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. SD08007
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DENIED
by National Adjudicatory Council
Hearing Held
In November 2006, the Sponsoring Firm submitted a Membership
Continuance Application tion ("MC-400" or
"the Application") with the Financial Industry
Regulatory Authority’s ("FINRA") Department of
Registration and Disclosure, seeking to permit person subject to a
statutory disqualification, to continue 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 haring,
accompanied by the Sponsoring Firm’s chief compliance officer,
Employee 1. FINRA Employee 1 and FINRA Attorney 1, 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 ("NAC").
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SD
Event
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X is statutorily
disqualified because in September 2006, he pled guilty to driving
under the influence of alcohol
("DUI"),
a felony in the state of State 1. X’s 2006 DUI conviction was a
felony because he had three
prior DUI misdemeanor convictions in State 1 in 1995, 1987, and
1985.
X was arrested for his fourth
DUI in June 2005, and initially
charged with a misdemeanor because the State 1 records showed that
two of his prior DUI arrests were eliminated through youthful
diversionary programs.
At the hearing, however, X testified that due to changes in State
1’s DUI laws, the State 1 court
reevaluated his prior conviction record and determined to count
all three of his prior DUI arrests as misdemeanor DUI
convictions. X also produced documentation to show that in August
2005, the State 1 court upgraded the fourth DUI charge against him
to a felony DUI, to which he pled guilty in September 2006.
The
court sentenced X to 90 days in jail and 12 months’ post-release
treatment, and imposed a $2,500 fine. X served his jail sentence,
paid his fine, and completed his required treatment. He testified
that he continues to be active in Alcoholics Anonymous and has a
sponsor in the program. X stated that he has maintained his
sobriety since April 2006.
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Sentence
Expiration |
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Prior
Industry Activity |
X
first registered in the securities industry as a general
securities representative (Series 7) in September 1989.
FINRA’s Central Registration Depository (“CRD”®) shows that
X was previously associated with five firms between July 1989 and
June 2006, when he registered with The Sponsoring Firm.
X was discharged
by a previous employer, Firm 1, in March 1999.
The record did not include a copy of the Uniform Termination
Notice for Securities Industry Registration (“Form U5”).
However, FINRA’s record for X shows that, prior to the
discharge, Firm 1 conducted a routine review of X’s customer
accounts and questioned him about certain of his accounts that
involved retired persons
purchasing initial public offerings. The record also
includes subsequent amendments that Firm 1 made to X’s Form U5
that indicate that two
customers filed complaints against X for unsuitable
recommendations.
X was discharged
by another previous employer, Firm 2, in May 2003. The
Form U5 filed by Firm 2 stated that it terminated X for “violating
firm policy. The [financial advisor] took discretion
in client accounts.” X
submitted documents to show that the questionable trades were done
on behalf of the widow
of a deceased account holder, at the request of the widow’s
attorney. X did not
submit any documents, however, to show that he had written proof
at that time that the widow had appropriate authority to request
the trades in the account.
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Background
Bill Singer's
Comment: X testified that the 1999
complaints settled by Firm 1 were due to the aggressive
business "culture" at Firm 1 that encouraged him
to "raise assets under management [and] grow [his]
accounts." X stated that he has "drastically changed
[his] business" since then, decreasing the number of
households he serves and focusing "only on high net worth
individuals that had excellent investor experience.
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X is currently employed as a general
securities representative with the Sponsoring Firm. He works from
his home office in City 1, State 2.
X’s record includes four
customer complaints filed against him,
resulting in two denials of
action and two settlements.
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In November
2006, customers SE and MC alleged that X had engaged in
unauthorized trading
in their accounts from 2002 until 2005 and asserted $8,000
in losses. Firm 2 stated
that its "review of the matter revealed no
evidence of wrongdoing" and denied
this claim "in its entirety" in January 2007.
X testified that his ex-wife
and her mother instituted this complaint
and that it had no substance. Employee 1 testified that the
complaint was a "malicious, frivolous attempt to
defame" X.
In January
2000, customers RA and MA alleged that their account was mismanaged.
Firm 1 denied this complaint in January 2000.
In July
1999, customer MM alleged that X had engaged in an unsuitable
strategy of investing in initial public offerings and that she
incurred losses of $59,000. Firm
1 settled the complaint in August 1999 for $20,000, and the
record shows no individual contribution from X.
In March
1999, customer KC alleged that X made unsuitable
investment recommendations in connection with her account and
that she incurred losses of $52,000. Firm
1 settled the complaint in April 1999 for $35,433, and the
record shows no individual contribution from X.
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Sponsoring
Firm |
The
Sponsoring Firm is based in City 2, State 3, and City 1, State 2.
It became a FINRA member in July
2005 when it purchased
a shell company named Firm 3, a former brokerage firm that
had been a FINRA member since April 1983. The Sponsoring Firm is a
full-service broker-dealer that has 29
branch offices, 20 offices of supervisory jurisdiction ("OSJs"),
14 registered principals, and 85 registered representatives
FIRM 3
FINRA issued Letters of Caution ("LOCs")
to Firm 3 following routine examinations in 2000, 2002, and
2004.
provisions
in its clearing agreement regarding the handling of customer
complaints and the availability of exception reports,
and for the untimely
filing of its annual audit
for the fiscal year ending December 31, 1999. FINRA did not
require Firm 3 to file a written response to this LOC because
the firm had responded to these items in an exit interview.
The
2002 LOC cited Firm 3 for failing
to timely report a notice of arbitration
and for failing to restrict the duties of a representative who
had not complied with continuing
education requirements.
Again, FINRA did not require Firm 3 to file a written response
to this LOC because the firm had responded to these items in
an exit interview.
The 2004
LOC cited Firm 3 for several violations, including
untimely filing of a disclosure event, failure
to report a termination for cause, continuing education
requirement violations, and failure to maintain option agreements
for two option accounts.
Firm 3 responded by letter dated February 2005, listing the
actions it had taken with regard to the deficiencies noted by
FINRA.
In January 2005,
FINRA suspended
Firm 3 because it had failed to comply with an arbitration award
or pay fees in an arbitration case,
or to satisfactorily respond to a FINRA request to provide
information concerning the status of compliance. FINRA lifted the
suspension in February 2005 when Firm 3 paid the applicable fees.
SPONSORING FIRM
FINRA issued The Sponsoring Firm
an LOC in February 2006,
following an alternative municipal examination of the Sponsoring
Firm in January 2006. The LOC cited the Sponsoring Firm for failing
to file a required form on a timely basis and failing to timely
update its designation of an individual responsible for anti-money
laundering compliance. The
Sponsoring Firm respondend by letter dated March 2006,listing the
actions it had taken with regard to the deficiencies noted by
FINRA.
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Proposed
Activity |
The
Sponsoring Firm proposes to continue to employ X as a general
securities representative, but states that he will move from his
current home office to the Sponsoring Firm’s OSJ in City 4,
State 1. |
Proposed
Supervisor |
The
Sponsoring Firm also proposes that the Proposed Supervisor will be
X’s primary supervisor, and that he will be located
in the same OSJ as the one where X is employed. The
Proposed Supervisor qualified as a general securities
representative in February 2000 and as a general securities
principal (Series 24) in September 2003. The Proposed Supervisor
joined the Sponsoring Firm in March 2006. The Proposed Supervisor currently
supervises nine registered representatives and is an active
producer. The record
shows no disciplinary history for the Proposed Supervisor.
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Member
Regulation Recommendation |
Member
Regulation recommends that the Application be denied
because:
1) X has repeatedly shown a
disregard for the law, as evidenced by his fourth
DUI conviction, which is "indicative of
irresponsible behavior";
2) X
failed to timely inform his then employer and amend his
Uniform Application for Securities Industry Registration or
Transfer ("Form U4") to reflect his fourth DUI arrest in
June 2005 and its upgrade to a felony
charge against him in
August 2005;
3) X’s record includes "serious"
customer complaints against him;
4) Firm
1 discharged X in 1999 for inappropriate recommendations to
seniors; and
5) Firm
2 discharged X in 2003 for taking "discretion in client
accounts."
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Considerations |
- Proposed Supervision
- Felony
- Timely Notices
- Regulatory History
PLAN OF HEIGHTENED SUPERVISION
The Sponsoring Firm has agreed to the following comprehensive
supervisory plan to ensure that it will be able to maintain
heightened supervision for X. The
Sponsoring Firm did not indicate by asterisk which of the proposed
procedures were heightened as to X and not required for other
registered representatives.
1. The Proposed Supervisor agrees to be the
primary supervisor responsible for X;
2. The Proposed Supervisor and X certify that they
are not related by blood or marriage;
3. For the duration of X’s statutory
disqualification, the Sponsoring Firm must obtain prior approval
from Member Regulation if it wishes to change X’s supervisor
from the Proposed Supervisor to another person;
4. X will
be required to maintain his office of employment at the same
office as the Proposed Supervisor in City 4, State 1;
5. X will have no
supervisory responsibilities;
6. The Proposed Supervisor will review and approve all new
account forms and forward them to the Sponsoring Firm’s
compliance department for final approval;
7. X will not
maintain discretionary accounts;
8. X will not
participate in initial public offerings;
9. The Sponsoring Firm’s chief compliance
officer, Employee 1, will review and approve all of X’s trades
on a daily basis by utilizing the Sponsoring Firm’s electronic
trading surveillance software;
10. The Proposed Supervisor will review
X’s incoming and outgoing mail on a daily basis. X will
not send correspondence without the Proposed Supervisor’s review
and approval;
11. The Proposed Supervisor will review all
written presentations and sales proposals that X intends to use;
12. The Proposed Supervisor will review X’s
sales contacts as to the nature of the contact;
13. The Proposed Supervisor will make random
calls to X’s customers on a monthly basis to
verify that X has adhered to all standards and disciplines
established by the Sponsoring Firm;
14. At least once per week, the Proposed
Supervisor will meet with X to review his activities to assure
compliance with the Sponsoring Firm’s written supervisory
procedures and with the heightened supervisory procedures;
15. All complaints pertaining to X, whether oral
or written, will be immediately referred to the Proposed
Supervisor for review and then to the Sponsoring Firm’s
compliance officer. 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
segregate documents pertaining to these complaints for review
during any statutory disqualification examination;
16. If, at any time, The Proposed Supervisor feels
that X has not complied with these heightened supervisory terms
and conditions, he will submit a written report to X that requests
his acknowledgement and understanding of the compliance
deficiencies in question, and will propose a plan as to how the
deficiencies will be corrected. X will be required to sign this
report and the Proposed Supervisor will forward it to the
Sponsoring Firm’s chief compliance officer for review and
approval. The Proposed Supervisor will also maintain a copy of the
signed report and proposed corrective plan in X’s personnel
file;
17. The Proposed Supervisor will be required to certify to the
Sponsoring Firm’s compliance department on a quarterly basis
(March 31, June 30, September 30,and December 31 of each year)
that the Proposed Supervisor and X are in compliance with all of
the above conditions of heightened supervision of X; and
18. At least once during each calendar quarter, a member of the
Sponsoring Firm’s compliance department will make an unannounced
visit to X’s office to ensure compliance with this agreement.
FELONY
X’s felony conviction
for DUI is recent—September 2006—and represents his fourth
conviction for driving under the influence of alcohol. We
appreciate that X has taken steps to deal with his addiction by
attending the court-ordered 12-month treatment program and
attending Alcoholics Anonymous meetings. Nonetheless, we find that
insufficient time has
passed to enable X to demonstrate that the change in
his behavioral pattern is fundamental and long-lasting and that he
can conduct himself in a responsible and compliant fashion in the
securities industry.
TIMELY NOTICES
At the hearing, X testified that he provided
timely information regarding the 2005 charges to his former
compliance officer at Firm 2 and that he did not understand why
his Form U4 did not reflect such information. The Hearing Panel
granted X’s request to file a post-hearing submission consisting
of deposition testimony from his former compliance officer on this
topic. The deposition testimony, however, is inconsistent. The
former compliance officer readily agreed that X promptly informed
him orally of the June 2005 arrest, which was a misdemeanor DUI. The
former compliance officer also testified that he
relayed this information to Firm 2’s management and legal
department, and that he understood that they were waiting to see
the ultimate disposition of the arrest before reporting it on the
Form U4. The former
compliance officer also testified, however, that he did
"not recall" that X told him in August 2005 that the DUI
arrest had been upgraded to a felony, although he did recall that
X came to him shortly after the June 2005 DUI arrest with a
"sob story" about how the misdemeanor was "more of
a serious offense."
The August 2005 upgrade of the charge to a felony was a
particularly important fact for X to have disclosed to Firm 2
because a felony conviction results in a person being subject to
statutory disqualification. Based on this inconsistent evidence,
we cannot find that X fulfilled his obligation to promptly inform
his employer of the gravity of the charges against him in order to
make proper disclosure on his Form U4.
REGULATORY HISTORY
Four customers filed
complaints against X between 1999 and 2006. Two of those
complaints were denied, but the other two, which both alleged
unsuitable transactions, were settled by Firm 1 for $20,000 and
$35,433. Moreover, X was
discharged by two of his former employers. Firm 1
discharged X in March 1999 after conducting a review of his
customer accounts and questioning him about inappropriate
purchases of initial public offerings by seniors. Firm 2
discharged X in May 2003 for taking "discretion in client
accounts."
X’s
disciplinary history and his repeated criminal convictions for DUI
demonstrate a lack of respect for authority and an inability to
conform to the regulatory atmosphere of the securities industry.
Although the NAC
noted the lack of formal disciplinary history for the Sponsoring
Firm, the Proposed Supervisor, and Employee 1, these facts
do not outweigh our concerns
about the seriousness and recency of X’s conviction, his history
of customer complaints, and the relatively short period of his
sobriety. We
are also not persuaded that the Sponsoring Firm has structured an
adequate plan of heightened supervision for X. At the hearing, the
Proposed
Supervisor testified that he is a producing principal who
currently supervises nine other individuals and that he expects to
receive an override on X’s production. We question whether the
Proposed Supervisor has sufficient time to devote
to the heightened supervision of a statutorily disqualified
individual such as X, and whether X’s supervisor should directly
profit from X’s production. Further, the proposed supervisory
procedures continue to place sole responsibility for the review
and approval of X’s daily trades upon Employee 1, via the
Sponsoring Firm’s electronic trading surveillance software, and
not on the Proposed Supervisor, the primary on-site supervisor.
Employee 1’s testimony at the hearing also fails to establish
the Sponsoring Firm’s ability to comply with terms of heightened
supervision for a statutorily disqualified person. Employee 1
stated that he currently employs eight representatives, including
X, who are subject to the Sponsoring Firm’s own heightened
supervisory procedures due to certain disclosures on their Forms
U4. The Sponsoring Firm’s procedures restrict such individuals
from working alone from their homes, yet Employee
1 concedes that X has been permitted to work from his home since
he started at the Sponsoring Firm in June 2006. When Employee 1
was questioned about this discrepancy at the hearing, he stated:
"I guess I can’t answer that."
Such inattention to the requirements of heightened supervision is
not acceptable in statutory disqualification matters.
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Citations |
Frank
Kufrovich, 55 S.E.C. 616, 625 (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).
As a registered representative, X
was responsible for knowing the rules of the securities industry
and for providing information about the 2005 criminal charges to
Firm 2 on a timely basis. See, e.g., Robert E. Kauffman, 51
S.E.C. 838, 840 (1993) ("Every person submitting registration
documents [to FINRA] has the obligation to ensure that the
information printed therein is true and accurate."), aff’d,
40 F.3d 1240 (3d Cir. 1994) (table).
It is axiomatic that the responsibility for maintaining
the accuracy of a Form U4 lies with each registered representative.
Dep’t of Enforcement v. Howard, Complaint No. C11970032, 2000
NASD Discip. LEXIS 16, at *31-32 (NASD NAC Nov. 16, 2000), aff’d,
55 S.E.C. 1096 (2002), aff’d, 77 F. App’x 2 (1st Cir. 2003).
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