Statutory Disqualification Index
SEC and FINRA
CASES OF NOTE
SD03001
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.

In the Matter of the Continued Association of X as an Investment Company and Variable Contracts Products Representative with The Sponsoring Firm 
MC-400: November 21, 2001

Redacted Decision SD Decision No. 03001

APPROVED by Hearing Panel of the NASD's Statutory Disqualification Committee/ National Adjudicatory Council

January 2003, a Hearing Panel of the Statutory Disqualification Committee of NASD held a hearing on the matter.

Filed Under: Felony, Tax Issues, Sponsor's Regulatory History, Approval after hearing
SD Event
In 1999, X pled guilty in a United States District Court to a charge of tax fraud (a felony), which resulted in the evasion of approximately $4,759 in taxes in violation of 26 U.S.C. ß 7201 (1999). 

Specifically, X admitted that he knowingly and willfully attempted to evade a substantial part of the income tax due to the United States by signing and causing to be filed a fraudulent individual tax return for the year 1991. The return, which was not filed until 1995, declared that X had received taxable income for the calendar year 1991 in the amount of $74,655, and that the amount of tax due was $13,150. X failed to provide accurate information to his accountants regarding additional income that he received in 1991. The return did not include approximately $32,676 in taxable income, which X received from his insurance brokerage business.

As a result of X's guilty plea, he was placed on probation for a term of five years. In addition to the standard conditions of probation, X was fined $4,000, confined to his residence for a period of six months, and ordered to perform 500 hours of community service. During the six month confinement, X was required to be at his residence at all times except for approved absences for gainful employment, community service, religious services, medical care, educational or training programs and at other such times as were specially authorized by the U.S. Probation Office. After X completed his six months of house arrest and his community service requirements, and paid his fine, he moved for early termination of his probation. By order dated 2002, a United States District Court granted X's request for early termination, effective in 2002.

Sentence Expiration
2002 early termination of 5 years probation (would have been until 2004)
Prior Industry Activity
Investment company products/variable contracts representative since 1981. 
Background
X has not been associated with an NASD member since 1999. X does not have any previous regulatory history, and the record does not contain any evidence of customer complaints against him.
Sponsoring Firm
The Sponsoring Firm has been a member of NASD since 1966. Principal place of business is in State1. One office of supervisory jurisdiction ("OSJ") and three branch offices. Employs three non-registered associated persons, 13 registered representatives, and one registered principal. 

During the last 10 years, the Sponsoring Firm has received two Letters of Caution ("LOC"), and NASD held a compliance conference:

  • In 1994, NASD issued an LOC to the Sponsoring Firm. NASD found that the Firm had violated certain registration requirements. NASD also found that the Firm had charged an administration fee on all no-load mutual fund purchases for a particular period, in violation of Conduct Rule 2430. The Firm responded to the LOC and advised NASD that the deficiencies had been corrected, and that it had refunded fees to customers who were improperly charged. 
  • In 1999, NASD held a compliance conference with the Firm to discuss deficiencies related to the Firm's compliance under the firm element of the continuing education requirement and deficiencies related to the Firm's annual compliance meeting. The Firm responded to the meeting with a letter in 1999 that addressed the deficiencies. 
  • In 2000, NASD issued an LOC to the Sponsoring Firm, alleging that the Firm had violated Municipal Securities Rulemaking Board (ďMSRBĒ) Rule G-2 by accepting two transactions in municipal securities while failing to have a registered municipal securities principal. The Firm promptly advised NASD that it had sent a memorandum to all registered representatives and order processing personnel that the Firm would process no transactions in municipal securities until a municipal securities principal became associated with the Firm.
Proposed Activity
An investment company products/variable contracts representative who will sell mutual funds, 401(k) plans, and retirement programs. X will be compensated with an annual salary plus a quarterly bonus. He will receive 80% of the net commissions received by the Firm for the sale of the mutual funds.
Proposed Supervisor
The Firmís president and owner will be responsible for supervising X in an off-site location. X will be working out of a branch office (Office2) in State1. The Sponsoring Firm's president will supervise X from the Sponsoring Firm's home office (Office1) in State1. Office1, which is an OSJ, is roughly 15 minutes by car from the Office2. 

The Proposed Supervisor has experience supervising other registered representatives, and he currently supervises between five to 10 other registered representatives from Office1. The Proposed Supervisor has over 32 years of experience working for the Sponsoring Firm, and he is the Firmís sole owner. The Proposed Supervisor has been registered with NASD since 1968, and he is currently registered as a general securities representative and a general securities principal. No regulatory history.

Member Regulation Recommendation
Denial
Considerations
X has accepted full responsibility for failing timely to file his 1991 tax return and for not reporting income in connection with that return. 

X began having financial difficulties beginning in 1988 when he and his two brothers purchased a commercial property for $325,000. X used $100,000 of his own funds to improve the property, which consisted of a grocery store and apartment building that X's grandparents had owned since the 1950's. X has represented that, when it became apparent that the property would not be a profitable investment, he agreed to refinance the property for $260,000 in 1989 to alleviate the financial burden on his two brothers. The property continued to sustain large losses through the early 1990's, and X eventually lost the property in a sheriff's sale in 1995.

X admits that he neglected his personal affairs during the period in which his financial situation deteriorated. This led to his failure to file his tax returns for the years 1991 through 1993 on a timely basis, and his failure properly to communicate with his tax advisors. He also admits that his 1991 tax return, which he did not file until 1995, did not report income documented by two Forms 1099. X also was delinquent in filing his 1992 and 1993 tax returns, as set forth in the Criminal Information. X became aware in 1995 of the IRS investigation related to his delinquent tax returns for the years 1991 through 1993. 

After his plea, X hired new tax advisors and filed all delinquent tax returns with the IRS, amended his 1991 tax return to include the missing Form 1099 income of $32,677, and made a settlement with the IRS to satisfy his tax obligations. X thus has fully satisfied his tax obligations. The IRS determined that X owed taxes in the amount of $5,152 for tax year 1991, based on his amended 1991 return, because of various offsets and expenses. At the hearing, X's tax advisor informed the Hearing Panel that certain income was inaccurately reported in Xís 1991 tax return as income from commissions when, in fact, it represented rental income that he had received. As a result, the amended 1991 tax return that the tax advisor prepared for X reclassified that amount as rental income. The Hearing Panel noted that the corrected 1991 tax return resulted in less tax being paid by X than the amount that was included in the original 1991 filing. Xís tax advisor testified that after including the $32,676 commission income that X had omitted in his original 1991 tax return and after applying adjustments for rental income and expenses, X's taxes due for 1991 amounted to $5,152, as compared to the $17,909 in taxes that he initially owed for 1991.

The conviction occurred almost four years ago and that the court granted X's request for early termination of his probation as of 2002, finding that X had successfully completed the terms of his probation. X served his six-month house arrest, performed over 500 hours of community service, and paid a fine in the amount of $4,000. Additionally, there has been no evidence of misconduct since the time of X's conviction. X has been gainfully employed since he left the securities industry in 1999 because of his status as a statutorily disqualified individual. He has been involved in marketing activities for X Associates, which is solely owned by X's brother and is not an NASD member, and he is presently working as the director of sales and marketing for a pharmacy benefit management company. 

The Sponsoring Firm has had no formal regulatory action taken against it since its inception in 1966. The Proposed Supervisor is a qualified and highly experienced general securities principal with no formal or informal disciplinary history, and we are persuaded that he will properly supervise X. Although the Firm has had a few LOCs in its regulatory history, we note that none of those actions alleged that the Firm had failed to supervise individuals, and we recognize that the Firm took prompt action to rectify its past deficiencies. 

The Sponsoring Firm agreed to certain additional supervisory procedures suggested by Member Regulation, including the requirement that the Sponsoring Firm's written supervisory procedures be amended to state that the Proposed Supervisor is the primary supervisor responsible for X. At the hearing in this matter, the Sponsoring Firm presented a draft of its revised written supervisory procedures that include the proposed heightened supervisory procedures applicable to X's supervision, the terms of which were agreed upon by the Sponsoring Firm and Member Regulation. 

Moreover, the Hearing Panel was particularly impressed with the seriousness with which the Proposed Supervisor has approached his supervisory responsibilities concerning X. The Proposed Supervisor testified that he has known X for 10 years, and that he is willing to take on the additional supervisory responsibility that is necessary to supervise a statutorily disqualified individual. In addition, JT, who conducted business with X from 1995 through 1999 in his capacity as a salesman with Firm 1, accompanied X to the hearing and vouched for his integrity. Further, we believe that the record demonstrates that X is rehabilitated and that he will adhere to the heightened supervisory plan outlined below. 

Under the supervisory conditions set forth below, X must submit to daily review of his sales contacts. Also, before any sales are placed for X, an employee of the Sponsoring Firm, acting on behalf of the Proposed Supervisor, will contact the client to verify the accuracy of the sale. Offsite supervision acceptable in this instance because the nature of Xís business takes him out of the office the majority of the time, X has been registered in the securities industry for 18 years with no regulatory history, and he has not engaged in fraudulent conduct that resulted in harm to customers. Also, at least once a month, the Proposed Supervisor will accompany X on his meetings with clients to verify that X has adhered to all standards and disciplines established by the Sponsoring Firm, and that, at least quarterly, the Proposed Supervisor will make unannounced visits to X's office.

UNDERTAKINGS

  1. The Proposed Supervisor shall be the primary supervisor responsible for X; 
  2. The written supervisory procedures for the Sponsoring Firm will be amended to state that the Proposed Supervisor is the primary supervisor responsible for X; 
  3. Each day, X will provide a list of all sales contacts, including the nature of the contacts; 
  4. Each day, the Proposed Supervisor will review Xís written sales contacts as to the nature of the contact; 
  5. The Proposed Supervisor will review all written presentations and/or proposals; 
  6. Before any sales are placed for X, an employee of the Sponsoring Firm, acting on behalf of the Proposed Supervisor, will contact the client to verify the accuracy of the sale
  7. At least once a month, the Proposed Supervisor will accompany X on sales appointments to verify that he has adhered to all standards and disciplines established by the Sponsoring Firm; 
  8. Once a month, the Proposed Supervisor will meet with X to review his activity and review compliance procedures;
  9. Once during a calendar quarter, the Proposed Supervisor will review X's activity by making unannounced visits to X's office; 
  10. Once a year, the Proposed Supervisor will present to X a written report as to his compliance with all necessary requirements in order for him to fulfill his obligations; 
  11. If at any time the Proposed Supervisor feels that X has not complied with these heightened supervisory terms and conditions, a written report will be submitted to him that requests his acknowledgement and understanding of the deficiencies and requires his signature and a plan as to how the deficiencies will be corrected. A copy of this signed report will be kept in X's file; and 
  12. The Proposed Supervisor must certify quarterly (March 31st, June 30th, September 30th, and December 31st) to the Compliance Department of the Sponsoring Firm that X and the Proposed Supervisor are in compliance with all of the above conditions of heightened supervision to be accorded X.
Citations
See Frank Kufrovich, Exchange Act Rel. No. 45437, 2002 SEC LEXIS 357, at *16 (Feb. 13, 2002) 
(upholding NASD's denial of a statutory disqualification applicant who had committed non-securities related felonies "based upon the totality of the circumstances" and NASD's explanation of the bases for its conclusion that the applicant would present an unreasonable risk of harm to the market or investors).
 
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