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NOTE:
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 and to the
entry of findings.
STATUTORY
DISQUALIFICATION APPLICATION
2007
By
Bill Singer
In
the Matter of the Association of X as a General Securities Representative
with The Sponsoring Firm
Redacted Decision Notice Pursuant to Section 19(d) Securities Exchange Act
of 1934 Decision No. SD07003
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| In the Matter
of the Association of X as a General Securities Representative
with The Sponsoring Firm Redacted Decision Notice Pursuant to
Section 19(d) Securities Exchange Act of 1934 Decision No. SD07003 |
APPROVED
by National Adjudicatory Council
On June 19, 2006, the Sponsoring Firm (“the Firm”)
submitted a Membership Continuance Application (“MC-400” or
“the Application”) with FINRA’s Department of Registration
and Disclosure, seeking to permit X, a person subject to a
statutory disqualification, to associate with the Firm as a
general securities representative. In April 2007, a subcommittee (“Hearing
Panel”) of FINRA’s Statutory Disqualification Committee held a
hearing on the matter. X appeared at the hearing, accompanied by
his counsel and by his proposed supervisor. LL and CD, appeared on
behalf of FINRA’s Department of Member Regulation (“Member
Regulation”).
Pursuant to NASD Rule 9524(a)(10), the Hearing
Panel submitted its written recommendation to the Statutory
Disqualification Committee. In turn, the Statutory
Disqualification Committee considered the Hearing Panel’s
recommendation and presented a written recommendation to the
National Adjudicatory Council, in accordance with Rule
9524(b)(1). |
| SD
Event |
X is statutorily
disqualified because he pled guilty in April 2003, to the felony
charge of driving under the influence of alcohol (“DUI”)
in State 1. X’s 2003 DUI was a felony because he had two
previous misdemeanor convictions for DUI in September 1997
(resulting in three years of probation, 30 days of imprisonment, a
$500 fine, and a six-month license revocation) and September 1991
(resulting in 12 days in jail and a $250 fine). For the 2003
felony conviction, the court fined X $1,000, revoked his driver’s
license for one year, and placed him on probation for five years.
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| Sentence
Expiration |
In October 2005, X
received early termination from probation.
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| Prior
Industry Activity |
X first registered in the
securities industry as a general securities representative (Series
7) in December 1995. He also qualified as a uniform securities
agent (Series 63) in December 1995 and as a general securities
principal (Series 24) in July 1997. He was previously associated
with 12 firms between May 1995 and June 2006. At the hearing, X
testified that he changed firms often in the beginning of his
securities career because he was an “account opener” for
another broker, and he followed this broker from firm to firm. X
also stated that he had changed employers frequently in his early
securities career because he was dissatisfied with the quality of
many of his early employers’ sales practices, and he sought to
find a group of co-workers that emphasized ethical business
practices. X stated that some of his early firms encouraged
“high-pressure sales tactics.”
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| Background |
X stated that he found a group of
co-workers that emphasized ethical business practices at Firm 2 in
2002, and that he stayed there until 2006 when the group
transferred to the Sponsoring Firm.
FINRA’s Central Registration Depository (“CRD”) shows
that one customer filed a complaint against X in September 2000,
alleging unsuitable
investments and excessive commissions. The customer sought
damages of $225,000. The parties settled
the complaint for $30,000 in March 2001. X testified that
he contributed the entire $30,000 through monthly deductions from
his gross commissions taken by the brokerage firm that employed
him at the time. The record shows no other regulatory actions
against X.
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| Sponsoring
Firm |
The Firm has 1 office of supervisory
jurisdiction (“OSJ”), no branch offices, and it employs 7
registered principals and 33 registered representatives. The Firm
is engaged in a general securities business.
- The Firm’s 2001 FINRA routine examination resulted in a Letter
of Caution (“LOC”) for an inaccurate balance ledger
and trial balance; one late FOCUS Report; and written
supervisory procedure violations. The Firm responded to FINRA
in a letter dated March 2001, stating that it had addressed
the deficiencies noted.
- FINRA’s 2005 routine examination of the Sponsoring Firm
resulted in a compliance conference for several deficiencies,
including continuing education violations; records violations
involving inaccurate Uniform Applications for Securities
Industry Registration or Transfer (“Forms U4”) and Uniform
Termination Notices for Securities Industry Registration (“Forms
U5”); and written supervisory procedure violations. The Firm
responded to FINRA in a letter dated April 2006, stating that
it had addressed the deficiencies noted.
- FINRA has begun, but not yet completed, its 2007 routine
examination of the Firm.
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| Proposed
Activity |
The Sponsoring Firm
proposes to employ X as a general securities representative in its
home office in State 1. |
| Proposed
Supervisor |
The Proposed Supervisor
has been employed in the securities industry since January 1994,
and he first became registered as a general securities principal
in May 1994. The Proposed Supervisor was previously associated
with 12 different brokerage firms between January 1994 and
September 2006, when he joined the Sponsoring Firm. Proposed
Supervisor will be X’s primary supervisor, and they will work in
close proximity in the same office. The Proposed Supervisor has
been employed by the Firm as a principal since September 2006, and
he began working for the Sponsoring Firm full time in February
2007.
CRD shows one regulatory action and two customer complaints
against the Proposed Supervisor:
- The regulatory action is a 1998
FINRA Decision and Order of Settlement against the
Proposed Supervisor when he was a compliance
officer at one of his former firms. Specifically, the
findings against the Proposed Supervisor were:
- from July 1996 through March 1997, the Proposed
Supervisor failed
to timely report to FINRA statistical and summary
information regarding 19 customer complaints;
- in March 1997, the Proposed Supervisor failed
to timely report to FINRA a state securities
consent judgment imposing penalties of $100,000;
- the Proposed Suervisor failed to develop and maintain a
continuing and current
education program for registered persons for the
year 1997; and
- the Proposed Supervisor failed to develop a written
training plan for the year 1997.
FINRA censured the Proposed Supervisor, fined
him $7,500, and ordered him to requalify
as a general securities principal. The Proposed Supervisor
paid the fine and requalified as a general securities principal in
July 1998.
- Two customers filed complaints
in 1996 against one of the Proposed Supervisor’s
former employers, naming the Proposed Supervisor as
the director of compliance. Both complaints were subsequently
withdrawn with no action against the Proposed
Supervisor.
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| Member
Regulation Recommendation |
Member Regulation
recommends that the Application be denied
because:
- X does not appear to recognize that his 2003 felony
conviction for a third DUI offense is serious and reflects irresponsible
behavior;
- X failed to amend
his Form U4 to disclose his felony conviction;
- X’s employment
history has been “very sporadic”;
- the Firm and X have not acted responsibly because the Firm
compensated X at a time when he was ineligible to
receive compensation; and
- the Proposed Supervisor’s
regulatory history is troubling due to his 1998 FINRA
settlement for supervisory failures.
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| Considerations |
- Is X responsibly addressing his alcoholism;
- Did X disclose his felony;
- Does X’s employment history support denial of the
application;
- The Firm's compensation of X; and
- The Firm and Proposed Supervision
ALCOHOLISM
X’s 2003 felony conviction for a third DUI offense is serious
and reflects irresponsible behavior. However, X recognizes the
seriousness of his offense and has acted responsibly to address
his underlying problem, alcoholism, since his last arrest in
January 2003. X testified that within two weeks of the January
2003 DUI arrest, he voluntarily
placed himself in an inpatient alcoholism treatment center for 30
days. The record contains documentation to corroborate his
testimony in the form of a certificate
of completion of inpatient treatment dated March 2003. X
further testified that immediately following his inpatient
treatment, he voluntarily
completed six months of intensive outpatient treatment,
during which time he became committed to the ongoing
program of Alcoholics Anonymous (“AA”). X stated that
he remains an active member of AA to date. This testimony was
corroborated by a certificate dated August 2003 from the executive
director of the outpatient treatment center and a letter dated
March 2006 from X’s AA sponsor. In addition, X’s
AA sponsor testified by telephone at the hearing and stated
that X has remained sober since February 2003, attends three to
five AA meetings per week, and is active in the AA program.
Accordingly, X has assumed full responsibility for his addiction
and has taken great strides to rehabilitate his alcoholism since
his 2003 DUI arrest.
DISLCOSURE
On six Form U4 amendments filed by Firm 2 for X between January
2004 and August 2005, the response to question 14A(1)6 indicates
only that X had been charged with a felony, with no mention of a
conviction. based on the record evidence and on our assessment of
X’s credibility as a witness. The preponderance of the evidence
in this record supports X’s contention that he promptly informed
his supervisor at Firm 2 of his felony conviction in 2003.
- Arrest: X testified that immediately
after his felony arrest in January 2003, he orally informed
the Former Proposed Supervisor about the felony charge.
X stated that he and the Former Supervisor prepared an
amendment to X’s Form U4 at that time to reflect the felony
charge but that the Former
Supervisor opined that it would “not be a problem” because
the charge was not securities-related. X further
testified that the Former Supervisor and others at Firm 2 were
intimately aware of X’s alcoholism treatment because he was
out of the office for 30 days in February-March 2003 to attend
his inpatient treatment, and for six months thereafter he
attended the outpatient treatment program three days per week
during work hours—from 10:00 a.m. until 1:00 p.m. Moreover,
X stated that because he was not permitted to drive, he had to
add one hour each way to those days in order to use local mass
transportation.
- Plea: X also testified that he orally
timely informed the Former Supervisor that he had pled guilty
to the felony DUI charge in April 2003 and been convicted, and
that the Former Supervisor again opined that it was “not a
problem” because the conviction was not securities-related.
He stated that he never attempted to conceal the felony
conviction from Firm 2, and that he recalled timely giving
court documents to the Former Supervisor and completing some
paperwork to amend his Form U4 to reflect the
conviction.
- U-4 Amendments: X
testified that he assumed that the Former Supervisor had
submitted this revised Form U4 to FINRA, but he admitted that
he had never checked his CRD on-line or later Forms U4
to see if the conviction had been properly disclosed. X stated
that he did not know about the deficiency in his Form U4 until
June 2006, when he attempted to register with the Sponsoring
Firm. X fully disclosed his felony charge and conviction to
the Sponsoring Firm in June 2006, and he testified that he was
surprised when the Sponsoring Firm informed him that the
felony conviction was a statutory disqualification. As to the
six Forms U4 referenced, X testified that he did not recall if
he had ever reviewed them or signed them. He further noted
that each of those amendments appears to have been made to add
a state registration for him, and that he
might have reviewed only the state registration portion of the
Form U4 without going back to review the remaining
sections of the Form U4. The copies of the six Form U4
amendments submitted by Member Regulation are not signed, and
Member Regulation conceded that they were copies of electronic
filings.
X also submitted
affidavits from two former employees of Firm 2, attesting that
they were aware in 2003 of X’s arrest for DUI, that X had never
attempted to conceal his arrest from anyone at Firm 2, and that
several of X’s co-workers were aware of his DUI and his
treatment for alcohol abuse. The record does not include
any statement from the Former Supervisor, and X testified that he
had not had any recent communication with the Former Supervisor.
As X testified, such complete disclosure was necessary to address
the questions of his continuing employment while attending six
months of outpatient alcoholism treatment and the suspension of
his driver’s license. Although X
should have been more diligent by checking his CRD online or by
following up with his employer to ascertain that the amended Form
U4 had been promptly filed with FINRA, he did not willfully fail
to disclose the DUI felony conviction to Firm
2.
EMPLOYMENT HISTORY
X first entered the securities industry in 1995, and between
May 1995 and June 2006, he was employed by 12 different firms.
While such a work record may not be ideal, such a fact does not
support denial of the Application. First, the Forms U5 filed by X’s
former employers indicate that the terminations
were voluntary. Second, the record shows that only
one regulatory event stemmed from those associations—the
March 2001 settlement of a customer complaint against X for
$30,000. Third, X testified credibly that, early in his career, he
acted as an account opener for another broker and chose to follow
this broker from firm to firm. X also credibly testified
that he was dissatisfied
with the work ethic at many of his early firms and
moved to other firms to attempt to find a group of co-workers that
employed good business practices.
COMPENSATION
The Sponsoring Firm submitted the MC-400 on June 19, 2006. X
was listed in CRD as being registered with the Sponsoring Firm
solely for the purpose of satisfying FINRA prerequisites for the
pending Application. During the course of a routine examination of
the firm in January 2007, FINRA staff discovered that X had been
receiving compensation from the Firm. In answer to FINRA staff’s
written questions, the Sponsoring Firm responded by letter dated
January 2007, that between
August and November 2006, the Firm engaged X as “a recruiter of
personnel pursuant to an oral contractor arrangement unrelated to
his registration at the Sponsoring Firm.” The Firm paid X $6,500
per month, for a total of $26,000. At the hearing, X
testified that he has been out of work since June 2006, supporting
his family with his savings and a second mortgage on his home. He
stated that he welcomed the opportunity to make some money when
the Sponsoring Firm offered to pay him to
speak to brokers that he knew and try to get them to interview
with the Firm. X stated that he and the Firm did
not realize that this activity was prohibited because he acted
only as an “introducer” of possible brokers to the Firm and
did not receive an override on any production that
those brokers achieved if they did join the Firm. X and the Firm
did not make any effort to conceal the relationship or the
payments, which FINRA examiners readily identified
in the Firm’s routine examination. As soon as FINRA informed the
Firm that this practice was not permitted during the Application
process, the Firm ceased the payments, and X again began living
off his savings. X stated that he and the Firm were extremely
sorry to have made this error.
SUPERVISION
The Firm has no formal disciplinary history. FINRA held a
compliance conference with the Firm after its 2001 routine
examination and issued an LOC to the Firm after its 2005 routine
examination. The Firm satisfactorily responded to FINRA regarding
the deficiencies cited in those reviews and has made the necessary
corrections to its procedures.
As to the Proposed Supervisor, we find that he is well
qualified to supervise X under heightened supervisory conditions.
The record shows that the Proposed
Supervisor has been in the securities industry since 1994,
qualifying as a general securities principal (Series 24) in May
1994 and requalifying in such capacity in July 1998. Prior
to 1994, he was employed by FINRA for more than four years as a
compliance examiner. There is no indication in the
record that the Proposed Supervisor left any of his prior
employers on other than a voluntary basis, and the two customer
complaints that named him in his role as compliance director of a
firm were withdrawn with no action against the Proposed
Supervisor. Although the Proposed Supervisor entered into a
settlement with FINRA in 1998 for certain violations that occurred
while he was acting as a compliance officer for a former
firm, complied with
the terms of the settlement by requalifying as a general
securities principal in July 1998. The Proposed Supervisor also
testified that he has had experience with supervising certain
individuals who are subject to heightened supervision due to
various state infractions.
The Firm also proposed the beginning of a well-structured plan
of heightened supervisory conditions to impose on X. After
reviewing the Firm’s proposal, we accept it, with the addition
of several enhancements:
1. The Firm will amend its written supervisory procedures to
state that the Proposed
Supervisor is the primary supervisor responsible for X;
2. The Proposed Supervisor
will supervise X on-site, in the Firm’s home office in
State 1;
3. The Proposed Supervisor must
approve every new account to be serviced by X
prior to the commencement of trading and will evidence his review
by signing the
new account paperwork. The Proposed Supervisor will also review
all account
suitability updates and initial the paperwork as evidence of his
review;
4. On at least a daily
basis, the Proposed Supervisor will promptly review every
order placed by X on behalf of his customers, including a
review for suitability
with the client’s investment objectives. X must place all orders
while he is
located on-site at the Firm’s home office in State 1. In the
Proposed Supervisor’s
absence, another qualified principal will perform this review.
Upon the Proposed
Supervisor’s return, he will review the orders and initial them
to indicate such
review;
5. On at least a monthly basis, the Proposed Supervisor will meet
with X to review
all aspects of his work at the Sponsoring Firm, including
compliance with the
Sponsoring Firm’s policies and procedures. the Proposed
Supervisor will
maintain a log of the meetings and the matters discussed and
reviewed;
6. On a quarterly basis, the Proposed Supervisor will review
reports and/or account
statements and will discuss the accounts with X at their monthly
meetings. The
Proposed Supervisor will certify quarterly (March 31, June 30,
September 30, and
December 31) to the Firm’s compliance department that he and X
are in
compliance with the conditions of heightened supervision to be
accorded X;
7. X will not be allowed
to have any discretionary accounts;
8. X will not act in a
supervisory capacity;
9. The Proposed Supervisor will review X’s incoming
correspondence (which
includes e-mail communications) upon its arrival and will review
outgoing
correspondence before X sends it out;
10. For the purposes of client communication, X
will only be allowed to maintain an
e-mail account that is held at the Firm and all e-mails
will be filtered through the
Firm’s e-mail system. The Proposed Supervisor will conduct a
weekly review of
all e-mail messages that X sends or receives, print them, and keep
them
segregated for ease of review during any statutory
disqualification audit (in
addition to complying with the e-mail retention requirements in
NASD Rule 3110
and Rules 17a-3 and 17a-4 of the Exchange Act);
11. All complaints pertaining to X, whether oral or written, will
be immediately
referred to the Proposed Supervisor for review, and then to the
compliance
department. The Proposed Supervisor will prepare a memorandum to
the file as
to what measures he took to investigate the merits of the
complaint (e.g., contact
with the customer) and the resolution of the matter. The Proposed
Supervisor will
keep documents pertaining to these complaints segregated for ease
of review;
12. The Firm’s compliance department will amend the Firm’s
special supervision list
to include the special supervision procedures relating to X that
the Proposed
Supervisor will perform;
13. X will not be allowed
to maintain securities accounts at any other broker-dealer
except the Sponsoring Firm; and
14. For the duration of X’s statutory disqualification, the Firm
must obtain prior
approval from Member Regulation if it wishes to change X’s
responsible
supervisor from the Proposed Supervisor to another person.
|
| Citations |
Frank Kufrovich, 55 S.E.C.
616, 625-26 (2002): (upholding FINRA’s denial of a statutory
disqualification applicant who had committed non-securities
related felonies “based upon the totality of the circumstances”
and FINRA’s explanation of the bases for its conclusion that the
applicant would present an unreasonable
risk of harm to the market or investors).
Question 14A(1) of the Form U4 is in two parts. The first part,
(a), asks if a person has ever “been convicted of or pled guilty
or nolo contendere (“no contest”) in a domestic, foreign, or
military court to any felony?”, and the second part, (b), asks
if a person has ever “been charged with any felony?”
Dep’t of Enforcement v. Gebhart, Complaint No. C02020057,
2005 NASD Discip. LEXIS 40, at *51 n.18 (NASD NAC May 24, 2005),
aff’d, Exchange Act Rel. No. 53136, 2006 SEC LEXIS 93 (Jan. 18,
2006), appeal docketed, No. 06-71021 (9th Cir. Feb. 27, 2006).“Credibility
determinations of the initial fact-finder, which are based
on hearing the witnesses’ testimony and observing their
demeanor, are entitled to considerable weight and deference and
can be overcome only where there is substantial evidence for doing
so.”
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| THE ARTICLES PUBLISHED HERE REPRESENT THE PERSONAL VIEWS OF THE
AUTHOR, AND NOT NECESSARILY THE VIEWS OF ANY LAW FIRM OR ORGANIZATION
WITH WHICH HE MAY BE AFFILIATED. ALL STATEMENTS MADE IN THESE ARTICLES
ARE FOR GENERAL INFORMATION ONLY AND ARE NOT INTENDED TO PROVIDE,
NOR SHOULD THEY BE RELIED ON AS, LEGAL ADVICE. READERS MUST CONSULT
WITH QUALIFIED LEGAL COUNSEL BEFORE RELYING UPON ANY CONTENT CONTAINED
HEREIN. STATEMENTS MADE IN THESE ARTICLES MAY BE INCORRECT FOR YOUR
JURISDICTION OR AT THE TIME WHEN YOU READ SUCH STATEMENTS THE UNDERLYING
RULES, REGULATIONS AND/OR DECISIONS MAY NO LONGER BE CONTROLLING OR
PERSUASIVE AS A MATTER OF LAW OR INTERPRETATION. |
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