LOOKING OVER YOUR OWN SHOULDER

The days of the "one-man shop" were once thought to be numbered. However, these independents are stubbornly holding on; recently given a new lease on life through the power of the personal computer and the Internet. Nonetheless, such mom-and-pop operations remain in the regulators' crosshairs. On December 9, 1998, the Securities and Exchange Commission ("SEC") instituted public administrative proceedings against FSC Securities Corporation ("FSC"), an NASD member firm engaged in a general securities business, primarily through small branch offices and independent contractor-registered representatives. FSC submitted an Offer of Settlement ("Offer") [without admitting or denying the findings set forth], which the SEC accepted.

Throughout 1992 through 1995 ("the relevant period"), a registered representative of FSC operated a one-person Office of Supervisory Jurisdiction ("OSJ") as an independent contractor ("the RR") and engaged in sales practice abuses including improper mutual fund switching and the sale of securities that were unsuitable investments for customers.

ýDuring the relevant period, FSC did not generate for its supervisory personnel an automated exception report that could reliably detect mutual fund switching.

ýDuring the relevant period, OSJ Principals were the primary supervisors of their subordinate registered representatives, but these Principals also had their own business and customers. Further, the production of these OSJ Principals was not supervised by any designated individual. The SEC deemed this system of supervision inadequate.

ýFSC failed to implement procedures sufficient to assure that compliance auditors would examine a sufficient number of customer accounts during audits of OSJs. As a result, with regard to audits of the Registered Representative's OSJ, FSC could not document to the SEC's satisfaction that the firm had reviewed an adequate number of accounts for evidence of sales practice abuse.

For the reasons cited above, the SEC ordered FSC Censured and fined $50,000. FSC was also ordered to comply with its undertaking to retain an acceptable Independent Consultant to review FSC's supervisory, compliance, and other policies and procedures.

For Further Reference:

In The Matter Of FSC Securities Corporation (Order Instituting Public Proceedings, Making Findings, And Imposing Sanctions, 34-40765, Admin. Proc. 3-9785, December 9, 1998).