NYSE ARCA, INC. Appearances. For the Complainant: Tony M. Frouge, Esq., and Adam J. Wasserman, Esq., NYSE Regulation.

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1 NYSE ARCA, INC. NYSE REGULATION, Complainant, Proceeding No v. WELLS FARGO PRIME SERVICES, LLC, February 2, 2018 Respondent. Respondent violated: (i) Exchange Act Rule 15c3-5(c)(1)(ii) by failing to have controls that were reasonably designed to prevent the entry of erroneous orders by rejecting orders that exceed appropriate price or size parameters, on an order-by-order basis or over a short period of time; (ii) Rule 15c3-5(e)(1) by failing to adequately review the effectiveness of its controls and to adequately document such reviews; and (iii) NYSE Arca Rule 11.18(b) and (c) by failing to establish and maintain adequate supervisory systems and written procedures that were reasonably designed to ensure compliance with Rule 15c3-5. Consent to a fine of $10,000. Appearances For the Complainant: Tony M. Frouge, Esq., and Adam J. Wasserman, Esq., NYSE Regulation. For the Respondent: Vanessa M. Hoffmann, Esq., Wells Fargo Prime Services, LLC. DECISION Wells Fargo Prime Services, LLC ( Wells Fargo Prime or Firm ) and NYSE Arca, Inc. entered into an Offer of Settlement and Consent for the sole purpose of settling this disciplinary proceeding, without adjudication of any issues of law or fact, and without admitting or denying

2 any allegations or findings referred to in the offer of settlement. 1 The Hearing Officer accepts the Offer of Settlement and Consent and issues this Decision in accordance with NYSE Arca Rules. 2 FINDINGS OF FACTS AND VIOLATIONS Overview 1. This matter involves violations of Securities Exchange Act of 1934 Rule 15c3-5 ( Rule 15c3-5 ) and NYSE Arca Rule From August 2012 through June 2017 (the Review Period ), Wells Fargo Prime violated: (i) Rule 15c3-5(c)(1)(ii) by failing to have controls that were reasonably designed to prevent the entry of erroneous orders; (ii) Rule 15c3-5(e)(1) by failing to adequately review the effectiveness of its controls and failing to adequately document such reviews; and (iii) NYSE Arca Rule 11.18(b) and (c) by failing to establish and maintain adequate supervisory systems and written procedures that were reasonably designed to ensure compliance with Rule 15c3-5. Background and Jurisdiction 3. Wells Fargo & Company ( Wells Fargo ) acquired Merlin Securities, LLC ( Merlin ) in August Merlin was a prime brokerage firm that served hedge funds and other customers. Three months later, Wells Fargo rebranded Merlin to Wells Fargo Prime. As a result of the acquisition, Wells Fargo Prime was registered as an Equities Trading Permit ( ETP ) Holder with NYSE Arca, Inc. (the Exchange ) dating back to January 19, Wells Fargo Prime provided products and services to alternative asset managers, including prime brokerage and trading services to customers. Wells Fargo Prime voluntarily terminated its registration in June The termination became effective on September 8, In December 2011, Merlin set its average daily volume ( ADV ) control limit under the Rule 15c3-5 at 50% for all symbols and for all customers. When Wells Fargo acquired Merlin in August 2012, it maintained the 50% ADV control limit. Wells Fargo Prime, however, never reevaluated the ADV control limit until October FINRA s Office of Hearing Officers reviewed the Offer of Settlement and Consent under the terms of a Regulatory Services Agreement (as amended) among NYSE Group, Inc., New York Stock Exchange LLC, NYSE Arca, Inc., NYSE MKT LLC, and FINRA. 2 The facts, allegations, and conclusions contained in this Decision were taken from the executed Offer of Settlement and Consent. 3 Pursuant to NYSE Arca Rule 10.1 ( Disciplinary Jurisdiction ), the Exchange retains jurisdiction over Wells Fargo Prime for one year after it terminated its registration. 2

3 6. This matter arises from an investigation by NYSE Regulation into the circumstances surrounding an erroneous order Wells Fargo Prime entered on July 29, 2016 (the July 29 Erroneous Order ). The investigation was expanded to include a review of the Firm s compliance with Rule 15c3-5 and NYSE Arca Rule during the Review Period. 7. In a letter dated December 14, 2016, NYSE Regulation Enforcement, on behalf of the Exchange, notified Wells Fargo Prime that it was investigating whether the Firm violated, among other rules, Rule 15c3-5 by failing to establish and maintain risk management controls and supervisory procedures reasonably designed to prevent the entry of erroneous orders. As a result of this investigation, the Firm was found to have violated Rule 15c3-5 and NYSE Arca Rule 11.18, as described in detail below. The July 29, 2016 Erroneous Order Violations 8. On July 29, 2016, Wells Fargo Prime entered a market order to sell 38,654 shares of Security X. The Firm entered the order on an agency basis on behalf of a customer and, as on the previous three days, the trader intended to work the larger parent order as separate single child orders not to exceed 2,700 shares. The trader at Wells Fargo Prime, however, failed to override the market order on July 29, 2016, so that he could continue working it in smaller lots using limit prices. 9. Of the 38,654 shares the trader entered on July 29, 2016, 18,682 shares executed. As a result of the July 29 Erroneous Order, the price of Security X decreased approximately 19.6%. The July 29 Erroneous Order accounted for approximately 43% of Security X s ADV during the previous 30 trading days. Violation of Rule 15c3-5(c)(1)(ii) 10. Rule 15c3-5 requires that a broker or dealer with market access, or that provides a customer or any other person with access to an exchange or alternative trading system... shall establish, document, and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of this business activity. Specifically, Rule 15c3-5(c)(1)(ii) requires that the risk management controls and supervisory procedures shall be reasonably designed to systematically limit the financial exposure of the broker or dealer that could arise as a result of market access, including being reasonably designed to... [p]revent the entry of erroneous orders, by rejecting orders that exceed appropriate price or size parameters, on an order-by-order basis or over a short period of time, or that indicate duplicative orders. 11. Wells Fargo Prime did not employ controls and procedures reasonably designed to potentially prevent erroneous orders. Specifically, the Firm did not utilize a reasonable ADV control limit. Indeed, the Firm s ADV control limit was set at 50% for all symbols and for all customers. If the Firm had employed a reasonable ADV control limit, it 3

4 potentially could have prevented the July 29 Erroneous Order, which represented 43% of Security X s ADV during the previous 30 trading days. 12. Accordingly, Wells Fargo Prime s controls were not reasonably designed to prevent the entry of erroneous orders, by rejecting orders that exceed appropriate price or size parameters, on an order-by-order basis or over a short period. Therefore, Wells Fargo Prime violated Rule 15c3-5(c)(1)(ii). Violation of Rule 15c3-5(e)(1) 13. Rule 15c3-5(e) requires that broker-dealers providing market access shall establish, document, and maintain a system for regularly reviewing the effectiveness of the risk management controls and supervisory procedures required by [Rule 15c3-5(b) and (c)] and for promptly addressing any issues. Specifically, Rule 15c3-5(e)(1) requires that broker-dealers shall review, no less frequently than annually, the business activity of the broker or dealer in connection with market access to assure the overall effectiveness of such risk management controls and supervisory procedures and that [s]uch review shall be conducted in accordance with written procedures and shall be documented. 14. During the Review Period, the ADV control limit review process in place at Wells Fargo Prime was not effective. In December 2011, Merlin set its ADV control limit at 50% for all symbols and for all customers. After Wells Fargo acquired Merlin in August 2012, it maintained the 50% ADV control limit. 15. From August 2012 through October 2016, there is no evidence that Wells Fargo Prime reevaluated the effectiveness or reasonableness of the 50% ADV control limit it had in place for all symbols and all customers. For example, although the Firm had quarterly meetings to evaluate its market access controls, no minutes from any of those meetings show any review of the Firm s ADV control limit until October 2016 (after the Firm was already on notice of the investigation). In addition, Wells Fargo Prime s written supervisory procedures did not specify any details about how such ADV control limit review should be conducted. 16. Wells Fargo Prime s failure to conduct adequate reviews during the Review Period, as well as its failure to adequately document such reviews, constitutes a violation of Rule 15c3-5(e)(1). Violation of NYSE Arca Rule 11.18(b) and (c) 17. NYSE Arca Rule 11.18(b) requires each member firm to establish and maintain a system to supervise the activities of its associated persons and the operations of its business. Such system must be reasonably designed to ensure compliance with applicable federal securities laws and regulations and NYSE Arca Rules. 4

5 18. NYSE Arca Rule 11.18(c) requires each member firm to establish, maintain, and enforce written procedures to supervise the business in which it engages and to supervise the activities of its associated persons that are reasonably designed to ensure compliance with applicable federal securities laws and regulations, and with the NYSE Arca Rules. 19. Wells Fargo Prime failed to evaluate the 50% ADV control limit that it had in place from August 2012 through October This fact demonstrates that the Firm s supervisory system was not reasonably designed to ensure compliance with Rule 15c3-5, in violation of NYSE Arca Rule 11.18(b). 20. In addition, no section of Wells Fargo Prime s written supervisory procedures specifically addressed ADV control limits or the evaluation thereof on a symbol basis, customer basis, and/or trading activity basis. Therefore, the Firm s written procedures were not reasonably designed to ensure compliance with Rule 15c3-5, in violation of NYSE Arca Rule 11.18(c). Relevant Disciplinary History 21. Wells Fargo Prime has no relevant disciplinary history. Other Factors Considered 22. In determining to resolve this matter on the basis set forth herein, Enforcement took into consideration that Wells Fargo Prime cooperated in NYSE Regulation s investigation and the Firm no longer is an ETP Holder with the Exchange. ORDER Wells Fargo Prime Services, LLC violated: (i) Exchange Act Rule 15c3-5(c)(1)(ii) by failing to have controls that were reasonably designed to prevent the entry of erroneous orders by rejecting orders that exceed appropriate price or size parameters, on an order-by-order basis or over a short period of time; (ii) Rule 15c3-5(e)(1) by failing to adequately review the effectiveness of its controls and to adequately document such reviews; and (iii) NYSE Arca Rule 11.18(b) and (c) by failing to establish and maintain adequate supervisory systems and written procedures that were reasonably designed to ensure compliance with Rule 15c3-5. SANCTIONS Wells Fargo Prime Services, LLC is fined $10,000. This sanction is effective immediately. Kenneth B. Winer Hearing Officer 5