UNITED STATES OF AMERICA
In the Matter of
Banc of America Securities LLC,
ORDER INSTITUTING PROCEEDINGS PURSUANT TO SECTIONS 15(b)(4) AND 21C OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS, AND IMPOSING REMEDIAL SANCTIONS AND A CEASE-AND-DESIST ORDER
The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be, and hereby are, instituted pursuant to Sections 15(b)(4) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Banc of America Securities LLC ("Respondent" or "BAS").
In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, which Respondent admits, Respondent consents to the issuance of this Order Instituting Proceedings Pursuant to Sections 15(b)(4) and 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order ("Order").
On the basis of this Order and Respondent's Offer, the Commission finds that:1
Banc of America Securities LLCis a broker-dealer registered with the Commission since March 22, 1990 (File No. 8-42263) and is the successor-in-interest to NationsBanc Montgomery Securities. BAS is a subsidiary of Bank of America Corporation and, during the relevant period, had its principal offices in San Francisco, New York and Charlotte. BAS is a member of the New York Stock Exchange, the National Association of Securities Dealers and other national securities exchanges.
This action results from BAS's violations of the recordkeeping and access requirements under Sections 17(a) and 17(b) of the Exchange Act and Rule 17a-4(j) thereunder. These violations were committed during a pending Commission investigation that is seeking to determine whether, among other things, BAS and other persons have engaged in improper securities trading prior to the public dissemination of the firm's equity research. During the investigation, BAS has repeatedly failed promptly to furnish documents that have been requested by the staff. Specifically, BAS failed in a timely manner (i) to produce electronic mail, including a particular e-mail exchange relating to matters that BAS knew were under investigation, (ii) to produce certain compliance reviews after the staff had requested them, and (iii) to produce compliance and supervision records concerning the personal trading activities of a former senior employee of the firm. When questioned about certain production failures and delays, BAS provided the staff with misinformation concerning the availability and the production status of such documents, and engaged in dilatory tactics that delayed the investigation.
The failures that give rise to this action impeded the Commission's ability to discharge its investigative and law enforcement responsibilities. The recordkeeping and access requirements that Section 17 of the Exchange Act imposes on broker-dealers are essential to the Commission's ability to enforce the federal securities laws and to protect investors. The Commission's authority to access a broker-dealer's books and records is unconditional, subject only to the requirement that any such examination be reasonable. Throughout the investigation, the staff's requests to obtain copies of or inspect BAS's records were reasonable. BAS failed to preserve or promptly furnish certain records after they were requested. As a result, BAS willfully violated Sections 17(a) and 17(b) of the Exchange Act and Rule 17a-4(j) thereunder.
C. BAS's Production Failures
In the Summer of 2001, the Commission received a letter from an anonymous informant (the "Anonymous Letter") containing allegations that, among other things, senior managers within BAS's equities department may have caused the firm to purchase or sell securities in the firm's proprietary accounts knowing that such securities would be the subject of forthcoming upgrades, downgrades or other market-moving research reports by the firm's equity research department.2 Attached to the Anonymous Letter was a sequence of e-mails from October 2000 between BAS's then-Director of Marketing and a news reporter ("the E-mail Exchange") discussing the impact of certain BAS downgrades on stocks featured in the reporter's news reports.
In November 2001, the staff issued BAS requests for documents and information concerning the allegations in the Anonymous Letter, including certain e-mail of seven senior managers for three years. In response, BAS undertook a prolonged process for recovering e-mail and having it reviewed by its former counsel for responsiveness and privilege before production to the staff. In many instances, BAS missed the deadlines set by the staff for responding to its requests. BAS also frequently failed to contact the staff to request extensions of time, failed to alert the staff that it would only be providing partial responses to pending requests, failed accurately to explain the reasons for the firm's production delays and, in certain instances, failed to disclose promptly that responsive documents had been destroyed or rendered unavailable for inspection by the staff. When BAS ultimately did respond to the staff's requests, its responses were often incomplete, inaccurate or unreliable.
The staff repeatedly expressed its dissatisfaction to former counsel for BAS about the manner in which BAS was responding to the requests. In May 2002, the staff objected to the rate at which BAS was producing e-mail. In November 2002, the staff informed BAS that its conduct was not consistent with the Commission's expectations of a regulated entity during an investigation. On December 19, 2002, the Commission issued an Order Requiring the Filing of a Sworn Statement Pursuant to Section 21(a) of the Exchange Act ("Section 21(a) Order"), which ordered BAS to provide much of the information that the staff had previously requested, but had not yet received. In February 2003, the staff again confronted former counsel for BAS about the production failures. The staff told counsel that adequate resources were not being devoted to the investigation and that BAS was not meeting the production obligations of a regulated entity. Despite these admonitions, the problems with BAS's production persisted and, in some cases, worsened. BAS and its former counsel continued to provide the staff with inaccurate information concerning the availability of documents and the status of BAS's production.
2. BAS's Failure to Promptly Produce E-Mail
By letter dated November 8, 2001, the staff requested BAS to produce e-mail for seven senior managers for the period January 1, 1999 through November 8, 2001. Unbeknownst to the staff, BAS had also received a copy of the Anonymous Letter months earlier and deduced that the staff's requests related to the allegations in that letter. BAS hired outside counsel ("former counsel") who began an investigation and learned, among other things, that the Director of Marketing had sent "blind carbon copies" (the "BCCs") of the E-mail Exchange to other senior BAS employees. The BCCs were responsive to the staff's November 8 request. Because the informant claimed to have worked for a recipient of the E-mail Exchange, the identity of the BCC recipients was material to the staff's ability to identify other BAS employees who may have knowledge of the matters alleged in the Anonymous Letter.
In responding to the staff request, BAS did not disclose its possession of the Anonymous Letter, the E-mail Exchange, and the BCCs. In December 2001, BAS advised the staff that it could readily produce e-mail created after June 2001, but that recovery of e-mail before then would require restoration from back-up tapes that would cause BAS to incur an "unreasonable amount of time, labor and expense."
Notwithstanding its advice to the staff that it could not restore pre-June 2001 e-mail without incurring significant burden and expense, BAS promptly restored the specific backup tape that was determined to have the E-mail Exchange on it in order to identify the BCC recipients to the E-mail Exchange. Within one week, BAS obtained copies of the E-mail Exchange reflecting the identities of the BCC recipients. The e-mail retrieved from the backup tape was then deleted from the firm's computer system. After retrieving the E-mail Exchange and identifying the BCC recipients, BAS did not promptly produce that information to the staff.
At the same time, BAS undertook a review of the post-June 2001 e-mail for production to the staff. By late May 2002, more than six months after the staff's initial request, BAS had produced only a small fraction of the responsive e-mails. On May 24, 2002, the staff informed BAS that its document production was delaying the staff's investigation and directed BAS to complete its production. The staff also directed the firm to produce, in electronic form, all e-mail for three of the seven individuals whose e-mail previously had been requested. The E-mail Exchange and the BCCs were responsive to this request, as well.
Over the next six months, BAS made several productions of e-mail responsive to the November 8, 2001 and May 24, 2002 requests. In August 2002, the staff scheduled testimony of the firm's former Marketing Director to occur in October 2002. In connection with that testimony, the staff reiterated its prior request that BAS complete its production of e-mail for the Marketing Director. On October 28, 2002, the staff convened the testimony of the firm's former Marketing Director. Prior to testimony, BAS's former counsel represented that the firm's production of the employee's e-mail in electronic format for October 2000 was complete. In preparing for testimony, however, the staff determined that the last transmission in the sequence of e-mails comprising the E-mail Exchange had not been produced. Moreover, during testimony, the staff learned that the former Director of Marketing had sent BCCs of the E-mail Exchange to four BAS employees and that BAS had received a copy of the Anonymous Letter and E-mail Exchange in June 2001. The staff demanded that BAS immediately produce a complete copy of the E-mail Exchange, including the copy reflecting all the BCC recipients, and directed BAS to provide a detailed explanation why these documents were not included in the firm's prior e-mail productions.
In the firm's response, BAS denied that it had intentionally withheld the documents from the staff. BAS explained that the omissions were due to a "technical glitch" that caused the e-mail recovery from the back-up tapes to be incomplete. However, BAS did not disclose that it had separately retrieved a copy of the E-mail Exchange reflecting the BCCs nearly a year earlier or that it had known since December 2001 that the E-mail Exchange had been copied to other senior managers within the firm.
On November 6, 2002, the staff instructed BAS to immediately complete its production in response to all prior requests in the investigation. On January 10, 2003, the staff requested that former counsel meet to discuss document production issues. On February 6, 2003, fifteen months after the staff's original request and the evening before the meeting was to occur, BAS produced most of the remaining e-mails for three of the seven individuals whose e-mail had been requested. At the time of the meeting, the firm's production as to the other four individuals remained incomplete. Ultimately, BAS's production of e-mail in response to the November 8, 2001 and May 24, 2002 requests was not substantially complete until the fall of 2003, nearly two years after the staff's original request.
3. BAS's Failure to Promptly Produce Compliance Reviews
To monitor for possible improper trading ahead of research, BAS's Compliance Department placed stocks that were the subject of material research changes3 on certain of the firm's restricted lists. Each day, the firm's computers matched the restricted lists against recent trading by the firm, its employees and its clients, and generated exception reports identifying trading in restricted securities. Using printouts of the exception reports, BAS compliance officers identified suspicious trades and conducted inquiries to determine whether the firm, its employees or its clients may have known of forthcoming research at the time they placed their trades. The compliance officers made notes regarding their review directly on the printouts (hereinafter "Compliance Reviews"), and once any necessary actions had been completed, the Compliance Reviews were collected and periodically sent to offsite storage for future reference.
a. The "Missing" or Destroyed Compliance Reviews
On November 6, 2002, the staff requested information and documents concerning securities trading by the firm in advance of research, including whether such trading had ever been the subject of a Compliance Review. Approximately one week later, several boxes of BAS documents stored at the facilities of a third-party vendor were destroyed by the vendor.4
BAS did not produce the trading information and Compliance Reviews by the deadline set forth in the November 6 request. On December 19, 2002, the Commission issued the Section 21(a) Order, which ordered BAS to provide, among other things, information "concerning whether [certain trades were] ever flagged, questioned or investigated by BAS." Information responsive to the Commission's Section 21(a) Order would have been contained in the Compliance Reviews.
In early to mid-January, BAS learned that certain boxes which likely contained Compliance Reviews had been destroyed two months earlier. On January 23, 2003, while continuing to investigate which boxes had been destroyed and the extent to which they contained responsive material, BAS requested a number of deferrals by the staff with respect to the Section 21(a) Order. In particular, BAS asked that the staff defer the firm's obligations with respect to information contained in the Compliance Reviews, claiming that the Section 21(a) Order was unduly burdensome. In doing so, BAS did not disclose that boxes containing Compliance Reviews had been destroyed. Based on the firm's representations, the staff agreed to defer BAS's obligations with respect to information in the Compliance Reviews. However, the staff conditioned the deferral on BAS's agreement to make certain Compliance Reviews available for inspection at the firm's offices in San Francisco.
On February 24, 2003, the staff traveled from Washington, D.C. to San Francisco to examine the Compliance Reviews, as well as to take testimony from certain BAS employees. In preparation for the staff's visit, BAS had prepared a spreadsheet showing the availability of Compliance Reviews. The spreadsheet contained two tabs: tab 1 showed routine reports ("List One") and tab 2 showed ad hoc reports ("List Two"). As the staff was about to begin its inspection, BAS through its former counsel provided the staff with List One, which identified hundreds of individual Compliance Reviews as "missing." Counsel explained that the "missing" Compliance Reviews on List One included documents that were destroyed in November, as well as other Compliance Reviews, which, while not destroyed, could nevertheless not be located. Thus, although the firm had known for weeks that the staff would be traveling to San Francisco to examine documents that BAS knew were "missing," BAS did not disclose this information until the moment the staff was about to begin the examination.
b. The Undisclosed Compliance Reviews
BAS did not give a copy of List Two to the staff. Moreover, BAS did not produce for examination the Compliance Reviews identified thereon, even though the firm was in a position to do so. Thus, when the staff left BAS's offices, the staff had received List One and knew only that hundreds of Compliance Reviews that it had expected to examine were "missing." The staff did not know, and would not learn for another eight months, that BAS had prepared List Two identifying many Compliance Reviews that it had neither disclosed nor provided to the staff. When asked to explain why these documents had not been identified or produced previously, BAS was unable to do so.
c. Some of the "Missing" Compliance Reviews are Found, but BAS Fails to Promptly Produce Them to the Staff
After returning from San Francisco, the staff demanded that BAS explain the facts and circumstances surrounding the "missing" Compliance Reviews. In response, BAS represented to the staff that it had engaged in an "extensive and comprehensive search for the requested compliance reviews . . . [and that] counsel has produced or [would] produce to the staff copies of all compliance reviews in its possession." Notwithstanding these representations, the firm's production failures continued. Moreover, the firm still did not disclose the existence of List Two or produce the documents identified on the list.
In May 2003, during a relocation of the Compliance department, BAS discovered numerous Compliance Reviews, including documents that previously had been identified as "missing" on List One, in the work space of the compliance department. BAS sent these documents to its former counsel for production to the staff. Former counsel, however, failed to produce these documents. When asked by the staff to explain why these Compliance Reviews had not been produced, BAS was unable to provide a satisfactory explanation.
In July 2003, BAS conducted another search for Compliance Reviews and located an additional 28,000 pages of Compliance Reviews that it had not previously produced, or that it had previously identified as "missing." The firm did not immediately advise the staff of this discovery. In August 2003, BAS hired new lead counsel to represent the firm in connection with the investigation, and in September 2003, the staff asked new counsel to review the completeness of the firm's prior productions. BAS's new counsel located the Compliance Reviews that BAS had discovered in July, as well as other documents that it determined had not been provided to the staff. Among the documents that new counsel located were the Compliance Reviews identified on List Two. The firm produced all of these documents in October 2003.
4. BAS's Failure to Promptly Produce Compliance and Supervision Documents
a. E-mail Concerning Compliance Inquiries into the Former Director of Marketing's Personal Trading
During its investigation, the staff issued multiple requests for compliance and supervision documents concerning the personal trading activities of BAS's former Director of Marketing. Among these was a request in November 2002 for "all documents concerning each compliance inquiry" into the Director of Marketing's trading activities.
Subsequently, in the Section 21(a) Order, the Commission ordered BAS to provide a statement concerning whether certain trades by the Director of Marketing were "ever flagged, questioned or investigated by BAS" and to "provide a detailed description of all of the facts and circumstances concerning each such instance." While preparing the firm's response to the Order, BAS's former counsel received detailed information concerning an inquiry that the firm's Compliance Department had conducted into stock purchases by the Director of Marketing and others prior to a ratings upgrade of the security by a BAS research analyst. The information referenced an e-mail indicating that BAS had flagged the suspicious trading and was conducting an inquiry. The e-mail, which previously had not been produced to the staff, described additional steps that BAS intended to take to investigate whether the Director of Marketing and others knew about the upgrade at the time of their purchases.
Although the documents and information concerning the Compliance Department's inquiry were responsive to the November 6, 2002 request and to the Commission's Section 21(a) Order, BAS failed to produce the e-mails concerning the inquiry to the staff and failed to disclose the information in its response to the Section 21(a) Order. In December 2003, the staff requested new counsel to investigate with respect to the prior productions on this subject. In response to that request, in January 2004, more than a year after the initial requests, BAS produced the e-mails concerning the Compliance Department's inquiry.5
b. Other Compliance Documents Concerning the Director of Marketing's Trading
As described above, throughout the investigation, the staff made multiple requests for compliance and supervision documents concerning trading by BAS's former Director of Marketing. During testimony in November 2003, the staff learned that BAS's Compliance Department may have maintained a separate file concerning the Director of Marketing's personal trading. Until then, the staff had received no such file from the firm and had been led to believe that no such file existed. On December 2, 2003, the staff requested that BAS's new counsel determine whether BAS had produced the complete compliance file relating to the Director of Marketing.
On December 23, 2003, BAS produced a compliance file relating to the Director of Marketing. Included in the file were documents concerning a regulatory inquiry that the firm had received concerning suspicious trading by the employee. Although it is unknown whether this particular file was the separate file that BAS maintained concerning the Director of Marketing's trading activities, it contained documents that were responsive to multiple prior requests.
Prompt access to a broker-dealer's books and records is fundamental to the Commission's ability to discharge its examination, investigative and law enforcement responsibilities.6 The Commission's authority to examine a broker-dealer's books and records is unconditional, and is subject only to the requirement that any such examination be reasonable.7 Prompt access to books and records is particularly critical during an enforcement investigation. When a broker-dealer unreasonably delays producing documents sought during an investigation, it impedes the staff's fact finding capability, can prevent the staff from determining whether violations of law have occurred or are occurring, and can interfere with the Commission's ability to prevent future harm to investors. Such misconduct compromises the integrity of the Commission's processes and warrants immediate, independent enforcement action.
A. Section 17(a) of the Exchange Act and Rule 17a-4(j) Thereunder
Section 17(a)(1) of the Exchange Act provides that each member of a national securities exchange, broker, or dealer "shall make and keep for prescribed periods such records, furnish such copies thereof, and make and disseminate such reports as the Commission, by rule, prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title." The Commission has emphasized the importance of the records required by the rules as "the basic source documents" of a broker-dealer. Statement Regarding the Maintenance of Current Books and Records by Brokers and Dealers, Exchange Act Rel. No. 10756 (April 6, 1974).
Pursuant to its authority under Section 17(a)(1) of the Exchange Act, the Commission promulgated Rule 17a-4. Rule 17a-4(b)(4)8 requires broker-dealers to "preserve for a period of not less than 3 years, the first two years in an accessible place... [o]riginals of all communications received and copies of all communications sent by such member, broker or dealer (including inter-office memoranda and communications) relating to his business as such." Rule 17a-4 is not by its terms limited to physical documents. The Commission has stated that internal e-mail communications relating to a broker-dealer's "business as such" fall within the purview of Rule 17a-4 and that, for the purposes of Rule 17a-4, "the content of the electronic communication is determinative" as to whether that communication is required to be retained and accessible. Reporting Requirements for Brokers or Dealers under the Securities Exchange Act of 1934, Exchange Act Rel. No. 38245 (Feb. 5, 1997); see also In the Matter of Robertson Stephens, Inc., Exchange Act Rel. No. 47144 (Jan. 9, 2003); In the Matter of Deutsche Bank Securities, Inc., et al., Exchange Act Rel. No. 46937 (Dec. 3, 2002).
Rule 17a-4(j)9 provides that "[e]very member, broker, or dealer subject to this rule shall furnish promptly to a representative of the Commission such legible, true and complete copies of those records of the member, broker or dealer, which are required to be preserved under this Rule, as are requested by the representative of the Commission." The Commission has enforced Rule 17a-4(j) when broker-dealers have failed promptly to furnish records requested by the staff that are required to be maintained under Section 17(a) of the Exchange Act and Rule 17a-4 thereunder. See SEC v. J.W. Korth & Co., 991 F.Supp. 1468 (S.D. Fla. 1998); In the Matter of Dominick & Dominick, Inc. et al., Exchange Act Rel. No. 29243 (May 29, 1991).
The e-mail communications that the staff requested from BAS were records that the firm was required to preserve under Section 17(a). While BAS does not appear to have violated the preservation requirements under Section 17(a) based on the facts described herein, Rule 17a-4(j) required BAS to promptly furnish these records to the staff upon request. As set forth above, by failing to produce the E-mail Exchange reflecting the BCCs until eleven months after receiving the staff's request, by failing to complete the e-mail production for the seven individuals identified in the staff's November 8, 2001 request until almost two years after receiving the staff's request, and by failing to produce Compliance Department e-mails concerning trading by the firm's former Director of Marketing for more than a year, BAS failed to promptly furnish these communications to the staff. Accordingly, BAS violated Section 17(a) of the Exchange Act and Rule 17a-4(j) thereunder.
B. Section 17(b) of the Exchange Act
Section 17(b) of the Exchange Act provides, in pertinent part, that "[a]ll records of persons described in subsection (a) of this section are subject at any time, or from time to time, to such reasonable periodic, special or other examinations by representatives of the Commission and the appropriate regulatory agency for such persons as the Commission or the appropriate regulatory agency for such persons deems necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title." The Commission's examination authority under Section 17(b) is self-executing.10 Included in the authority to examine records is the authority to make or require copies of such records.11
The Commission's staff may make or require copies of a broker-dealer's records without a formal Commission request or subpoena. Moreover, the Commission has made clear that it is of "overriding importance" that broker-dealers comply with the requests of regulatory authorities during investigations. See In the Matter of Wedbush Securities, Inc., 48 S.E.C. 963, 971-2, Exchange Act Rel. No. 25504 (Mar. 24, 1988). "If a firm is ill-equipped to provide the full degree of cooperation necessitated by such an investigation . . . it has the obligation to act to correct that situation . . .. Failure to do so is certainly no defense." In the Matter of Donald T. Sheldon, Exchange Act Rel. No. 31475 (Nov. 18, 1992), aff'd, 45 F.3d 1515 (11th Cir. 1995) (internal citations omitted); see also In the Matter of Stephen S. York World Wide Investments, Inc., Exchange Act Rel. No. 23382 (June 30, 1986) (registrant violated Section 17(b) of the Exchange Act by failing to make its books and records available to Commission representatives for examination and inspection during normal business hours); In the Matter of Bangs Securities, Inc., Exchange Act Rel. No. 21167 (July 24, 1984) (registrant violated Section 17(b) of the Exchange Act by failing to make its books and records available for inspection by Commission staff members). Thus, the refusal to produce records for reasonable examination or removal by Commission staff members, or any unreasonable delay in producing such documents, constitute violations of law.
In this case, the Commission's staff made reasonable requests to BAS for access to its records, and the firm unreasonably delayed furnishing such records to the staff. BAS failed to produce e-mail in a timely manner, including the complete E-mail Exchange reflecting the BCCs, the e-mail for the seven individuals identified in the staff's November 8, 2001 request, and the Compliance Department e-mail concerning securities trading by the firm's former Director of Marketing. In addition, after receiving the staff's November 6, 2002 request for the Compliance Reviews, BAS failed to preserve such reviews for examination by the staff. BAS also failed to produce in a timely manner the Compliance Reviews that were not "missing" or destroyed, and failed to produce the Compliance Reviews identified on List Two even though they were readily accessible for examination. Finally, BAS failed to produce in a timely manner the compliance and supervision records concerning the personal trading activities of the firm's Director of Marketing. Accordingly, BAS violated Section 17(b) of the Exchange Act.
Based on the foregoing, the Commission finds that BAS willfully violated Sections 17(a) and 17(b) of the Exchange Act and Rule 17a-4(j) thereunder.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in Respondent Banc of America Securities LLC's Offer.
ACCORDINGLY, IT IS HEREBY ORDERED THAT:
A. Pursuant to Section 21C of the Exchange Act, BAS shall cease and desist from committing or causing any violations and any future violations of Sections 17(a) and 17(b) of the Exchange Act and Rule 17a-4(j) thereunder;
B. BAS is censured pursuant to Section 15(b)(4) of the Exchange Act; and
C. BAS shall, within ten days of the entry of this Order, pay a civil penalty in the amount of $10,000,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the U.S. Securities and Exchange Commission; (C) hand-delivered or mailed to the Office of Financial Management, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (D) submitted with a cover letter that identifies BAS as the Respondent in this proceeding and includes the file number of this proceeding, a copy of which cover letter and money order or check shall be sent to Scott W. Friestad, Assistant Director, Division of Enforcement, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington DC, 20549-0708.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding.
2 The staff's investigation of these allegations is continuing.
3 Such changes included, for example, upgrades and downgrades of firm research ratings, initiations of research coverage, and significant price target and earnings estimate adjustments.
4 According to BAS and the storage vendor, the destruction was inadvertent and attributable to an error in the manner in which the boxes were coded during a record reclassification program that lasted from August 2001 until December 2002. Although BAS has been unable to identify all of the contents of these boxes, the firm has confirmed that a number of Compliance Reviews were destroyed.
5 Additional Compliance Department e-mails concerning securities trading by the firm's former Director of Marketing, which were responsive to the staff's previous document requests, were also included in the January 2004 production.
6 The record keeping rules are "a keystone of the surveillance of brokers and dealers by [Commission] staff and by the security industry's self-regulatory bodies." In the Matter of Edward J. Mawod & Co.,46 S.E.C. 865, 873 n.39 (1977) (citation omitted), aff'd sub nom . Mawod & Co. v. SEC, 591 F.2d 588 (10th Cir. 1979). The Commission's "examination authority . . . is, of course, essential to any effort by the Commission to discharge its responsibilities under the Act." S. Rep. No. 94-75, 94th Cong., 1st Sess. 120 (1975).
7 In applying the access provisions of Section 17 to national securities exchanges and associations, the Commission has observed "Commission staff members are authorized directly, by Section 17 of the Act, to obtain copies of exchange and association records for examination and for removal from their premises. That statutory authorization is unconditional except for the requirement that any such record examination be `reasonable.'" Interpretive Release Relating to Recordkeeping and Record Production Obligations of National Securities Exchange and Registered Securities Associations, 18 S.E.C. Docket 670, Exchange Act Rel. No. 16278 (Oct. 12, 1979). These provisions apply to brokers and dealers as well.
8 Rule 17a-4(b)(4) was amended effective May 3, 2003.
9 Rule 17a-4(j) was amended effective May 3, 2003.
10 S. Rep. No. 94-75, 94th Cong., 1st Sess. 120 (1975) ("The language of Section 17(b), which confers the examination authority, makes clear that it is self-executing, i.e., there would be no need for the Commission, as a condition precedent to inspecting any reports, to require by rule that the persons described in Section 17(a) keep any such records.")
11 Id.("[T]he authority to examine records would include the authority to make or require copies of such records.")
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