“When you are evaluating an investment, access to appropriate disclosure documents, including an accurate description of the risk involved, is extremely important,” said Richard G. Ketchum, chief executive officer, NYSE Regulation, Inc. “During the time in question, these firms did not have adequate controls in place to carry out their responsibilities to their customers.”
Federal securities laws and rules govern the delivery of prospectuses and trade confirmations. NYSE rules govern the delivery of written descriptions (commonly referred to as product descriptions) in connection with customer purchases of Investment Company Units, which include ETFs, the delivery of other documents (as referenced below) to firm customers, and the establishment and maintenance of appropriate procedures of supervision and control.
From July 1, 2003 to October 31, 2004 (the “relevant period”), and in certain cases continuing through 2005, firms experienced varying deficiencies relating to the delivery of prospectuses and/or product descriptions to many customers who purchased securities, stemming in part from the failure to have appropriate policies and procedures in place.
Firms failed to deliver prospectuses to certain institutional, retail, and/or private banking customers who purchased inter alia equity securities, including syndicate and non-syndicate IPO sales and aftermarket purchases associated with IPOs, equity linked notes, Unit Investment Trusts, corporate and other debt securities, including syndicate corporate debt transactions, mutual funds, asset backed securities, prime brokerage transactions, and/or product descriptions (or other disclosure documents) to customers who purchased ETFs.
Citigroup Global Markets Inc. also failed to deliver trade confirmations in excess of a million transactions involving numerous customer accounts. This failure began in early 2001 and continued through the relevant period.
Lehman Brothers Inc. also failed to send important account documents, such as Trade Confirmations, to its customers at certain times during the relevant period.
Numerous firms were unable to determine the origination dates for their failures and deficiencies. During the course of this investigation, Keefe, Bruyette & Woods, Inc. was unable to locate required records related to the delivery of prospectuses to certain customers that engaged in syndicate equity transactions during the relevant period. This firm’s failure to maintain these books and records prevented it from conducting a complete review.
Some firms relied upon outside vendors to deliver offering and other categories of documents to customers, or an internal prospectus fulfillment facility, or instructed issuers’ financial printers to send prospectuses to customers. While firms may contract with outside vendors for the provision of securities related services, compliance with the federal securities laws and NYSE rules is the sole responsibility of the firms and may not be assigned or delegated to others.
Enforcement conducted this review after it learned in other investigations that prospectuses were not being sent to customers as required by federal securities laws and NYSE rules. As detailed in the decisions announced today, numerous firms experienced one or more deficiencies in connection with one or more offerings and/or products. The nature and extent of the misconduct, in conjunction with other aggravating or mitigating circumstances unique to each firm, such as the level of cooperation, the self-reporting of the deficiencies, and the remediation efforts undertaken by the firms determined the level of the penalties.
The settling member firms agreed to provide to NYSE Enforcement within 90 days a certification that their current policies and procedures, including written supervisory and operational policies and procedures, regarding the delivery of prospectuses, product descriptions, and in certain instances trade confirmations are reasonably designed to ensure compliance with the current federal securities laws and NYSE rules.
These disciplinary actions include violations of Section 17(a) of the Securities Exchange Act of 1934 and Rules 17a-3 and 17a-4 thereunder, Exchange Act Rule 10b-10, and NYSE Rules 342, 401, 440 and 1100(b).
NYSE Regulation Enforcement staff that was responsible for these cases has now transferred to the Financial Industry Regulatory Authority (“FINRA”).
In settling these charges brought by NYSE Regulation, the firms neither admitted nor denied the charges.