In the wake of a scandal that led to jail sentences for several traders last month, the
New York Stock Exchange
has proposed forcing floor brokers to report their personal financial interests as well as trading errors.
The proposal would require NYSE members to report to the exchange all securities accounts in which they have a financial interest, or control, including banks and hedge funds not under its jurisdiction.
It also would require floor brokers to keep an account of all trading errors, including instances in which traders purchase the wrong stock or miss a market by failing to execute a trade on time. That rule is intended to keep brokers from using such transaction errors to hide personal trading.
"I certainly support the intent. It
enforcement is difficult. Obviously there's more surveillance
required," says John Markese, president of the Chicago-based
American Association of Individual Investors
. He adds that disclosure requirements might be difficult to enforce because they rely on self-reporting by floor brokers.
Securities and Exchange Commission
this week published the proposed rule changes and began seeking public comment. The full commission will vote on the proposals after a review period in the coming weeks, an SEC spokesman says.
The planned disclosure requirements were among a lengthy list of initiatives the NYSE announced last summer in a settlement with the SEC over floor-trading activities at the exchange.
The scandal erupted after federal prosecutors indicted eight independent floor brokers and two executives of the brokerage
in 1998 and charged them with trading illegally for themselves and taking profits of as much as 90% on trades at the NYSE.
Six of those individuals eventually pleaded guilty to illegal trading and falsifying broker records, and in January were sentenced to prison terms of up to 20 months and fines of up to $100,000.
The SEC began an investigation of the NYSE's involvement with floor-trading activities and, last June, the exchange settled with the SEC, promising to enact a number of
Aside from the error account and financial-interest disclosure requirements, the NYSE said it would draft a new procedures manual for Big Board surveillance and investigation, and place regulatory staff on the exchange floor.
An NYSE spokeswoman this week said the exchange is in compliance with its settlement.
The floor-trading scandal came at a sensitive time for the Big Board, as it is considering plans to go public, and is also facing criticism regarding the effectiveness of its self-policing operation.
And the criticism isn't going away.
In December, John D'Alessio, a former floor broker who was arrested and charged with illegal trading (the charges were later dropped), filed a suit against the exchange in
New York County Supreme Court
. D'Alessio claims that top officials at the NYSE knew of illegal trading and profit-taking by floor brokers, but condoned the practice and lied to prosecutors about it.
The case was recently moved to the
U.S. District Court for the Southern District of New York
, where it is pending.
Dominic Amorosa, a New York lawyer representing D'Alessio, says the proposed rule changes could help identify who's actually trading what on the exchange floor.
Clearly, he said, the Big Board proposed the changes now because of the floor-broker scandal. "They're running around now like they're looking to abide by the law."
NYSE spokesman Ray Pellecchia says some of the initiatives relating to floor trading were under way before the scandal surfaced, but adds, "they certainly do address the issues that came up in the Oakford situation."