Enforcement Actions
Financial Industry Regulatory Authority (FINRA)
CASES OF NOTE
2011
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.
December 2011
Internet Securities and Michael Wayne Beardsley (Principal)
AWC/2009020930302/December 2011
Beardsley was a registered representativeís direct supervisor who was responsible for reviewing and approving the representativeís securities transactions, but failed to exercise reasonable supervision over the representativeís recommendations of exchange-traded funds (ETFs) in customersí accounts, thereby allowing the representative to conduct numerous unsuitable transactions. 

As the firmís chief compliance officer (CCO), Beardsley was responsible for ensuring that the firm filed all necessary Uniform Applications for Securities Industry Registration or Transfer (Forms U4), Uniform Termination Notices for Securities Industry Registration (Forms U5) and Rule 3070 reports. The Firm and Beardsley failed to timely amend Beardsleyís Form U4 to disclose the settlement of an arbitration against him, the firm and the registered representative; the firm failed to timely amend a registered representativeís Form U5 to disclose settlement of the arbitration; and the firm and Beardsley failed to timely report the settlement to FINRAís 3070 system

The Firm and Beardsley failed to establish and maintain a supervisory system reasonably designed to achieve compliance with applicable securities laws, regulations and FINRA rules as they pertain to private placements. The firm and Beardsley failed to conduct investigations of offerings for suitability but relied on information the registered representative who proposed selling the offering provided; never reviewed issuersí financials, nor attempted to obtain information about the issuers from any third parties; failed to maintain documentation of their investigations; allowed a registered representative to draft selling agreements with offerings which allowed the issuer to make direct payment to an entity the representative, not the firm, owned,; failed to implement supervisory procedures to ensure compliance with SEC Exchange Act Rule 15c2-4(b); and failed to implement supervisory procedures to prevent general solicitation of investments in connection with offerings made pursuant to Regulation D. 

The Firmís written procedures required Beardsley to obtain and review, on at least an annual basis, a written statement from each registered representative about his or her outside business activities; despite the fact that several registered representatives were actively engaged in outside business activities, Beardsley failed to obtain any such written statements. 

For almost a three-year period, Beardsley did not request any duplicate statements of outside securities accounts firm employees held; he neither requested nor obtained any written notifications from firm employees concerning their actual or anticipated outside securities activities. In addition, the Firm and Beardsley failed to implement an adequate system of supervisory control policies and procedures regarding testing supervisory procedures for compliance, erroneous criteria for identifying and supervising producing managers, including Beardsley, review and monitoring transmittal of funds or securities, customer changes of address, customer changes of investment objectives, and concomitant documentation for its limited size and resources exception in FINRA Rule 3012. Moreover,he firm and Beardsley completed an annual certification in which Beardsley certified that he had reviewed a report evidencing the firmís processes for establishing, maintaining and reviewing policies and procedures reasonably designed to achieve compliance with applicable FINRA rules, Municipal Securities and Rulemaking Board (MSRB) rules and federal securities laws and regulations; modifying such policies and procedures as business, regulatory and legislative changes and events dictate; and testing the effectiveness of such policies and procedures on a periodic basis, the timing and extent of which is reasonably designed to ensure continuing compliance with FINRA rules, MSRB rules and federal securities laws and regulations. In fact, the report did not evidence any processes for testing the effectiveness of such policies, and no such testing was done.

Furthermore, on the firmís behalf, Beardsley executed an engagement letter committing the firm to serve as a placement agent for an issuer of limited partnership units. The letter, which a registered representative of the firm drafted, falsely represented that the firm was not a registered broker-dealer. 

The Firm and Beardsley failed to enforce the firmís Customer Identification Program (CIP) in that they completely failed to verify four customersí identities. The Firm and Beardsley failed to conduct a test of the firmís anti-money laundering (AML) compliance program for a calendar year. FINRA found that the firm conducted a securities business while failing to maintain its required minimum net capital.

Internet Securities: Censured; Fined $12,500; Required to retain an outside consultant to review and prepare a report concerning the adequacy of the firmís supervisory, and compliance policies and procedures, and supervisory controls; the report shall make specific recommendations addressing any inadequacies the consultant identifies, and the firm shall act on those recommendations. FINRA imposed a lower fine after it considered the firmís size, including, among other things, the firmís revenues and financial resources. 

Michael Beardsley: No fine in light of financial status: Suspended 1 year in Principal capacity only
Tags:  ETF    Private Placement    Suitability    Annual Compliance Certification    Away Accounts    AML    CIP     |    In: Cases of Note : FINRA
March 2011
Eric Damien Kallies
AWC/2009016654401/March 2011

Kallies executed purchases of exchange-traded fund (ETFs) in a managed joint account of public customers without the customersí knowledge or consent, and without having obtained the customersí prior written authorization to exercise discretion and his firmís prior written acceptance of the account as discretionary.

Kallies made a presentation consisting of several slides to the customers in connection with an investment strategy program he was recommending and was considered ďsales literature.Ē Kallies made the presentation without first obtaining approval from the appropriate registered principal of the firm, and it was never filed with FINRA within 10 business days of its first use. The presentation generally failed to disclose the risks of investing in the securities that were discussed, failed to disclose the general risks associated with investing in mutual funds and ETFs, and failed to disclose the heightened risk of investing in inverse types of ETFs. The absence of certain disclosures resulted in the presentation not being fair and balanced and not providing the investor with a sound basis for evaluating facts in regard to a particular security or service, and the slides contained unwarranted and/or misleading information.

Charts in some slides failed to include the total annual fund operating expense ratio, a prospectus offer and standardized average annual total returns for one, five and ten years; rather, they included the annualized rates of return, which is considered non-standardized performance and must be accompanied by the standardized performance listed. In addition, the charts in some slides failed to include the performance disclosures required by SEC Rule 482(b)(3); these disclosures generally require that the sales material disclose that the performance data quoted represents past performance, that past performance does not guarantee future results and that performance may be lower or higher.

Eric Damien Kallies : Fined $15,000; Suspended 30 business days
Tags:  ETF     |    In: Research and Advertising
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