NEW YORK STOCK EXCHANGE LLC
NYSE HEARING BOARD DECISION 07-116 September 7, 2007
WACHOVIA CAPITAL MARKETS LLC
MEMBER ORGANIZATION
Violated NYSE Rule 1100(b) by failing to deliver product descriptions to customers that purchased Exchanged Traded Funds; violated NYSE Rule 342 by failing to provide for, establish, and maintain appropriate procedures of supervision and control, including system of follow-up and review, with respect to its operational and technological activities relating to delivery of product descriptions — Consent to censure, $375,000 fine, and undertaking.
Appearances:
For the Division of Enforcement For Respondent
Susan Merrill, Esq. Edward Rosenblatt, Esq.
Anthony Cavallaro, Esq.
Richard Chin, Esq.
Brian Vincent
Ronald Schwan
A Hearing Officer on behalf of the New York Stock Exchange LLC (“NYSE” or the “Exchange”) considered a Stipulation of Facts and Consent to Penalty entered into between NYSE Regulation, Inc.’s Division of Enforcement (“Enforcement”) and Wachovia Capital Markets LLC (“Respondent” or “WCM” or the “Firm”), an NYSE member organization. Without admitting or denying guilt, Respondent consented to a finding by a Hearing Officer that it:
I. Violated NYSE Rule 1100(b) by failing to deliver product descriptions to customers that purchased Exchanged Traded Funds.
II. Violated NYSE Rule 342 by failing to provide for, establish and maintain appropriate procedures of supervision and control including a system of follow-up and review, with respect to its operational and technological activities relating to the delivery of product descriptions.
For the sole purpose of settling this disciplinary proceeding, without adjudication of any issues of law or fact, and without admitting or denying any allegations or findings.
Stipulation of Facts and Consent to Penalty, Respondent stipulates to certain facts, the substance of which follows:
Background and Jurisdiction
1. WCM is a Delaware limited liability corporation with its principal place of business in Charlotte, North Carolina, is registered with the United States Securities and Exchange Commission (“SEC”) and is a member organization of the NYSE. WCM is a global investment banking and multi-service brokerage firm that, among other things, trades securities for primarily institutional customers. As of 2006, the Firm maintained approximately 28 branch offices and employed over 1,000 registered representatives. For the second quarter of 2006, WCM had a net capital of approximately $1.5 billion.
2. By letter dated October 18, 2004 (the “October Letter”), which WCM received, Enforcement requested that the Firm conduct a review of its policies and procedures in the area of prospectus delivery concerning the offering of new issues and the sale of mutual funds and provide Enforcement with the results of its assessments. Enforcement requested that the Firm use the time-period of July 1, 2003 through October 31, 2004 for its review (the “Relevant Period”). Thereafter, Enforcement requested that the Firm expand its review regarding the delivery of prospectuses and product descriptions. Subsequently, the Firm provided additional information.
Summary of Violative Conduct
3. During the Relevant Period, WCM had a systemic deficiency relating to the delivery of product descriptions to customers that purchased Exchange Traded Funds (“ETFs”) in the secondary market. This systemic deficiency prevented the Firm from sending product descriptions to institutional customers that purchased ETFs as required by NYSE rules.
Applicable Federal Securities Laws and NYSE Rules
4. Section 5(b)(2) of the Securities Act of 1933 (the “Securities Act”) prohibits the delivery of certain securities unless such delivery was accompanied by or preceded by a prospectus that met the requirements of the Securities Act.1
Hearing Officer Note: The facts, allegations, and conclusions contained in paragraphs 1 to 14 are taken from the executed Stipulation of Facts and Consent to Penalty between Enforcement and Respondent. No changes have been made to the stipulated paragraphs by the Hearing Officer.
On December 1, 2005, a new set of prospectus delivery rules became effective. Among other things, under the new rules, a final prospectus will be deemed to precede or accompany a security for sale for purposes of Section 5(b)(2) of the Securities Act as long as the final prospectus meeting the requirements of Section 10(a) of the Securities Act is filed or the issuer will make a good faith and reasonable effort to file it with the SEC as part of the registration statement within the timeframe set forth in Securities Act Rule 424. See Securities Offering Reform, Exchange Act Release No. 34-52056, 2005 SEC Lexis 1789 (July 19, 2005).
5. NYSE Rule 1100(b) governs the delivery of written descriptions (commonly referred to as product descriptions) in connection with customer purchases of Investment Company Units, which include ETFs as defined in Section 703.16(A) of the NYSE Listed Company Manual. NYSE Rule 1100(b) provides that, with respect to ETFs “as to which the sponsor or other appropriate party has obtained an exemption from Section 24(d) of the Investment Company Act [of 1940]” and which are listed on the NYSE or have unlisted trading privileges, “members and member organizations shall provide to all purchasers of such [securities] a written description of the terms and characteristics of such securities, in a form prepared or approved by the Exchange, not later than the time a confirmation of the first transaction in such security is delivered to such purchaser.”
6. Most sponsors of ETFs have obtained exemptions under Section 24(d) of the Investment Company Act of 1940. For certain transactions involving ETFs for which an exemption has not been obtained, member organizations are required to deliver prospectuses to customers who purchase such securities as required by Section 5(b)(2) of the Securities Act.
The Firm’s Prospectus Delivery Procedures
7. During the Relevant Period, WCM used third-party, outside printers to deliver prospectuses for transactions occurring on the initial pricing date for corporate debt offerings and asset-backed deals. For all other types of transactions, WCM delivered prospectuses to customers without the assistance of an outside vendor or outside printers.
Failure to Deliver Required Product Descriptions
8. During the Relevant Period and continuing until 2006, WCM had a systemic deficiency relating to the delivery of product descriptions (or any other disclosure documents) to customers that purchased ETFs in the secondary market. This systemic deficiency prevented the Firm from sending product descriptions to customers that purchased ETFs. The failure to deliver product descriptions for ETF transactions constituted violations of NYSE Rule 1100(b).
9. The Firm began selling ETFs in 2003, but did not establish and maintain appropriate policies and procedures to ensure the delivery of product descriptions (or any other disclosure documents) to customers that purchased ETFs in the secondary market. In or about the first quarter of 2006, the Firm remediated this deficiency and enhanced its policies and procedures to ensure the delivery of product descriptions (or any other disclosure documents) to customers that purchased ETFs.
Failure to Supervise (NYSE Rule 342)
10. NYSE Rule 342(a) provides, in pertinent part that: “[e]ach office, department or business activity of a member or member organization shall be under the supervision and control of the member or member organization establishing it and of the personnel delegated such authority and responsibility.”
11. NYSE Rule 342(b) provides, in pertinent part that: “[e]ach member organization shall provide for appropriate supervisory control and shall designate a principal executive officer to assume overall authority and responsibility for each office, department or business activity, and provide for appropriate procedures of supervision and control [and] establish a separate system of follow-up and review to determine that the delegated authority and responsibility is being properly exercised.”
12. As set forth in paragraphs 4 to 11, WCM failed to provide for, establish and maintain appropriate procedures of supervision and control including a system of follow-up and review, with respect to its operational and technological activities relating to the delivery of product descriptions. In addition, during the Relevant Period, the Firm failed to maintain written procedures designed to ensure that product descriptions were being disseminated to customers that purchased ETFs.
Other Factors
13. The Firm cooperated fully in responding to Enforcement’s requests for information regarding the Firm’s policies, procedures, and practices for providing prospectuses and product descriptions to customers that purchased certain securities.
14. To comply with its current practices and applicable federal securities laws and NYSE rules, the Firm has enhanced its policies and procedures, including the development of enhanced written supervisory and operational policies and procedures regarding the delivery of prospectuses and product descriptions.
DECISION
The Hearing Officer, in accepting the Stipulation of Facts and Consent to Penalty, found Respondent guilty as set forth above.
PENALTY
In view of the above findings, the Hearing Officer imposed the penalty consented to by Respondent of a censure, a fine in the amount of $375,000, and an undertaking to provide Enforcement with a written certification that Respondent’s current policies and procedures, including written supervisory and operational policies and procedures, regarding the delivery of prospectuses and product descriptions are reasonably designed to ensure compliance with the federal securities laws and NYSE rules applicable to the delivery of prospectuses and product descriptions. Respondent will provide Enforcement with this written certification within 90 days from the date on which this Decision becomes final.
For the Hearing Board
Peggy Kuo – Chief Hearing Officer
Guiliano Law Group
If you have been the victim of securities fraud and you have a complaint, you should consult with an attorney. The practice of Nicholas J. Guiliano, Esq., and The Guiliano Law Group, P.C., is limited to the representation of investors in claims for fraud in connection with the sale of securities, the sale or recommendation of excessively risky or unsuitable securities, breach of fiduciary duty, and the failure to supervise. We accept representation on a contingent fee basis, meaning there is no cost unless we make a recovery for you, and there is never any charge for a consultation or an evaluation of your claim. For more information contact us at (877) SEC-ATTY.
