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. SD08003 |
DENIED
by National Adjudicatory Council
Hearing Held
On September 12, 2007, the Sponsoring Firm submitted a
Membership Continuance Application (“MC-400” or “the
Application”) with the Financial Industry Regulatory Authority's
Department of Registration and Disclosure seeking to permit X, a
person subject to a statutory disqualification, to associate with
the Sponsoring Firm as a general securities representative. In
March 2008, 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, his proposed
primsupervisor (“the Proposed Supervisor”), and the Firm’s
chief compliance officer (“Employee 1”). FINRA Employee 1 and
FINRA Attorney 1, appeared on behalf 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 ("NAC"),
in accordance with NASD Rule 9524(b)(1).
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SD
Event
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X
is statutorily disqualified because in 2006,
the NAC issued a decision imposing
a bar in all capacities on X for his failure to respond
to FINRA’s repeated requests for information in an ongoing
investigation regarding the adequacy of research reports.
[Case Redacted].
The NAC decision also found that
X and his previous firm, Firm
1, negligently issued
research reports that failed to include required
disclosures and contained misleading information.
[Case Redacted]. The
NAC stated that it would have imposed a 60-day suspension and a
$20,000 fine for the inadequate research reports, but did not do
so because of the bar for X’s failure to respond. [Case
Redacted].
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Sentence
Expiration |
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Prior
Industry Activity |
X
first registered in the securities industry as a financial and
operations principal (Series 27) in 1983.
He qualified as a general securities representative (Series 7) in
1983 and as a general securities principal (Series 24) in 2001. He
was previously associated with 14 firms between June 1982 and
February 1993, when he formed Firm 1.
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Background
Firm 2:
Investment Services Company (services Firm 3) owned 100% by X
Firm 3: LLC
(sole member/shareholder is X) Investment Mgmt Company (for Firm
4)
Firm 4: Mutual
Fund (Cayman based)
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X currently
serves as president of Firm 2, an investment services company
that he incorporated in State 1 in June 2007. X
owns 100 percent of Firm 2,
which provides all investment related services to Firm
3, a State 1 limited liability company of which X is the sole
member and shareholder.
Firm 3 is the investment management company for Firm 4, a mutual
fund company operating out of the Cayman Islands. X represented at
the hearing that, if FINRA permits, he proposes to continue his
work with Firm 2 if he re-enters the securities industry.
In addition to the recent unqualified bar, X's
disciplinary record includes three prior FINRA formal actions.
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In 1994,
FINRA accepted a Letter of Acceptance, Waiver and Consent
("AWC")
submitted by X and
Firm 1. The AWC censured
and fined the respondents $7,500, jointly and severally,
for failing to obtain an amendment
to the firm’s restriction agreement with FINRA;
In 1998,
FINRA accepted an AWC
from X and Firm 1 for failing to develop a written training
plan, and failing to develop and maintain a continuing
and current education
program for registered representatives in 1996 and
1997. FINRA censured
the respondents and imposed a $2,500 fine, jointly and
severally; and
In 2000,
FINRA accepted an AWC
submitted by X and Firm 1 for numerous violations, including: 1)
failing to keep written records of affirmative determinations in
short sale
transactions that the firm effected for its own account or the
accounts of its customers; 2) failing to report sales
transactions as short sales to Nasdaq’s Automated Confirmation
Transaction Service; 3) failing to file advertisements
with FINRA’s Advertising Department; 4) failing to maintain
advertisement files; 5) failing to disclose the firm’s name on
Bulletin Board advertisements posted by associates of the firm;
6) failing to provide the price of securities in research
reports; 7) failing to disclose risks of short selling
in research reports that recommended short sales; 8) issuing
research reports that failed to provide a sound basis for
evaluation, omitted material facts or made misleading statements
or claims; and 9) failing to establish, maintain and enforce
procedures reasonably designed to achieve compliance with
advertising rules, short selling rules, and trade reporting
rules. FINRA ordered
the respondents to retain an independent consultant to
review and make recommendations concerning the adequacy of the
firm’s policies and procedures, to remove all advertisements
on Firm 1’s website and refile them with FINRA’s Advertising
Department, and to pre-file any future advertisement with FINRA’s
Advertising Department 15 days prior to use. FINRA also censured
and fined the respondents $75,000, jointly and severally, and
ordered X to requalify as a general securities principal within
60 days. X requalified as a general securities principal in
2001.
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Sponsoring
Firm |
The
Sponsoring Firm is based in City 1 State 2 and it has been a FINRA
member since 1999.
The Firm has 1 office of
supervisory jurisdiction ("OSJ"), no branch
offices, and it employs
three registered principals and five registered representatives.
The Firm’s MC-400 represents that it "specializes
in illiquid high yield, distressed and emerging market situations,
particularly those that are ‘under-followed.’"
FINRA has approved Sponsoring Firm to engage in a general
securities business, and Proposed Supervisor represented that
Sponsoring Firm deals
only with institutional customers.
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FINRA issued the Firm a Letter of Caution (LOC)
after the 2002 routine
examination for late amendments to its Form
BD, FOCUS filing deficiencies, and improper records on order
tickets and confirmations. FINRA did not ask Sponsoring
Firm to respond to this LOC;
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FINRA’s 2004
routine examination was filed with a finding of no
deficiencies.
2006
routine examination, FINRA issued Sponsoring Firm an
LOCfor late
transaction reporting. Sponsoring Firm responded in a
2006 letter stating that it had addressed the deficiencies
noted.
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Proposed
Activity |
The
Sponsoring Firm proposes to employ
X as a general securities representative in its only location,
the OSJ in City 1, State 2. The Sponsoring Firm describes X’s
proposed duties as "Internal Research and Sales,"
stating that he will limit
his analysis of companies to the Firm’s internal use, will
discuss only companies that the Firm has previously approved for
him as indicated in the proposed heightened supervisory
procedures, and will be restricted from writing and distributing
research for public consumption. The
Sponsoring Firm also states that X will "have contact with
our institutional client base and discuss potential sales
transactions of those companies regarding which he is approved to
correspond." The Firm proposes to compensate X on a commission-only
basis |
Proposed
Supervisor |
The
Firm proposes that Proposed Supervisor will be X’s primary
supervisor, with assistance from several "back-up"
supervisors, and they will work in close proximity in the same
office. Proposed Supervisor qualified as a general securities
representative in September 1987 and as a general securities
principal in September 1998. He is a managing
member of the Firm and serves as its chief compliance officer and
president. He is also a direct owner of Sponsoring Firm, owning
53.5 percent of the Sponsoring Firm’s limited liability company’s
membership interest.
Proposed Supervisor currently
directly supervises four other individuals at Sponsoring Firm,
none of whom is subject to heightened supervisory procedures.
Proposed Supervisor previously was associated with seven different
brokerage firms between July 1989 and January 1999, when he formed
Sponsoring Firm. The record shows no
disciplinary history for Proposed Supervisor.
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Member
Regulation Recommendation |
Member
Regulation recommends that the Application be denied
because:
1) X’s statutorily
disqualifying event
is securities-related, serious, and very recent;
2) X has other disciplinary
history;
3) the capacity in which the
Firm proposes to employ X is in direct conflict with his
disqualifying event; and
4) Proposed
Supervisor may be considered unsuitable as a proposed supervisor
due to the number and importance of his other roles within the
Firm.
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Considerations |
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;
4. Correspondence:
- 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.
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OTHER CONSIDERATIONS
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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
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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.
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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.
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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.
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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.
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Citations |
"[b]ars are intended
to prohibit completely a person’s ability to engage in any
future securities business with any member firm, thus precluding
re-entry into the securities industry absent extremely unusual
circumstances." See
- The Ass’n of X as a Gen. Secs. Representative,
Redacted Decision No. SD01016 (2001), at 4, available at http://www.finra.org/web/groups/enforcement/documents/nac_stat_dq_decisions/p011593.pdf;
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The Ass'n of X as an Inv. Co. and Variable Contracts Products
Representative, Redacted Decision No. SD99023 (1999), at 3,
available at http://www.finra.org/web/groups/enforcement/documents/nac_stat_dq_decisions/p012616.pdf.
FINRA-barred
applicant is required to make an extremely strong showing to find that approval of an application for re-entry would serve
the public interest.
The Ass’n of X as an Inv. Co. and Variable Contracts Products
Representative, Redacted Decision No.
SD99023 at 3.
Gershon Tannenbaum, 50 S.E.C. 1138, 1140
(1992) ("In NASD proceedings . . ., the burden rests on the
applicant to show that, despite the disqualification, it is in the
public interest to permit the requested employment.");
M.J.
Coen, 47 S.E.C. 558, 561 (1981)
("[A]ny member wishing to employ such a [statutorily
disqualified] person . . . must ‘demonstrate why the application
should be granted.’").
NASD Rule 2711 was intended "to improve the objectivity of
research and provide investors with more useful and reliable
information when making investment decisions" and "to
restore investor confidence in a process that is critical to the
equities markets." NASD
Notice to Members 02-39 (July 2002).
FINRA’s primary means of
obtaining information in investigations is to compel the
production of information by FINRA members and associated persons
via NASD Rule 8210. Cf.,
e.g., Charles
R. Stedman, 51 S.E.C. 1228,
1232 (1994) (affirming bar on registered representative for
failure to comply with NASD Rule 8210). "To allow associated
persons to ‘flout’ [NASD Rule 8210] would ‘subvert the NASD’s
ability to carry out its regulatory responsibilities.’" Jonathan
Garret Ornstein, 51 S.E.C. 135,
141 (1992) (quoting
Daniel C. Adams, 47
S.E.C. 919, 922 (1983)).
Citadel Sec. Corp., 2004 SEC
LEXIS 949, at *13 (May 7, 2004) ("[I]n determining whether to
permit the employment of a statutorily disqualified person, the
quality of the supervision to be accorded that person is of utmost
importance. We have made it clear that such persons must be
subject to stringent oversight by supervisors who are fully
qualified to implement the necessary controls.") (internal
quotation omitted).
The burden is on the
applicant in a statutory disqualification proceeding, however, to
present its best evidence to demonstrate that the association of
the proposed individual would be in the public interest. That is not
necessarily achieved by agreeing to amend its proposal to include
reasonable supervisory procedures suggested by Member Regulation
or the NAC. See, Tannenbaum, 50 S.E.C. at
1140.
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