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Firm penalised $83,000 for breaching NZX rules

Wednesday 22nd December 2010

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McDouall Stuart Securities has been publicly censured for five alleged breaches of NZX rules and ordered to pay NZX a total of $83,000 for four of them.

But McDouall Stuart said its directors and executives did not agree with four of the five breaches, and believed all penalties were manifestly extreme given the circumstances, lack of personal or other gain, and the protection at all times of clients' assets and their best interests.

"The directors nonetheless, have decided that there is a reasonable likelihood that costs would exceed the penalties imposed to continue to fight these allegations, and therefore have taken a commercially pragmatic approach of moving forward," McDouall Stuart said.

The breaches largely related to well-documented arguments of interpretation of NZX participant regulations which led it to resign from the accreditation category as an NZX trading and settlement firm in mid-March 2010, McDouall Stuart said. It remained accredited as an NZX sponsor.

The NZ Markets Disciplinary Tribunal said it found McDouall Stuart acted in breach of a number of NZX participant rules and the terms of an amended waiver granted to it by NZX on December 24, 2009.

The tribunal found that nine times in January, February and March this year McDouall Stuart failed to have liquid capital at the levels prescribed in the amended waiver.

It did not accept McDouall Stuart's argument that compliance was only required as at a particular date, and imposed a $25,000 penalty.

For the second breach it found McDouall Stuart persisted with its inclusion of a subordinated loan of securities in its liquid capital calculation, despite a clear direction from NZX that it did not approve the subordinated loan.

But the tribunal also accepted the firm genuinely believed its position concerning the subordinated loan was correct, and said it considered the rules involved to have been deficiently drafted at the time.

A third breach was not holding client assets in excess of client obligations on 13 occasions between September 2008 and February 2010, the tribunal said, penalising the firm $13,000 for the breach.

It noted that McDouall Stuart denied 10 of the 13 occasions on the basis that a $300,000 bond held by NZX should be included in the firm's client assets.

The fourth breach was failing to hold client assets on trust for clients at all times, not obtaining from the bank holding the client funds account a written acknowledgement of the trust status of the account, and failing to produce evidence of the trust status of the account.

All those matters related to an account held by McDouall Stuart with Charles Schwab in the US, the tribunal said.

It noted NZX had institutional knowledge of the structure of the Charles Schwab account and should have been aware the account was not a trust account.

McDouall Stuart was penalised $30,000 for that breach, and $15,000 for the fifth breach which involved failing to ensure excess client funds were paid to clients where possible.



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