Statutory Disqualification Index
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.

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. SD07001

APPROVED by National Adjudicatory Council

On October 30, 2006, the Sponsoring Firm (“the Firm”) completed a Membership Continuance Application (“MC-400” or “the Application”) seeking to permit X, a person subject to a statutory disqualification, to associate with the Firm as a general securities representative. 

A hearing was not held in this matter. Rather, pursuant to NASD Rule 9523, FINRA’s Department of Member Regulation (“Member Regulation”) recommended that the Chair of the Statutory Disqualification Committee, acting on behalf of the National Adjudicatory Council, approve X’s proposed association with the Sponsoring Firm.

Filed Under: Felony, Controlled Substance, Misdemeanor, Recency, Treatment/Rehabilitation, Sponsor's Regulatory History, Prior misconduct, Adequacy of plan, Approval w/o hearing
SD Event
X is statutorily disqualified because in October 2003, he pled guilty in a State 1 court to felony “theft of a controlled substance,” which stemmed from his theft of a controlled substance from the pharmacy where he was employed as a clerk June-July 2003. On that same date, he also pled guilty to three misdemeanor charges (not statutorily disqualifying events) of “criminal attempt of theft of a controlled substance.” 

The State 1 court sentenced X to five years’ imprisonment for the felony conviction and 12 months for each of the three misdemeanor convictions. The court suspended the imposition of the prison sentences, however, and instead placed X on five years’ probation and ordered him to pay $10,374.18 in restitution. In September 2006, X received a conditional discharge from probation, and the record shows that he paid the court-ordered restitution in full in August 2006. The conditional discharge released X from the supervision of his probation officer and provided that, for the remainder of his probationary period (September 2006 – November 2008), X must continue his “good behavior” and “refrain from violating the law in any respect.” X’s former probation officer informed Member Regulation that X has had no intervening offenses since his arrest in July 2003.

Sentence Expiration
X’s probation is due to expire in November 2008
Prior Industry Activity
X first registered in the securities industry as a general securities representative (Series 7) in October 1983. She also passed the uniform securities agent state law examination (Series 63) in October 1983.

X was previously employed by Firm1 from October 1983 until November 1997, and Firm2 from November 1997 until April 2005. Firm2 discharged X in April 2005, stating on the Uniform Termination Notice for Securities Registration (“Form U5”) that she “violated firm policy by accepting from a customer oral discretion to place certain trades in his account.” X stated that she did not exercise oral discretion, and maintained that Firm2 had terminated her because it wanted to eliminate her and save money by distributing her clients and income between the remaining two members of her partnership “team.”

X has not previously been employed in the securities industry. He qualified as a general securities representative (Series 7) in December 2006. He also qualified as a uniform securities agent state law (Series 63) and as a registered options principal (Series 4) in January 2007. X is currently employed as an office assistant for an electric company. Prior to that, he was a full-time college student, and he completed his bachelor’s degree in December 2006. 

While attending college, he served as an unpaid intern for the Sponsoring Firm from May to September 2006. Member Regulation represents that the Firm terminated X’s internship immediately when Member Regulation informed the Firm that X could not associate with it in any manner without FINRA approval. Member Regulation also represents that it is satisfied with the Firm’s response to this situation.

Sponsoring Firm
The Sponsoring Firm became a FINRA member in June 1992. The Firm engages in a general securities business, has 1 office of supervisory jurisdiction and no branch offices, and employs 4 registered principals and 5 registered representatives. 

FINRA has not yet commenced its 2007 routine examination of the Firm. 

  • FINRA issued a Letter of Caution (“the 2005 LOC”) and a Minor Rule Violation (“the 2005 MRV”) to the Firm after its 2005 routine examination. 
    • The 2005 LOC cited the Firm for several deficiencies, including membership agreement violations, books and records inaccuracies, inadequate written supervisory procedures, failure to timely report a customer complaint, and failure to test the Firm’s Anti-Money Laundering Program. The Firm responded to the 2005 LOC in a letter dated April 2006, stating that it had corrected the deficiencies. 
    • The 2005 MRV fined the Firm $1,000 for untimely reporting of municipal securities transactions. 
  • FINRA also issued an LOC to the Firm following its 2003 routine examination (“the 2003 LOC”). 
    • The 2003 LOC cited the Firm for inaccurate books and records, one deficient employee Uniform Application for Securities Industry Registration or Transfer (“Form U4”), inadequate written supervisory procedures, inaccurate customer records, failure to maintain options agreements, and late reporting of municipal securities transactions. The Firm responded to the 2003 LOC by letter dated June 2003, stating that it had corrected the deficiencies. 
  • The Firm also has some recent state disciplinary history. 
    • In March 2004, the State 2 Securities Department denied the Firm’s application for registration as a dealer in State 2 because the Firm effected 69 purchase transactions for two State 2 residents prior to being registered in that state

The record shows no additional customer complaints, disciplinary proceedings, or arbitrations against the Firm.

Proposed Activity
General Securities Representative. The Firm will compensate him by a salary and a company bonus. 
Proposed Supervisor
The Proposed Supervisor will supervise X on-site at the Firm’s home office in State 1. The Proposed Supervisor has been employed by the Sponsoring Firm since June 1999, when he entered the securities industry. He qualified as a general securities representative in September 1999 and as a general securities principal (Series 24) in July 2003. FINRA’s Central Registration Depository (“CRD”) shows no disciplinary or regulatory proceedings, complaints, or arbitrations against the Proposed Supervisor.
Member Regulation Recommendation
  1. Whether the particular felony at issue, examined in light of the circumstances related to the felony and other relevant facts and circumstances, creates an unreasonable risk of harm to the market or investors; and
  2. The totality of the circumstances in reaching a judgment about X’s future ability to deal with the public in a manner that comports with FINRA’s requirements for high standards of commercial honor and just and equitable principles of trade in the conduct of his business. 

Although X’s criminal conviction is serious, the felony conviction occurred in 2003, almost four years ago, and the NAC is not aware of any other misconduct by X. Also, X has been punished for his felony offense by a State 1 court, which ordered him to pay $10,374.18 in restitution and placed him on probation for five years. X paid the restitution, and he received a conditional discharge from probation in September 2006.  

Further, although NAC was initially concerned with the fact that X’s felony involved theft from a former employer, it recognized that X did not steal money, but rather stole drugs to support his then addiction.

The record indicates that since his 2003 arrest, however, X has been participating successfully in a program of recovery with Alcoholics and Narcotics Anonymous. X’s recovery sponsor submitted a letter stating that he and X attend meetings together several times each week and actively work to continue X’s sobriety. X has also demonstrated his commitment to his rehabilitation by completing his college degree and by maintaining an office assistant position with an electric company, where he has been responsible for accounts payable and receivable, as well as payroll. 

Moreover, as an added precaution, we note that the Firm has specifically provided that X will not have access to cash or securities of customers. The proposed supervisor is well qualified and has worked in the securities industry since 1999 with no disciplinary history. 

The Sponsoring Firm has been a member of FINRA since 1992, with no formal disciplinary history. The Firm has agreed to the following comprehensive supervisory plan to ensure that it will be able to maintain heightened supervision for X (Heightened Supervision not accorded to other RRs af Firm is noted in RED):

  1. The Sponsoring Firm will amend its written supervisory procedures to state that the Proposed Supervisor is the primary supervisor responsible for X; 
  2. X will not maintain discretionary accounts and will not have access to cash or securities of customers; 
  3. X will be employed as a general securities representative and will not be permitted to act in a supervisory capacity; 
  4. The Proposed Supervisor will supervise X on-site at the Firm’s home office in State 1; 
  5. The Proposed Supervisor will review and pre-approve each securities account prior to X’s opening of the account. The Proposed Supervisor will document his review by dating and signing the account paperwork and maintaining it at the Firm’s home office; 
  6. The Proposed Supervisor will review and approve X’s orders after execution, or as soon as practicable, on a “T + 1” basis. The Proposed Supervisor will also review the trade reports on a T + 1 basis and document his review by dating and initialing them and maintaining them at the Firm’s home office; 
  7. The Proposed Supervisor will review X’s incoming written correspondence (including e-mail communications) upon its arrival and will review outgoing correspondence before it is sent; 
  8. For the purposes of client communication, X will only be allowed to maintain an e-mail account that is held at the Firm, with all e-mails being filtered through the Firm’s e-mail system. If X receives a business-related e-mail message in another e-mail account outside the Firm, he will immediately deliver that message to the Firm’s e-mail account. X will also inform the Firm of all outside e-mail accounts that he maintains. The Proposed Supervisor will conduct a weekly review of all email messages that X sends or receives and will print the e-mail messages and keep them segregated for ease of review during any statutory disqualification audit; 
  9. 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 of the Firm. 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 all documents pertaining to these complaints segregated for ease of review; 
  10. If the Proposed Supervisor is out of the office, the Proposed Supervisor 2, president of the Firm, will act as X’s interim supervisor;
  11. 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, or if it wishes to make a material change in X’s job responsibilities; and 
  12. The Proposed Supervisor must certify quarterly (March 31st, June 30th, September 30th, and December 31st) to the Compliance Department of the Firm that he and X are in compliance with all of the above conditions of heightened supervision.
FINRA By-Laws, Art. III, Sec. 4 (referring to Section 3(a)(39) of the Securities Exchange Act of 1934 (“the Exchange Act”), which provides that all felony convictions are statutorily disqualifying events if they occurred within 10 years preceding the filing of an application to enter the securities industry).

FINRA By- Laws, Art. III, Sec. 4 (referring to Section 3(a)(39) of the Exchange Act, which provides that misdemeanor theft is a statutorily disqualifying event only if the theft involves “funds or securities”). 

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).

Enforcement Actions