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].

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.

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)

• 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 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.

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;

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;

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;

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.

1. The Ass’n of X as a Gen. Secs. Representative, Redacted Decision No. SD01016 (2001), at 4, available at http://www.finra.org/web/groups/enforcement/documents/nac_stat_dq_decisions/p011593.pdf; 
2. The Ass'n of X as an Inv. Co. and Variable Contracts Products Representative, Redacted Decision No. SD99023 (1999), at 3, available at http://www.finra.org/web/groups/enforcement/documents/nac_stat_dq_decisions/p012616.pdf.

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.