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. 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).

Filed Under: Willfulness, Recency, Prior misconduct, Adequacy of plan, Denial
SD Event
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].

Sentence Expiration
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.

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.

  1. 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;

  2. 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

  3. 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.

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)

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.
  • 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;

  • 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.

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.

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.


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:

  1. 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;
  2. Frequency of Procedure: Such review shall be conducted daily;

5. Outside Business and Outside Brokerage Accounts:

  1. 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;
  2. 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.



  1. 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

  2. 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. 

  3. 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.

  4. 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.

  5. 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.

"[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 
  1. The Ass’n of X as a Gen. Secs. Representative, Redacted Decision No. SD01016 (2001), at 4, available at
  2. The Ass'n of X as an Inv. Co. and Variable Contracts Products Representative, Redacted Decision No. SD99023 (1999), at 3, available at

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.

Enforcement Actions
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