SEC SENDS SALES PRACTICES MESSAGE TO INDUSTRY
OLDE PART 3

The six-month ruleat Olde required an RR to execute a buy transaction in a special product in a customer's account at least once every six months. Sales transactions did not count, nor did purchases of non-Olde stocks, regardless of the size of the trades. If a customer did not purchase a special product within six months, the customer's account was reclassified as a "house account" and coded "999" in Olde's computer system, to which other RRs had access. The customer had no voice in the matter. From that point on, any RR could solicit the customer to buy a special product. If another RR was successful in getting the customer to buy a special product, the customer would then be assigned to that RR, who would keep the account as long as he or she abided by the six-month rule. The firm encouraged the sales force to waste no time on people who repeatedly rejected the firm's recommendations.

During the relevant period, many of Olde's new hires were recent college graduates with no prior securities industry experience. Prospective RRs were given a research report for one of the firm's special venture stocks and told to study it for 10 minutes, at the conclusion of which they were required to "pitch" the stock to an Olde regional manager, the goal being to get the "customer" to buy 1,000 shares of the stock. Those who did well were hired.

Once hired, new employees began an apprenticeship program Olde called the graduated B52/B7FI and Assistant Programs ("the assistant programs"). Under the assistant programs, all new hires began work as "call center trainees," prospecting for new customers while studying for the Series 52 examination. If the trainees passed their Series 52 examination on the first try, they were allowed to continue in the program; if not, they often were dismissed.

After studying for and passing their Series 52 examination, the municipal securities representatives, known within Olde as the B52s, began selling municipal securities and studying for their Series 7 examination. In order to continue in the program, the assistants were required to

pass their Series 7 examination on the first try,

sell $500,000 in fixed income investments, and

open 20 new accounts, within five months of entering the program.

B-7 Licensed Assistants were sent to firm headquarters in Detroit for two-weeks of classroom training, which Olde attempted to conduct each month. During these two weeks of primarily intensive sales training, Olde taught its new RRs a number of specific techniques designed to increase their chances of selling special venture stocks, thereby maximizing the firm's profit and the income to the RRs. In addition to lectures, the firm distributed sales scripts and set aside time for the new RRs to practice techniques on each other in role-playing sessions. With superbrokers, regional managers and occasionally management looking on, the new RRs paired up and pretended to sell each other special venture stocks. In these sessions, the trainee playing the customer tried to end the conversation without buying anything, while the trainee playing the RR attempted to make a sale, regardless of any objections tendered by the customer.

One technique taught in training was that which Olde referred to as "cross-selling." Olde provided its RRs with "cross-selling directories," which juxtaposed non-Olde stocks with special venture stocks in the same general industry groups. The special venture stocks in these directories were securities that had been analyzed by Olde's research department. Olde RRs received relatively insignificant compensation for trades in non-Olde stocks listed in the directories. Olde RRs were taught to attempt to convince customers who wished to place an order for the purchase of a non-Olde stock to purchase a special venture stock instead. Significant numbers of Olde RRs viewed aggressive cross-selling as necessary to survive at Olde since the firm paid RRs relatively insignificant compensation for trades in non-Olde stocks. The firm's credo was expressed during the two-week training course:why let someone buy a stock you're not going to get paid on?

On the topic of how to convince customers to buy special venture stocks, the firm taught its RRs a technique known among the firm's RRs as "three bullets and a close." The technique required RRs

to pick out three positive facts from the research reports Olde issued on its special venture stocks;

to "create a sense of urgency" by delivering those facts to the customer in rapid succession; and

followed immediately by a closing (a concluding statement designed to prompt the customer to make a decision) from a script of closings the firm handed out at training. If the customer did not agree to buy after the first three bullets and a close, the technique required the RR to pitch three more bullets and another close and to repeat the pattern until the customer bought.

The SEC closely examined Olde's use of scripts and made a number of pointed observations.

An objection script was used even though it called upon the RRs to make misrepresentations, the responses calling for the RRs to represent that the stock "is going up" being only the most obvious examples.

The SEC criticized the response to the objection "I'll watch (the stock for awhile)," which called for the RR to respond "I've been watching this stock for two years. This is the time to buy 1,000 shares." PROBLEM: Given the high turnover at Olde, the majority of its RRs had not been in the securities industry for two years, much less following a particular stock for two years.

Another misrepresentation from the script came in response to the objection "I don't take recommendations." The script called for the RR to respond "I spend 60 to 80 hours a week analyzing and researching investments. We are highly qualified to give recommendations." PROBLEM:Former employees testified that, in their experience, the only "analyzing" RRs did was reading Olde's research reports in order to extract "bullets" for their sales pitches.

Several of the objection responses from the script call for the RR to say, "The stock is going up. Let's buy 1000 shares," "My favorite stock is _________. I'm buying it for all my customers and I would like you to buy 1000 shares," and "The market is down, this is no time to run and hide, this is a buying opportunity. The stock is going up let's buy 1000 shares." PROBLEM: When RRs expressed concern that those responses amounted to improper guarantees of future performance, they were told not to worry.

Olde's sales manual touted margin as a way the RRs could increase their compensation. Specifically, in the part of the manual devoted to explaining how RRs get paid it's stated Let's now take a look at some payout examples. Looking at the examples, you can see how margin, when suitable, can substantially increase your payout. The page that followed was a list of six examples demonstrating how RRs could increase their compensation through using margin and centered at the bottom of this page of examples, in capital letters, were the words "THINK BIG!!!" In addition, Olde's standard two-page account opening form included a margin account agreement. Some customers did not realize that they were requesting a margin account when they opened their account at Olde. PROBLEM:The SEC doesn't really view margin as a tool to increase payout. So, it's not a great idea to put that concept in writing. It naturally follows, therefore, that casually including a margin agreement with the standard new account form -- especially given the THINK BIG admonition -- might not be viewed by the SEC as a sound practice.

Under Olde's SmartTrade program, a customer with at least a $500,000 account can purchase commission free 1,000 or more shares of any security; under the SmartTrading program, any customer could purchase 1,000 or more shares of an Olde recommended stock commission free.

What they told the press:Senior Olde officials disclosed in response to inquiries by the financial press that the firm, on commission-free trades, could earn revenue by capturing the spread on those securities in which the firm made a market. In addition, pursuant to Rule 10b-10, customer confirmations disclosed that the firm had acted as principal in the customers' transactions and was a market maker in the security.

What they told their customers:Certain senior sales officials instructed the firm's RRs that if customers asked them how the firm made money they were to say that the firm hoped to make money on other trades or on margin interest, omitting the fact that the firm earned revenue by capturing the spread. Another senior sales official instructed the firm's RRs to disclose to sophisticated customers (who asked) that the firm could capture the spread, but to tell other customers that the firm hoped to make money on other business from the customers. PROBLEM: The SEC found this inconsistent disclosure as fraudulent because RRs misleadingly failed to disclose that Olde and its RRs profited from the spread.