For Immediate Release 99-72 New York Stock Exchange Failed To Enforce Floor Broker Compliance; NYSE Agrees to Remedies Washington, DC, June 29, 1999 -- The Securities and Exchange Commission announced today that it simultaneously instituted and settled an administrative proceeding against the New York Stock Exchange, Inc. In its administrative order, the Commission finds that the NYSE failed to enforce compliance with federal securities laws and NYSE rules prohibiting proprietary and on-floor trading by NYSE floor broker members in violation of Section 19(g) of the Securities Exchange Act of 1934. The Commission's Order directs the NYSE to comply with undertakings to implement various remedial measures for its floor broker regulatory program and floor trading operations. The NYSE agreed to the entry of the Order without admitting or denying the Commission's findings. Richard H. Walker, the Commission's Director of Enforcement, said, "This action underscores that self regulatory organizations, such as the New York Stock Exchange, must vigilantly enforce the federal securities laws and their own rules. Because the potential for fraud and abuse has increased as the markets have expanded, now more than ever the investing public needs to count on a strong partnership among the self regulatory organizations and the government in enforcing the law." Carmen J. Lawrence, Director of the Commission's Northeast Regional Office, commented that, "This case demonstrates that an essential component of any regulatory program is routine, random surveillance. Such surveillance creates the presence of a `cop on the beat' which enhances deterrence and detection of wrongdoing. The undertakings ordered in this action, along with those remedial measures already taken by the NYSE, should go a long way toward improving the NYSE's floor member regulatory program." In the Order, the Commission found that: The NYSE failed, from 1993-1998, to detect and halt illegal schemes in which groups of independent NYSE floor brokers effected and initiated trades from the NYSE floor in exchange for a share of the trading profits and losses. Those schemes violated Section 11(a) of the Exchange Act and Rule 11a-1 thereunder, and related NYSE rules, which prohibit NYSE members from executing trades for their own accounts, accounts in which they have an interest, and accounts over which they exercise investment discretion. In one such scheme, floor brokers received $11.1 million in unlawful profits by effecting and initiating trades through a non-NYSE member broker-dealer, the Oakford Corporation. To date, nine of these Oakford floor brokers have pleaded guilty to criminal charges arising from their unlawful trading, and three have settled civil charges brought by the Commission. The United States Attorney for the Southern District of New York has stated that these nine defendants are among at least 64 NYSE floor brokers who participated in profit- sharing arrangements until 1998. The NYSE's regulatory program suffered from two major deficiencies: (1) The NYSE failed to surveil for profit-sharing or other performance-based compensation of independent floor brokers. Since 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) of the Exchange Act and Rule 11a-1 unless it could claim entitlement to an applicable exemption. (2) The NYSE suspended its routine independent floor broker surveillance for extensive periods, the longest of which lasted for two years, between 1995 and 1997. Although the NYSE continued to investigate tips and complaints about floor brokers during these periods of suspension, this was no substitute for a routine surveillance program and the NYSE should have devoted sufficient resources to conduct surveillance and investigations simultaneously. The NYSE has consented to remedial undertakings, including: * Improve Surveillance of Floor Members: The NYSE will conduct biennial examinations of all floor members, maintain random surveillance of floor members beyond that, and ensure adequate staffing. Under the supervision of an Independent Committee of its Board of Directors, the NYSE will create new procedures manuals for surveillance, examination, and investigation of floor members. * Comprehensive Review of NYSE Rules and Procedures: The NYSE will retain an independent consultant to study its rules and regulatory procedures, and report the conclusions of that study and suggested amendments to the NYSE's Board of Directors. * Electronic Order Capture: The NYSE will develop and implement systems for the electronic capture of orders prior to transmission to and representation on the floor through execution. * Education Program: The NYSE will ensure that its members receive adequate education concerning obligations and prohibitions under the securities laws and NYSE rules. * Internal Audit: The NYSE will maintain its Regulatory Quality Review Department as a substantial, independent, internal audit staff. For more information, see Litigation Release Nos. 15653 and 15743. For more information, contact: * Carmen J. Larwrence, Regional Director, Northeast Regional Office (212) 748-8035 * Andrew J. Geist, Associate Regional Director, NERO (212) 748-8186 * Barry W. Rashkover, Assistant Regional Director, NERO (212) 748-8373 # # #