NYSE Regulation, Inc. has fined New York-based Deutsche Bank Securities a total of USD1.275 million in two separate disciplinary actions. The first action, which resulted in the imposition of a censure and USD950,000 fine, is due to the firms reported failure to provide required conflict of interest disclosures on published research reports. The second action concerns supervisory and control failures due to a former employee’s misuse of password protected data at another firm.
“Accurate and adequate conflict of interest disclosures on published research reports are essential so that the investing public can make informed decisions about the objectivity and independence of the recommendations,” says Susan L. Merrill, the chief of enforcement at NYSE Regulation. “Firms must ensure that there are adequate infrastructure and procedures in place so the required conflict of interest disclosures are up-to-date and accurate.”
In the first action, an NYSE hearing officer found that from July 2002 through to June 2004 the firm failed to include required conflict disclosures on a significant number of its published reports, which is in violation of NYSE Rule 472. Also the firm failed to ensure that required conflict disclosures were provided during firm research analysts’ public appearances. These failures occurred primarily because the firm did not devote sufficient resources to ensure that the disclosure databases were up to date. The updating was also done by manually by employees. As a result, a significant number of the firm’s published research reports, as well as public appearances by research analysts, did not contain required conflict of interest disclosures over a period of nearly two years.
The firm’s senior research managers understood that the firm relied on a manual process to input data to generate conflict of interest disclosures. Those managers were informed on several occasions that the process was time consuming and prone to delays. Knowing this information, managers failed to undertake a systematic review of the firm’s research disclosures or to verify that the appropriate research disclosures were included in the published reports and during analysts’ public appearances. The NYSE imposed a fine of USD950,000 fine for the failings which Deutsche Bank Securities consented to.
The second disciplinary concerns supervisory and trading violations. An NYSE hearing officer found that from November 2001 through January 2003 the firm violated NYSE Rule 342 by failing to reasonably supervise an employee who used his former member firm employer’s password to access confidential information.
After joining DBSI, the employee learned that his username and password at his former member firm were still valid. During the course of his employment with DBSI, the employee accessed the data more than 200 times in total. He used the data to perform some of his work functions at DBSI’s Index Development Group, including comparing the data from his former member firm to other publicly available data, assisting in resolving anomalies in the development of certain DBSI indices that were in progress but never finalised, and providing his former member firm with data requested by his colleagues at DBSI and its parent. Some of this data was also provided to his supervisor.
From at least November 2001 until the end of January 2003, the employee openly shared the Firm A data with other employees and it was widely known that the employee was accessing this data from the website. The employee also provided his username and password to one other colleague who used it to access certain data. The NYSE ruled that DBSI should have known of the employee’s use and distribution of confidential and proprietary information but failed to discover it.
They also violated NYSE Rule 342 by not placing the employee’s activities within the “supervision and control of the member or member organisation establishing it and of the personnel delegated such authority and responsibility” because his supervisor was employed by the non-member firm Deutsche Bank AG’s London Branch and therefore was outside the jurisdiction of NYSE Regulation. It was not until after the employee’s termination that DBSI employed a supervisor to supervise members of the Index Development Group.
The firm also failed to comply with NYSE requirements over entry and cancellation of Market-on-Close/Limit-on-Close orders. The firm also failed to reasonably supervise its MOC/LOC, audit trail and prime broker business activities. Deutsche Bank Securities, Inc. consented a USD325,000 fine in this second proceeding
Deutsche Bank have neither denied or admitted the allegations leveled against them.