NYSE Regulation announced that it has censured and fined 18 firms and two former firms a total of US$5.85 million for failing to submit accurate electronic blue sheets containing trading information requested by the NYSE and other regulators, and for failing to establish and maintain appropriate systems and procedures for the supervision and control of this reporting requirement.

In addition to the monetary penalties, the firms agreed to validate their trade reporting processes and confirm the validations to the NYSE.

In settling the charges, the firms neither admitted nor denied the allegations. The sanctioned firms are: Calyon Securities (USA) Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., Neuberger Berman LLC, NF Clearing Inc., UBS Securities LLC, Wachovia Capital Markets LLC, Charles Schwab & Co. Inc., National Financial Services LLC, Pershing LLC, Piper Jaffray & Co., Southwest Securities Inc., Credit Suisse First Boston, E*Trade Clearing LLC, Goldman, Sachs & Co., LaBranche Financial Services Inc., Lazard Capital Markets LLC, Lehman Brothers Inc., Preferred Trade Inc., Sanford C. Bernstein & Co. LLC and SunGard Global Execution Services LLC.

Blue sheets are documents that are generated by firms at the request of regulators in connection with investigations of questionable trading. The blue sheets provide information such as the identity of an account holder for whom specific trades were executed and whether a transaction was a buy or a sell and long or short. Since 1989, firms have submitted blue sheets in an electronic format to all regulators including the NYSE.

Inaccuracies and systemic problems were first detected at the firms by the market surveillance division of NYSE Regulation and then referred to the Division of Enforcement for prosecution. The inaccurate blue sheets were submitted over a significant period of time and resulted from deficiencies that were systemic in nature, it found. The inaccuracies included the reporting of short equity sales as long sales. Additionally, some firms continued to have ongoing deficiencies in blue sheet reporting even though NYSE Regulation alerted them to these problems.

The hearing panel decisions found that many of the firms contracted with outside vendors to generate and submit electronic blue sheets on their behalf. Similarly, some of the firms acted as clearing firms and relied upon transactional data supplied by executing firms. “Nevertheless, it is ultimately the responsibility of firms to reasonably ensure that the information submitted to regulators is accurate and in compliance with federal securities laws and NYSE rules,” it stressed. “This responsibility may not be assigned or delegated to others.”

“Blue sheets are an essential component of NYSE investigations into insider trading, market manipulation and other potential violations. Firms must get their operations in order, then periodically test their internal systems to be sure this vital information is accurate,” said Susan Merrill, chief of enforcement, NYSE Regulation. “We cannot allow the failure of firms to respond accurately and completely to regulatory requests for information to impede our investigations.”

The 20 settling firms consented to the imposition of fines of US$150,000, US$300,000 or US$500,000 depending upon each firm’s level of responsibility. Firms that had systemic deficiencies for extended periods of time, more than one type of problem and/or waited for an unreasonable period of time before correcting problems were subject to higher fines than firms that experienced a fewer number of problems and remediated those problems quickly.

Additionally, the NYSE said that Goldman, Sachs & Co. was credited with providing an extraordinary level of cooperation by being the first to self-report systemic blue sheet problems to the NYSE, thereby contributing to an industry awareness of the technological problems relating to blue sheet reporting, sharing with the NYSE the results of its comprehensive review and expending significant resources to remediate the problem.

NYSE Regulation worked cooperatively with the NASD Amex Regulation Division, on behalf of the American Stock Exchange, in the action against Merrill Lynch. The Amex will receive one-half of the US$500,000 fine in connection with its own settlement with this firm.