NYSE Plans Tougher Sanctions Against Brokerages

The New York Stock Exchange plans to continue to compel brokerages to make meaningful reforms, The Globe and Mail reports, quoting NYSE Enforcement Chief Susan Merrill.

"A sanction must be sharp enough that it will not be shrugged off as simply another cost of doing business," Merrill told lawyers at the Toronto firm Borden Ladner Gervais. "Where misconduct has been serious, the sanction probably has to be severe. A sanction should be a memorable event; it should not be part of the routine."

Since her appointment in 2004, Merrill has overseen the most severe monetary punishments issued to companies for breaking NYSE rules, including a $19 million fine against Morgan Stanley for breaching prospectus rules and a $13.5 million penalty placed on Merrill Lynch & Co. for failing to supervise brokers involved in market timing

The NYSE re-evaluated its regulatory department in 2004 after it had been accused of not controlling the brokerage industry closely enough. NYSE was even charged, by the Securities and Exchange Commission, of failing to adequately scrutinize specialist firms, which oversee floor auctions.

A recently conducted review of NYSE enforcement policies led to a conclusion that the NYSE must go well beyond monetary fines and make more use of other penalties. For example, the NYSE will compel more firms to apply new internal procedures that are aimed at prevention of any more wrongdoing and conduct regular reviews to evaluate how well the new safeguards are functioning.

"In some cases, the undertakings are even more important than the fines," Merrill said. "It may involve more dollar-for-dollar expense. It offers a way to ensure that the firm looks into the problems that caused the violations. With a fine, the firm may be able to pay the money and put to one side the underlying problem."

NYSE may also impose limits on some lines of business run by a brokerage firm, and impose supervisory conditions on a firm. The NYSE and the National Association of Securities Dealers warned members that they might suspend entire lines of business for periods of time.