## Facts

- New York Stock Exchange, Inc. (NYSE) was registered as a national securities exchange and functioned as a self-regulatory organization (SRO) with duties to enforce compliance with federal securities laws and its own rules.
- NYSE’s Regulatory Group (including Market Surveillance, Member Firm Regulation, and Enforcement) oversaw monitoring and discipline of member conduct; within Market Surveillance, Specialist Surveillance reviewed alerts and Trading Investigations handled referrals.
- From 1999 through 2003, NYSE specialists engaged in widespread unlawful proprietary trading, including:
  - trading ahead of customer orders; and
  - interpositioning (placing the specialist’s account between matching customer orders to capture a spread).
- The misconduct caused more than $158 million in customer harm.
- NYSE’s automated surveillance for trading-ahead was poorly calibrated and operated in a way that missed potential violations:
  - alert parameters (time and price-spread) were set so broadly that meaningful violations were less likely to be flagged;
  - only a fraction of alerts were reviewed, and fewer were referred for investigation;
  - alert review commonly examined only one randomly chosen day, despite recommendations to examine a longer period; and
  - automated interpositioning surveillance was not implemented until late 2002, and internal guidance de-emphasized interpositioning detection.
- NYSE’s investigative and disciplinary practices were found to be inadequate:
  - referrals were often made under a less stringent rule that reduced escalation to formal enforcement;
  - investigations were narrowly limited to the specific event referred and did not generally examine whether additional violations occurred or whether conduct was intentional;
  - repeated violations were frequently addressed through informal measures rather than formal disciplinary proceedings; and
  - customer complaints were commonly resolved by reimbursement without disciplinary action.
- The SEC instituted a public administrative proceeding under Exchange Act §§ 19(h)(1) and 21C; NYSE submitted an offer of settlement, consenting to findings (except jurisdiction) without admitting or denying them.

## Issues

1. Whether NYSE, as an SRO, failed to comply with and enforce compliance by its members and associated persons with the Exchange Act, SEC rules, and NYSE rules, in violation of Exchange Act § 19(g)(1).
2. Whether deficiencies in NYSE’s surveillance, investigation, and disciplinary systems warranted sanctions and remedial undertakings under Exchange Act §§ 19(h)(1) and 21C.

## Decision

- The SEC found that NYSE failed to meet its statutory SRO obligations to enforce compliance with the securities laws and exchange rules.
- The SEC censured NYSE.
- The SEC ordered NYSE to cease and desist from committing or causing violations of Exchange Act § 19(g)(1).
- The SEC required NYSE to comply with specified undertakings aimed at improving surveillance, investigative practices, and disciplinary processes.
- The order was entered on consent, with NYSE neither admitting nor denying the findings (except as to jurisdiction).

## Legal Principles

- An SRO’s duty under Exchange Act § 19(g)(1) includes maintaining reasonably designed surveillance capable of detecting member violations and responding effectively when risks of violations are identified.
- Surveillance is insufficient where detection tools and review practices (e.g., alert parameters, sampling periods, and follow-up procedures) are set or used in a manner that predictably misses known forms of misconduct.
- An SRO must conduct investigations and discipline in a manner reasonably calculated to deter and stop violations; repeatedly relying on narrow investigations, informal measures, or restitution-only resolutions can constitute a failure to enforce compliance.
- The SEC may sanction an SRO for regulatory program failures that permit widespread member misconduct to persist, and may impose cease-and-desist relief, censure, and remedial undertakings to address those failures.

## Conclusion

The SEC determined that NYSE’s weak surveillance design, limited alert review, delayed interpositioning detection, and under-escalation of investigations and discipline amounted to a failure to enforce compliance as required by Exchange Act § 19(g)(1), warranting censure, cease-and-desist relief, and mandated remedial undertakings.


In re New York Stock Exch., Inc., Exchange Act Release No. 51524 (SEC Apr. 12, 2005)