Plan of Heightened Supervision
The Sponsoring Firm has proposed heightened supervisory procedures to govern X’s activities. The proposed procedures include the following pertinent conditions:
1. Sponsoring Firm’s written supervisory procedures ("WSPs") shall be amended to incorporate by reference these heightened supervisory procedures. The WSPs shall also be amended to state that Proposed Supervisor is Sponsoring Firm.’s registered principal in charge of supervising sales and trading. Employee 2 is Sponsoring Firm’s registered principal in charge of supervising research. Employee 1 is Sponsoring Firm’s Chief Financial and Compliance Officer and a registered principal. While X will not be permitted to open accounts or enter client orders, and will only be acting to introduce potential accounts to Sponsoring Firm, Proposed Supervisor will be X’s primary supervisor responsible for X’s oversight;
2. X shall not act in a supervisory capacity nor hold any supervisory (principal) level licenses while registered at Sponsoring Firm;
3. X shall be required to work in Sponsoring Firm’s Office of Supervisory Jurisdiction;
- Supervisory Procedure: Proposed Supervisor and/or Employee 1 shall review all of X’s incoming and outgoing written correspondence, including all paper correspondence, facsimiles, e-mail communications and instant messaging. Proposed Supervisor and/or Employee 1 shall use Sponsoring Firm’s third party service provider auditing program to review all e-mails and instant messaging;
- Frequency of Procedure: Such review shall be conducted daily;
5. Outside Business and Outside Brokerage Accounts:
- Supervisory Procedure: Pursuant to NASD Rules 3030, 3040 and 3050, upon registration with Sponsoring Firm, and upon any occurrence of the following, but no less than quarterly thereafter regardless of the existence of updated information, X shall disclose to Sponsoring Firm and Proposed Supervisor pursuant to Rule 3030, all outside business activity; pursuant to Rule 3040, all outside business activity in the securities or investment banking industry; and pursuant to Rule 3050, all outside brokerage accounts subject to such rule;
- Supervisory Procedure: Sponsoring Firm shall have the discretion to approve or deny the opening of such accounts or the assuming of such outside business activities not known to Sponsoring Firm prior to X’s registration with Sponsoring Firm, and under all circumstances shall require duplicate statements and confirms be sent to Sponsoring Firm from the executing broker-dealer respecting all accounts falling under NASD Rule 3050;
6. At all times when Proposed Supervisor is out of the office, X shall be supervised by a supervisor designated by Proposed Supervisor and such designated supervisor hierarchy shall begin with Employee 2 and then proceed to Employee1 and then other registered personnel maintaining the appropriate supervisory licenses. Under no circumstances shall these heightened supervisory procedures be modified in any manner due to the temporary absence of Proposed Supervisor. All designated supervisors shall be subject to the same review procedures and timetables as Proposed Supervisor;
7. Sponsoring Firm shall require that X alert Sponsoring Firm and Proposed Supervisor to all investor complaints pertaining to X whether verbal or written. Proposed Supervisor shall subsequently prepare a complaint memorandum as to what measures Proposed Supervisor took to investigate the merits of the complaint (e.g., contact with the investor) and the resolution of the matter;
8. Proposed Supervisor shall certify to Sponsoring Firm quarterly that Proposed Supervisor and X are in compliance with all of the above conditions of heightened supervision respecting X. Such quarterly certifications shall be made a part of Sponsoring Firm’s NASD Rule 3013 Annual Office Business Inspection Report;
9. Should Sponsoring Firm or Proposed Supervisor find that X has violated or intends to violate any NASD rules or the provisions of these Heightened Supervisory Procedures, Sponsoring Firm or Proposed Supervisor shall take immediate internal disciplinary action. Such violation or intended violation shall be grounds for immediate termination of X’s registration and employment with ISI and shall be at Sponsoring Firm’s sole discretion;
Internal Research and Sales
10. Discretionary Accounts: Without regard to whether Sponsoring Firm allows the establishment of discretionary accounts (currently it does not) X shall not maintain discretionary accounts at any time;
11. Pre-Approval of New Accounts: X shall pre-approve any client contact for opening an account. Proposed Supervisor shall review and pre-approve the opening of each new securities account, prior to such opening by Sponsoring Firm. Proposed Supervisor shall evidence such approval by signing or initialing, and dating all account opening documents. X shall not be the contact on any account. Proposed Supervisor will approve and control any X introduced account. Copies of all such documents shall be maintained at Sponsoring Firm’s office;
12. Order Entry Restriction: Proposed Supervisor shall generate orders and execute all orders on any account opened or introduced by X. Proposed Supervisor shall evidence his review by signing or initialing the order documentation, such as order blotters or any other documentation reflecting same;
13. Further Restrictions on Sales Communications with Institutional Clients: X shall be restricted from communicating with any client of Sponsoring Firm respecting any security Sponsoring Firm is permitted to transact business in unless and until such security is approved by Proposed Supervisor and is entered into an "Approved Securities List." Proposed Supervisor shall evidence such approval on the "Approved Securities List" by signature and initial, and by dating, provided that this restriction shall not restrict X from communicating with clients who solicit information from X respecting securities that are not on the Approved Securities List;
14. X’s letter dated March 4, 2008, referencing "FINRA Rule 8210 Compliance Statement," certifies his understanding and agreement with Sponsoring Firm’s amended proposed heightened supervisory procedures for X and his commitment to comply with Rule 8210.
Sponsoring Firm Has Not Made the Strong Showing Necessary for the NAC to Approve X’s Re-Entry to the Securities Industry Despite the NAC’s Recent Imposition of an Unqualified Bar on X
X Knowingly Failed to Respond to Numerous FINRA Requests for Information and Deliberately Impeded an Important Ongoing Investigation. X lied under oath during the OHO proceeding when he denied that he was involved in the writing or posting of the Firm 5 research reports.
The NAC imposed an Unqualified Bar upon X, and that was done so very recently. Only 14 months from the imposition of the Bar and the filing of the MC-400; and only 20 months before he appeared for this hearing.
X has a disciplinary history which demonstrates his tendency to ignore regulatory authority and pursue his own course of action. X’s counsel argued at the hearing that the three FINRA formal actions that occurred prior to the 2006 bar are not separate statutorily disqualifying events, and thus should not be held against X in considering this Application. Still, the NAC felt obligated to consider X’s full disciplinary history in assessing his current Application to return to the securities industry and whether he presents a potential risk to the investing public. Given X’s extensive and lengthy history of proven lack of compliance with FINRA rules, the NAC gave little weight to his arguments regarding his alleged reformation of character and newly found respect for regulatory authority.
Sponsoring Firm's proposed supervision deemed inadequate. The revised proposed structure, however, is fragmented and does not place the primary daily responsibility for X squarely in the hands of one capable and available supervisor. The proposed procedures did not convince the NAC that the Sponsoring Firm will be able to exercise the necessary control over X’s activities. For example, there is no provision covering supervision of X in meetings with clients outside of the office, or in his outside e-mail or instant messaging correspondence. The Sponsoring Firm also proposes to have X involved in the preparation of research reports, an area in which the NAC previously found his work to be violative and misleading to the public. Although the Sponsoring Firm argues that X will not publicly disseminate his reports, the plan is for others in the Sponsoring Firm to use X’s research, and presumably they will be able to communicate aspects of that research to customers.