NEW YORK STOCK EXCHANGE, INC. 

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A Stipulation of Facts and Consent to Penalty is submitted by the Respondent without admitting or deny guilt, but merely consenting to findings by the Hearing Panel.

• NYSE Rules 342 (supervision, suitability, sales practices); 401 (due diligence, books and records); 405(account supervision, due diligence); 410(written authorization); and 440 (books and records)

• '34 Act Section 17(a)

• Sec.  220.8(b) and (c) of Reg. T (90 day restrictions)

Censure, 
$400,000 fine,
and an undertaking  to retain an independent outside consultant to conduct a review  and prepare a report for submission to NYSE within 120 days. 

An Exchange Hearing Panel considered a Stipulation of Facts and Consent to Penalty entered into between the Exchange’s Division of Enforcement and A.G. Edwards & Sons, Inc.  (the “Firm”), a member organization. 

The Firm  is primarily engaged in retail securities brokerage and maintains more than 700 branches nationwide. Beginning in 1998, Enforcement initiated a series of investigations concerning the Firm following receipt of referrals from the Exchange’s Division of Member Firm Regulation's  Sales Practice Review Unit (“SPRU”). The referrals were based upon exceptions noted by MFR examiners in their 1997, 1998, 1999, 2000 and 2001 supervisory standards/sales practice examinations of the Firm. The exceptions were noted in several reports (collectively, the “SPRU Reports”) and were provided to the Firm.

NYSE alleged that the Firm

• failed to supervise the marketing and sale of callable certificates of deposit (“Callable CDs”); 

• permitted the recommendation and sale of securities to customers which were unsuitable; 

• permitted producing branch office managers who handled their own customer accounts to review and approve a) their own correspondence and communications with the public, b) account designation changes, and c) order errors; 

• failed to maintain accurate customer account information; 

• permitted employee trading of securities on Firm research department’s restricted securities list; 

• did not provide for the accurate account statement pricing of bond and mutual fund positions; 

• did not timely allocate orders; 

• failed to properlyextend credit; and 

• permitted statutorily disqualified individuals to become associated with the Firm.

Several aspects of the allegations are instructive in terms of policies and procedures that should be monitored and enhanced.  For example, the NYSE seemed particularly distressed thatthe Firm did not have policies or procedures reasonably designed to ensure that RRs understood, and properly informed customers of, the features of Callable CDs.  By early 2000, more than 400 customers, who primarily were elderly and were seeking short term, fixed income investments, complained about 220 RRs who had sold them Callable CDs.  Specifically, the complaining customers alleged that they had not been fully informed regarding: 

1. call risk, i.e., that the call feature creates uncertainty as to the ultimate maturity of the investment; 

2. reinvestment risk, i.e., that if the Callable CD is called, the funds would likely have to be reinvested at a lower rate of return; and 

3. market risk, i.e., that because of the issuer’s call option, there is a ceiling as to price appreciation, but alternatively, should rates rise, the market price of the Callable CD would fall. 

As of the date of the decision, the Firm had settled approximately 220 complaints relating to callable CDs for a total of approximately $2 million.  Notably, there was criticism that the Firm did not provide formal training sessions with specific instructions concerning the proper disclosures to be made to customers when soliciting the purchase of a Callable CD. Furthermore, the NYSE criticized the practice of offering formal training sessions about Callable CDs to its RRs but not making attendance at such training sessions a requirement before RRs could solicit the purchase of a Callable CD. 

A surefire way to antagonize regulators is to disregard their prior findings --- especially when there was no formal charges issued.  The NYSE alleged that its examiners noted repeat findings of inadequate policies and procedures pertaining to the supervision of producing BOMs who reviewed/approved their own practices in the SPRU Reports for 1998-2001.( 21 producing BOMs or Assistant BOMs from 17 branch offices reviewed and approved their own correspondence, account designation changes, or order errors with respect to customer accounts they handled). Nonetheless, the Firm did not seem to take the examiners' hints and didn't overhaul the system of producing BOM's self policing.  A particularly egregious example was one producing BOM who received a letter in which a customer complained that the BOM had effected unauthorized trades in the customer’s account and did not report the complaint to the Firm.

NYSE also citeddisapprovingly the Firm's policies that resulted in RRs never updating the Firm’s records of customers’ investment objectives when changed, or they did so using different methods, which resulted in the Firm’s official customer records on file at the main office not being current and accurate. For example,RRs in several regions changed a customer’s investment objectives without completing an updated new account form (“NAF”). The Firm allowed its RRs to change customer data in a desktop software program called BrokerVision, which was used primarily for marketing purposes.  This procedure allowed RRs to alter the Firm’s BrokerVision records without necessarily completing an updated NAF, which would have made corresponding changes to the official customer records on file at the main office. In addition, the Firm failed to implement a system of follow-up and review by which it could detect that inaccurate or inconsistent records of investment objectives were being created by its RRs.

The Firm’s policies and proceduresregarding employee trading of securities on the Firm’s research restricted listallowed different departments to place securities on the Firm’s restricted list for various reasons. The Firm updated its restricted securities list on a daily basis and posted it electronically, making it available to RRs on their desktop computers.  Employees were prohibited from trading securities in any employee related accounts until 48 hours after a new “Buy” or “Accumulate” research recommendation had first been issued. “Sell” or “Reduce” recommendations restricted employee trading for three trading hours after the recommendation had been issued. However, the Firm interpreted the 48-hour prohibition to include weekends, so that securities restricted on a Friday could be traded on Monday, the next trading day. The Firm also permitted its employees to violate the 48-hour restriction up to three times within a 12-month period before taking any disciplinary action.

NYSE Information Memo 00-19, dated July 21, 2000, reiterates the requirements of Exchange Rules 410, 440 and SEA Regulations 17a-3(a)(6) and (7), and states that when orders are entered through a block desk, the terms of each order must be documented prior to, or contemporaneous with, the order’s transmission to the block desk. The terms must include all account designations, as well as the number of shares to be allocated to each account. The Firm had varying policies and procedures that permitted bundled orders to be identified after entry; this was not acceptable.

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