. 94-123, at 54-57 (1975).

Section 11(a), subject to certain exemptions, makes it "unlawful for any member of a national securities exchange to effect any transaction on such exchange for its own account, the account of an associated person, or an account with respect to which it or an associated person thereof exercises investment discretion." In other words, Independent Floor Brokers are prohibited from exploiting their time and place advantage to their own benefit through proprietary or discretionary trading. Rule 11a-1, with certain exceptions, prohibits an exchange member, while on the trading floor, from initiating any transaction in any security traded on the exchange for any account "in which such member has an interest, or for any such account with respect to which such member has discretion."4 When Independent Floor Brokers trade for their own accounts or for accounts in which they have an interest, their interests may come into conflict with those of their customers, they may usurp trading priority owed to customer orders, and they are situated to commit other violations such as trading ahead and frontrunning, in which brokers execute proprietary trades while in possession of unexecuted customer orders for the same security.

An account can constitute an Independent Floor Broker's "own account" under Section 11(a) or an account in which an Independent Floor Broker "has an interest" under Rule 11a-1 even if the Independent Floor Broker's name does not appear on the account records. For example, an account becomes the Independent Floor Broker's "own account" under Section 11(a) or an account in which an Independent Floor Broker "has an interest" under Rule 11a-1 if the broker receives compensation based on a percentage of the account's trading profits or losses regardless of whether the broker's name is on the account records. The issue to be determined is whether the compensation arrangement results in the member having a participation in the performance of an account. Accordingly, any compensation arrangement that results in the exchange member sharing in the trading performance of an account, however structured, makes the account that member's "own account," or constitutes an "interest" in the account, for purposes of Section 11(a) and Rule 11a-1. A floor broker sharing in the profits or losses of an account for which the broker is effecting or initiating trades is inimical to the purpose of Section 11(a) and Rule 11a-1.

2. The NYSE's Obligation As A Self-Regulatory Organization

Section 6(b) of the Exchange Act requires the NYSE, as a registered national securities exchange, to be organized and have the capacity to be able to carry out the purposes of the Exchange Act and to comply and enforce compliance by its members with the Exchange Act, the rules and regulations thereunder, and the rules of the NYSE. The Exchange Act further requires the NYSE, as a self-regulatory organization, to comply with, and enforce the provisions of the Exchange Act, the rules and regulations thereunder and its own rules. 5

The NYSE has an affirmative obligation to be vigilant in surveilling for, evaluating, and effectively addressing activity that could involve violations of these provisions. The NYSE established a Regulatory Group that has the responsibility to enforce compliance by its members with the Exchange Act, the rules and regulations thereunder, and the NYSE's own rules. The NYSE's Regulatory Group consists mainly of three divisions: (1) Market Surveillance; (2) Enforcement; and (3) Member Firm Regulation. Prior to Spring 1998, Market Surveillance had the principal responsibility to surveil and investigate Independent Floor Brokers for trading violations.

3. Unlawful Trading on the NYSE Floor

The USAO, following consultation with the SEC and the NYSE, has stated that, as of April 30, 1999, there was probable cause to believe that 64 Independent Floor Brokers prior to February 1998 had effected transactions on the NYSE floor for accounts as to which those floor brokers received a share of the profits.6 Effecting transactions in this manner violates Section 11(a) and Rule 11a-1, and NYSE Rules 90 and 111. In some instances, Independent Floor Brokers traded ahead of customer orders or engaged in frontrunning; in certain cases, individuals assisted by falsifying certain order tickets or other books and records.

For example, in February 1998, the USAO announced that a grand jury had indicted eight Independent Floor Brokers, a registered non-member broker-dealer, The Oakford Corporation, and its principals, with perpetrating an unlawful floor trading scheme in which the Independent Floor Brokers shared in the profits or losses generated from the trades they effected or initiated on the NYSE trading floor. On February 25, 1998, the Commission filed a civil action against these Independent Floor Brokers (whom the NYSE summarily suspended), The Oakford Corporation and an additional six broker-dealers, alleging the receipt by these defendants of $11.1 million in unlawful profits. The Commission's initial and amended complaints and the USAO indictment charge, among other things, that between 1993 and early 1998, Independent Floor Brokers: (a) violated Section 11(a)(1) and Rule 11a-1 by effecting or initiating trades on the NYSE floor for accounts that bore The Oakford Corporation's name, but which also were the Independent Floor Brokers' own accounts because the Independent Floor Brokers received between 70% and 90% of the account profits or losses, or accounts over which the floor brokers had discretion; and (b) profited from the information they acquired on the NYSE floor by trading ahead of customer orders and, in some instances, engaging in frontrunning in violation of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder. See SEC v. The Oakford Corporation, 98 Civ. 1366 (S.D.N.Y. Feb. 25, 1998).7 The Commission and the USAO further charged that certain Independent Floor Brokers falsified floor order tickets and commission invoices while The Oakford Corporation employees fabricated order tickets by pre-time-stamping them to create the appearance that bona fide orders existed prior to the transmission to and execution of trades on the NYSE floor, when, in fact, no such orders existed. Also, in the Spring of 1998, the USAO charged two additional floor brokers involved in the Oakford scheme in informations filed under seal. To date, nine of the ten floor broker defendants have pleaded guilty to criminal charges8 and three have settled with the Commission.9

Similarly, the Commission's staff uncovered evidence suggesting that NYSE Independent Floor Brokers engaged in other unlawful trading schemes in violation of Section 11(a) and Rule 11a-1 and related NYSE rules by effecting or initiating trades on the NYSE trading floor for performance-based compensation over several years up to 1998. The NYSE's Regulatory Group did not uncover the Oakford floor trading scheme or those other schemes. The Commission and the NYSE are continuing to investigate possible unlawful trading by others on the NYSE floor.

D. THE NYSE'S FAILURE TO ENFORCE COMPLIANCE
BY INDEPENDENT FLOOR BROKERS

1. The NYSE's Failure To Police For
Performance-Based Compensation

From at least 1991 through 1997, the NYSE failed to take appropriate regulatory action to police for the receipt of performance-based compensation by Independent Floor Brokers. The NYSE failed to seek information that would determine whether Independent Floor Brokers were concealing their proprietary interests by trading in an account held in someone else's name while reaping a percentage of the trading profits. This is one of the principal ways floor brokers violated Section 11(a), Rule 11a-1 and related NYSE rules in Oakford and other trading schemes. Because the NYSE failed to take appropriate action to surveil for performance-based compensation, in those circumstances it also failed to uncover related instances of frontrunning, trading ahead of, and trading into customer accounts, which also occurred in Oakford and other trading schemes.

Since at least 1991, the NYSE understood that if an Independent Floor Broker were to share in the profitability of an account, the Independent Floor Broker executing orders for that account on the NYSE Floor might violate Section 11(a)(1) and Rule 11a-1, unless it could claim entitlement to an applicable exception. In 1991, the NYSE's Market Performance Committee established a Committee on Trading for Eighths (the "Trading for Eighths Committee") to study the growing practice of intra-day trading.10 The Trading for Eighths Committee, comprised of NYSE members, presented its report to the Market Performance Committee in January 1992. The report noted that if an Independent Floor Broker

is compensated for his services based on the profitability
of transactions in such a way that he becomes, in effect, a
"partner" with his customer in the trade, such a broker may
then become subject to the restrictions contained in Section
11(a)[(1)].11

Having specifically noted that a broker's compensation arrangements could indicate that the broker was a "partner" with the customer, and therefore that the broker held a proprietary interest in the customer's account, the NYSE failed to police brokers' compensation arrangements as a means of detecting such improper interests. Rather, the NYSE's then-existing methods of reviewing compensation arrangements were limited to reviewing commission bills (in such circumstances where those bills had been created) to confirm that the commissions indeed had been billed, and following up where anomalies were noted. The NYSE failed to establish surveillance procedures designed to evaluate how those commissions were computed, or to examine on a routine basis the payments flowing from the customer to the Independent Floor Broker in order to determine if those payments were based on a profit-sharing arrangement. The NYSE should have expended the resources to perform such surveillance because establishing the existence of profit-sharing arrangements would have provided proof of violations of the "own account" provision of Section 11(a)(1) and "interest" provision of Rule 11a-1.

The NYSE's failure to police for performance-based compensation arrangements of Independent Floor Brokers was a material inadequacy of its regulatory program.

2. The NYSE's Failure To Conduct Continuous
Surveillance of Independent Floor Brokers

The NYSE is required to monitor and maintain surveillance over its members to ensure compliance with applicable federal securities laws and rules and NYSE rules. Historically, the NYSE's Division of Market Surveillance conducted the surveillance of Independent Floor Brokers through periodic reviews of selected Independent Floor Brokers (referred to as "Routine Independent Member Surveillance"). Routine Independent Member Surveillance was intended to police a given number of selected Independent Floor Brokers per month to determine whether these Independent Floor Brokers were engaging in proprietary trading, discretionary trading, or other conduct in violation of Section 11(a), Rule 11a-1 and related NYSE Rules 90, 95 and 111. These brokers were chosen at random, based solely on volume of trading activity, and without any indication or suggestion that a violation of the law might have occurred.

The NYSE suspended its random selection program several times between 1990 and 1998. The longest period of suspension lasted from approximately August 1995 through December 1997, when the NYSE redirected resources to investigating tips and complaints about Independent Floor Broker misconduct.12 Investigation of tips and complaints, however, is not a substitute for a routine surveillance program. The NYSE failed to dedicate sufficient resources to allow the regulatory staff responsible for Routine Independent Member Surveillance to perform both random and for-cause reviews simultaneously. Also, the NYSE's efforts to follow-up on tips and complaints were limited in scope and did not detect the wrongdoing in Oakford. The NYSE's failure to maintain random as well as for-cause surveillance of Independent Floor Brokers for significant periods resulted in inadequate regulation of Independent Floor Brokers. Although random selection was not designed to detect or identify profit-sharing arrangements, had the Exchange deployed additional resources to maintain random surveillance while also conducting for-cause reviews, it would have created an additional deterrent effect by heightening the presence of NYSE officials in policing floor activities, and it would have created additional opportunities for detection of

anomalies, or led to the surfacing of additional tips and complaints, which might have led to the discovery of illegal trading schemes.13

E. ACTIONS TAKEN BY THE NYSE

Since late 1997, when the USAO informed the NYSE of unlawful floor trading through The Oakford Corporation, the NYSE has undertaken certain steps with respect to its Independent Floor Broker regulatory program, including: assisting the USAO and the Commission in investigating and prosecuting the Oakford cases and other matters; creating, in March 1998, a task force specifically designated to take regulatory action against Independent Floor Brokers; issuing NYSE Information Memo No. 98-34 (Oct. 6, 1998) regarding floor broker compensation arrangements; designing and implementing a program to require the examination of all Independent Floor Brokers within two-year cycles; proposing an amendment to a NYSE rule to require certain members and member organizations to make and keep written records of compensation arrangements that they enter into; filing two new NYSE rules to require all members to disclose their own accounts or accounts over which they exercise any discretion and to maintain error accounts to facilitate NYSE monitoring for trading abuses; and beginning development of a Floor Audit Trail (described below) for the electronic capture of certain order information.

F. CONCLUSION

Based upon the foregoing, the Commission finds that from at least 1991 through December 1997, the NYSE, without reasonable justification or excuse, failed to enforce compliance by Independent Floor Brokers with Section 11(a) and Rule 11a-1 of the Exchange Act, and NYSE Rules 90, 95 and 111, governing floor trading, in violation of Section 19(g) of the Exchange Act.

IV.

In view of the foregoing, it is in the public interest to order compliance with the undertakings specified in the NYSE's Offer of Settlement.

Accordingly, IT IS HEREBY ORDERED THAT:

The NYSE shall comply with the following undertakings:

1. The NYSE undertakes that within twelve months from the date of issuance of this Order, the NYSE shall enhance and improve its regulation of Independent Floor Brokers, member firm floor brokers, specialists, registered competitive market makers and competitive traders (collectively "Floor Members") by: (a) examining the floor trading activities of all Floor Members every two years; (b) ongoing, continuous surveillance of all Floor Members; (c) thoroughly investigating indications of possible violations by Floor Members; (d) ensuring that members of its regulatory staff are present on the NYSE trading floor during trading hours to surveil for potential trading violations; (e) ensuring adequate coordination among all staff responsible for Floor Members surveillance, investigations, and disciplinary matters; and (f) increasing staff with adequate expertise in the regulation of Floor Members within the Department of Member Trading Analysis. In connection with the foregoing, the NYSE undertakes to commit sufficient resources to employ at all times an adequate number of qualified regulatory personnel to enforce compliance by Floor Members with applicable federal securities laws and NYSE rules.

2. The NYSE undertakes that an Independent Committee of the NYSE's Board of Directors shall draft comprehensive procedures manuals outlining the objectives, policies, and procedures of the NYSE's Floor Members trading surveillance, investigation and examination programs, including procedures manuals for the conduct of examinations, surveillance and investigations. For the purposes of these Undertakings, "Independent Committee" shall mean a committee comprised of a majority of non-industry directors. Within 180 days from the date of the issuance of this Order, the NYSE undertakes that the Independent Committee shall submit drafts of the above-referenced procedures manuals to Commission staff for review. Within 60 days from the receipt of comments from Commission staff, the NYSE undertakes that the Independent Committee shall submit the procedures manuals to the Board of Directors. Within 45 days of the receipt of the procedures manuals, the Board of Directors shall adopt the procedures manuals, and shall submit to the Commission any proposed rule changes, which comply with Section 19 of the Exchange Act and Rule 19b-4 thereunder, that may be required in connection with the manuals. If the Board of Directors determines that any of the recommendations of the Independent Committee are unduly burdensome or impractical, it may propose an alternative reasonably designed to accomplish the same objectives. Any such alternative proposal by the Board of Directors shall be submitted to Commission staff for review within 60 days of the receipt by the Board of Directors of the procedures manuals prepared by the Independent Committee. Within 60 days of the receipt of comments from Commission staff, the NYSE's Board of Directors shall adopt the procedures manuals and shall submit to the Commission any proposed rule changes, which comply with Section 19 of the Exchange Act and Rule 19b-4 thereunder, that may be required in connection with the manuals.

3. The NYSE undertakes that no later than 30 days from the date of the issuance of this Order, the NYSE shall file an affidavit with the Commission stating that the NYSE has assigned to an Independent Committee of the Board of Directors the tasks described in section IV.2. of this Order. No later than twelve months from the date of the issuance of this Order, the NYSE shall file an affidavit with the Commission setting forth the details of the NYSE's compliance with the undertakings described in sections IV.1. and IV.2. of this Order. Upon written request and good cause being shown, the Commission staff may grant the NYSE such additional time as the Commission staff deems necessary to submit an affidavit. The affidavits shall be delivered to the Director, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C., 20549.

4. The NYSE undertakes that within 30 days from the date of the issuance of this Order, the NYSE shall retain, at the NYSE's expense, an Independent Consultant, not unacceptable to Commission staff, who shall review the NYSE's rules, practices and procedures (including interpretations) (referred to below as "rules") applicable to Floor Members and recommend changes to these rules necessary to strengthen the ability of the NYSE to carry out its responsibilities and make recommendations regarding codification of unwritten rules. Within twelve months from the date the Independent Consultant is retained, the Independent Consultant shall submit to the NYSE's Board of Directors a written report detailing its recommendations and shall submit a copy of such report to the Commission. Within 45 days from the receipt of the report, the Board of Directors shall act on all recommendations. If the Board of Directors determines that any of the recommendations of the Independent Consultant are unduly burdensome or impractical, it may propose an alternative reasonably designed to accomplish the same objectives. The Board of Directors shall submit any such alternative to the Independent Consultant within 45 days from the receipt of the Independent Consultant's report. The Independent Consultant shall evaluate such alternative and, if appropriate, either approve the alternative or amend the Independent Consultant's recommendations. Following such evaluation, the Independent Consultant shall submit a revised report to the Board of Directors and shall submit a copy of such revised report to the Commission. Within 45 days from the receipt of the revised report, the Board of Directors shall act on all recommendations.

5. The NYSE undertakes that for the period of engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with the NYSE, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as representatives of the NYSE. Any firm with which the Independent Consultant is affiliated or of which he/she is a member, and any person engaged to assist the Independent Consultant in performance of his/her duties under this Order shall not, without prior written consent of the Commission's Division of Market Regulation, enter into any employment, consultant, attorney-client, auditing or other professional relationship with the NYSE, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as representatives of the NYSE for the period of the engagement and for a period of two years after the engagement.

6. The NYSE undertakes that no later than 30 days from the date of the issuance of this Order, the NYSE shall file an affidavit with the Commission stating that the NYSE has hired the Independent Consultant described in section IV.4. No later than twelve months from the date of the issuance of this Order, the NYSE shall file an affidavit with the Commission setting forth the details of the NYSE's compliance with the remaining undertakings described in section IV.4. Upon written request and good cause being shown, the Commission staff may grant the NYSE such additional time as the Commission staff deems necessary to submit these affidavits. The affidavits shall be delivered to the Director, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C., 20549.

7. The NYSE undertakes to design and implement a mandatory, regular education program for Floor Members that addresses Floor Members' obligations and prohibitions under the federal securities laws and NYSE rules. Within 180 days from the date of the issuance of this Order, the NYSE shall submit a proposed rule change, which complies with Section 19 of the Exchange Act and Rule 19b-4 thereunder, to the Commission requesting approval for such an education program. Upon written request and good cause being shown, the Commission staff may grant the NYSE such additional time as the Commission staff deems necessary to submit the rule filing.

8. The NYSE undertakes to continue the development and implementation of an electronic Floor system ("Phase I Floor Audit Trail") which will be used to enter details related to orders before those orders can be represented or executed on the trading floor. Specifically, within 30 days from the date of the issuance of this Order, the NYSE shall submit a proposed rule change, which complies with Section 19 of the Exchange Act and Rule 19b-4 thereunder, to the Commission setting forth the complete details and specifications of the Phase I Floor Audit Trail, and shall fully implement the Phase I Floor Audit Trail within nine months of the Commission's approval of the proposal. Upon written request and good cause being shown, the Commission staff may grant the NYSE such additional time as the Commission staff deems necessary to submit the rule filing.

9. The NYSE undertakes to design and implement within the time frame set forth below an audit trail sufficient to enable the NYSE to reconstruct its market promptly, to effectively surveil the NYSE, and to facilitate the effective enforcement of the federal securities laws and NYSE rules ("Phase II Order Audit Trail"). At a minimum, the Phase II Order Audit Trail shall provide: (a) an accurate, time-sequenced record of orders, quotations and transactions, beginning with the receipt of an order by any NYSE member firm, and further documenting the life of the order through the process of execution or cancellation of that order; and (b) for synchronization of clocks used in connection with the audit trail. Specifically, the NYSE shall submit a proposed rule change in a form acceptable to the staff and which complies with Section 19 of the Exchange Act and Rule 19b-4 thereunder, to the Commission setting forth the details of the Phase II Order Audit Trail together with detailed technical specifications, within seven months from the date of the issuance of this Order, and shall fully implement the Phase II Order Audit Trail within fifteen months of the Commission's approval of the proposal, unless otherwise specified by the Commission.

10. The NYSE undertakes that no later than 24 months from the date of the issuance of this Order, the NYSE shall file an affidavit with the Commission setting forth the details of the NYSE's compliance with the undertakings described in section IV.9. Upon written request and good cause being shown, the Commission staff may grant the NYSE such additional time as the Commission staff deems necessary to submit an affidavit. The affidavit shall be delivered to the Director, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C., 20549.

11. The NYSE undertakes to maintain the Regulatory Quality Review Department as a substantial, independent internal audit staff that has adequate resources to regularly review all aspects of the NYSE (including the regulatory function, the disciplinary process and the surveillance of the trading on the NYSE) and regularly reports directly to the Finance and Audit Committee of the NYSE Board of Directors. The NYSE shall implement any recommendations of the independent internal audit staff or shall provide the reasons for any decision not to implement such recommendations to the audit committee of the Board of Directors.

12. The NYSE undertakes that no later than 24 months from the date of the issuance of this Order, the NYSE shall file an affidavit with the Commission setting forth the details of the NYSE's compliance with the undertakings described in section IV.11. Upon written request and good cause being shown, the Commission staff may grant the NYSE such additional time as the Commission staff deems necessary to submit an affidavit. The affidavit shall be delivered to the Director, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C., 20549.

By the Commission.

Jonathan G. Katz

Secretary


FOOTNOTES

1

Section 19(h)(1) of the Exchange Act provides:

The appropriate regulatory agency for a self-regulatory organization is authorized, by order, if in its opinion such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title, to suspend for a period not exceeding twelve months or revoke the registration of such self-regulatory organization, or to censure or impose limitations upon the activities, functions, and operations of such self-regulatory organization, if such appropriate regulatory agency finds, on the record after notice and opportunity for hearing, that such self-regulatory organization has violated or is unable to comply with any provision of this title, the rules or regulations thereunder, or its own rules or without reasonable justification or excuse has failed to enforce compliance-(A) in the case of a national securities exchange, with any such provision by a member thereof or a person associated with a member thereof.

2

Section 19(g)(1) of the Exchange Act provides in relevant part:

Every self-regulatory organization shall comply with the provisions of this title, the rules and regulations thereunder, and its own rules, and . . . absent reasonable justification or excuse enforce compliance-(A) in the case of a national securities exchange, with such provisions by its members and persons associated with its members.

3

The findings made herein are made pursuant to the NYSE's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.

4

See also NYSE Rule 90(a) (prohibiting a member from effecting a transaction "for his or its account"); NYSE Rule 95(a) ("[n]o member while on the Floor shall execute or cause to be executed on the Exchange, . . . any transaction for the purchase or sale of any stock to which transaction such member is vested with discretion as to (1) the choice of security to be bought or sold, (2) the total amount of any security to be bought or sold, or (3) whether any such transaction shall be one of purchase or sale"); and NYSE Rule 111(a) ("[n]o member shall initiate transactions, while on the Floor, for an account in which he has an interest").

5

Sections 19(g) and 19(h) of the Exchange Act, 15 U.S.C. 78s(g) and 78s(h).

6

Each of the USAO, the SEC and the NYSE is continuing its investigation of on-floor trading at the NYSE, and it is possible that this number will increase.

7

The Commission also alleged that the conduct in question violated NYSE Rules 90, 92, 95 and 111.

8

Of the nine floor broker defendants that pleaded to criminal charges, three defendants pleaded guilty to direct violations of Section 11(a) and Rule 11a-1 by effecting transactions on the NYSE floor in accounts in which the floor brokers shared in the profits and losses, in accounts in which the floor brokers had an interest, and in accounts in which the floor brokers exercised investment discretion. Six other defendants pleaded guilty to conspiracy to violate Section 11(a) and Rule 11a-1 by trading on the NYSE floor in accounts over which they exercised investment discretion and, in the case of two of those six defendants, accounts in which they also had an interest.

9

The three floor brokers that have settled with the Commission have consented to injunctions against future violations of Section 11(a) and Rule 11a-1 by effecting and initiating transactions in their own accounts, accounts in which they have an interest, and in accounts in which they exercise investment discretion. These floor brokers have also consented to bars with a right to reapply after five years, and to other relief.

10

As used here, intra-day trading, also called "flipping"or "trading for eighths,"is a practice in which floor brokers represent both buy and sell orders in the same stock for the same customer, and attempt to execute them in a manner that captures the spread between the bid and offer prices in that stock.

11

Report of the Committee on "Trading for Eighths"at 3.

12

Some of the unlawful conduct in Oakford and another floor trading scheme took place during the period of this 1995 through 1997 suspension of random selection surveillance.

13

Other periods during which the Regulatory Group suspended random selection of Independent Floor Brokers for review were: (1) May 1994 through September 1994; (2) several periods during 1992; and (3) mid-1990 through May 1991.

http://www.sec.gov/litigation/admin/34-41574.htm


Modified:06/29/1999