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. SD08004

DENIED by National Adjudicatory Council
Hearing Held

In February 2008, the Sponsoring Firm submitted a Membership Continuance Application (“MC-400” or “Application”) with the Financial Industry Regulatory Authority’s (“FINRA”) 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 May 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, Attorney 1, the Proposed Supervisor, and the Sponsoring Firm’s chief compliance officer, Employee 1. FINRA Employee 1 and FINRA Attorney 1 appeared on behalf of 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: Cherry Picking, Recency, Remote State, Adequacy of plan, Denial
SD Event
X is statutorily disqualified because he consented to a January 2003 Letter of Acceptance, Waiver and Consent (“AWC”), in which FINRA imposed an unqualified bar on him. 

The AWC found that from March through December 2000, X violated NASD Rule 2110 by engaging in a practice known as “cherry picking”—entering certain personal and customer trades into a holding account with his then employer, Firm 1, without designating customer account numbers, and then later, at the end of the trading day, allocating the trades among these different accounts. Accordingly, X had information concerning intra-day performance of the securities underlying these trades at the time of allocation. The AWC also found that X violated NASD Rules 2110 and 2510(b) by exercising discretionary authority over the accounts of six customers by causing securities transactions to be effected in these accounts without obtaining the customers’ prior written authorization and Firm 1’s acceptance of the accounts as discretionary.

Sentence Expiration
Prior Industry Activity
X first registered in the securities industry as a general securities representative (Series 7) in August 1994. He requalified as a general securities representative in January 2008.
X was associated with Firm 1 from July 1994 until January 2001, when Firm 1 terminated him. The Uniform Termination Notice for Securities Industry Registration (“Form U5”) filed by Firm 1 in January 2001, stated that its internal review revealed that X “was involved in allocating trades both to his own account and to certain client accounts some time after those trades were executed.” Firm 1 concluded that X had: “(1) executed trades for the benefit of certain client accounts without proper written documentation of discretionary trading authority; (2) executed trades without prior or simultaneous allocations of those trades to any account, instead allocating those trades to various accounts after market movements had occurred; and (3) allocated certain favorable trades to the accounts of family members or to his own account.” 

Since February 2001, X has been employed with Firm 2. X represents that Firm 2, a former client of his when he was employed by Firm 1, is a $400 million hedge fund that began in 1992. He states that he focuses on investor relations and marketing at Firm 2 and has “utilized [his] contact list of institutional and high net worth investors to grow the size of the fund.” Currently, X is an employee of Firm 2 and markets only Firm 2’s fund to potential investors. X states that he has been limited in this role, and he wants to re-enter the securities industry with the Sponsoring Firm in order to be permitted to market the securities of numerous hedge funds to institutional investors. X represents that if he is permitted to re-enter the securities industry, he will no longer be employed by Firm 2. Instead, Firm 2 will become only one of several hedge funds that he can market to potential institutional investors. The record shows no other disciplinary or regulatory proceedings, complaints, or arbitrations against X.

Sponsoring Firm
The Sponsoring Firm is based in City 1, State 1, and it has been a FINRA member since May 2005. The Sponsoring Firm has 1 office of supervisory jurisdiction (“OSJ”), no branch offices, and it employs two registered principals and 12 registered representatives. The Sponsoring Firm represents that it is engaged in private placements for securities and acts “as a finder for hedge funds and other alternative investments that are formed as investment partnerships and limited partnerships.” Essentially, the Sponsoring Firm introduces hedge funds to institutional investors. If the investors choose to put money into the funds, the hedge fund manager pays a fee to the Sponsoring Firm. 

Thus far, FINRA has conducted only one routine examination of the Sponsoring Firm— the initial examination in 2005, which resulted in a Letter of Caution (“LOC”) for several violations, including: 1) failing to enforce written supervisory procedures regarding the review and subsequent approval of electronic communications; 2) failing to notify the Securities and Exchange Commission and FINRA that the Sponsoring Firm was utilizing a third party vendor to assist in retaining email communications; 3) failing to evidence supervisory review and approval by a registered principal of all incoming and outgoing electronic institutional sales material; and 4) failing to implement an adequate customer identification program.

Proposed Activity
The Sponsoring Firm proposes to employ X from a non-branch location in City 2. This location is the same as the one where he is currently employed by Firm 2. The Sponsoring Firm represents that X will work as a “registered sales person introducing hedge funds to sophisticated investors.” The Sponsoring Firm will compensate X with a percentage of the total fees that it receives from the hedge fund managers if the investors that X introduces to the funds choose to invest in them. The Sponsoring Firm states that a “typical fee agreement is 20% of management and performance fees in arrears. Firm pays 90% of the 20% to Rep.
Proposed Supervisor
The Sponsoring Firm proposes that the Proposed Supervisor, the Sponsoring Firm’s CEO, will be X’s primary supervisor, with assistance from Employee 1, the Sponsoring Firm’s chief compliance officer. The Proposed Supervisor and Employee 1 will not be located in the same office as X. Rather, they will be in the Sponsoring Firm’s home office in City 1, State 1, while X remains at Firm 2’s office in City 2, approximately one hour away from City 1. 

The Proposed Supervisor and his wife own the Sponsoring Firm. The Proposed Supervisor first qualified as a general securities representative in March 1989, and he requalified in that capacity in April 2005. He qualified as a general securities principal (Series 24) in 2004. The Proposed Supervisor currently supervises 13 individuals at the Sponsoring Firm. The Proposed Supervisor was previously associated with six investment or investment-related firms from October 1988 until May 2003, when he formed the Sponsoring Firm.

Employee 1 qualified as a general securities representative in 1982 and as a general securities principal in 1994. He joined the Sponsoring Firm in December 2007 as the Sponsoring Firm’s chief compliance officer and financial and operations principal (“FINOP”) (Series 27). FINRA’s Central Registration Depository (“CRD”®) shows that Employee 1 is also currently associated with six other firms in capacities ranging from general securities representative to FINOP to president.

Member Regulation Recommendation
Member Regulation recommends that the Application be approved because: 

1) X’s disqualifying event, though serious, was his only infraction while employed in the securities industry; 

2) X has not engaged in any intervening misconduct since his disqualifying event; 

3) X’s proposed activities are unrelated to his disqualifying event

4) a sufficient period of time has passed since X’s disqualifying event; 

5) the Sponsoring Firm and the Proposed Supervisor are suitable to supervise X; and 

6) the Sponsoring Firm has submitted a solid plan of heightened supervision.



The Sponsoring Firm has agreed to the following comprehensive supervisory plan to ensure that it will be able to maintain heightened supervision for X. The items that are denoted with an asterisk (*) are conditions of heightened supervision for X. Other registered representatives of the Sponsoring Firm are not subject to these heightened supervisory conditions. 

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 act in a supervisory capacity; 

3. *X will not be permitted to engage in cold calling or cold contacts via email of potential investors. Telephone reports of X’s incoming and outgoing calls will be made available to the Proposed Supervisor. The Proposed Supervisor will review and maintain copies of the phone reports. To evidence his review, the Proposed Supervisor will initial the reports and keep them segregated for review during any statutory disqualification examination; 

4. *X will provide the Proposed Supervisor with a list of every proposed investor that he will contact on behalf of a hedge fund, alternative investment vehicle or private equity deal. This list will include basic suitability information and contact information. He will update the list monthly with activity information. The potential investors on the list will come from introduction agreements with the Sponsoring Firm, X’s relationships with high net worth individuals and institutional investors over the past seven years, and referrals from the Sponsoring Firm, managers/sponsors and other investors. The Proposed Supervisor will keep the list of proposed investors segregated for review during any statutory disqualification examination; 

5. *The Proposed Supervisor or his designee will review and pre-approve all potential investors for introduction to a manager/sponsor via an activity form that X will provide before an introduction is made. If an introduced potential investor makes an investment with a manager/sponsor before the pre-approval has been obtained via an activity form, X will forfeit his compensation for the introduction and an internal review will be commenced and documented by the chief compliance officer. The outcome of that review will be placed in the special supervision folder. One possible outcome is termination. If X is terminated, the Sponsoring Firm will list the cause of termination on his Form U5 as his having violated heightened supervisory procedures. The Proposed Supervisor will copy and initial the activity form to evidence his review and will keep it segregated for review during any statutory disqualification examination; 

6. *For the purposes of client communication, X will only be allowed to maintain an email account that is held at the Sponsoring Firm, with all emails being filtered through the Sponsoring Firm’s email system. If X receives a work-related email in his personal email account, he will immediately forward it to Employee 1. Employee 1 or his designee will conduct a weekly review of all email communications that are either sent or received by the Sponsoring Firm. Employee 1 will print the documentation of this email review and maintain it in a heightened supervision file that he will keep segregated for review during any statutory disqualification examination; 

7. *Employee 1 will approve all of X’s outgoing correspondence (other than email) prior to mailing, and all incoming mail addressed to X will first be sent to the home office of the Sponsoring Firm, to be reviewed by Employee 1, and then forwarded to X; 

8. *The Proposed Supervisor will visit X every three weeks in X’s City 2 office to review the activity forms and any files regarding introduced investors. The Proposed Supervisor will document the results of those visits and keep the documentation segregated for review during any statutory disqualification examination; 

9. *All complaints pertaining to X, whether verbal or written, will be immediately referred to the Proposed Supervisor for review and then to the Sponsoring Firm’s compliance department. The Proposed Supervisor will prepare a memorandum to the file as to the 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 documents pertaining to these complaints segregated for review during any statutory disqualification examination; 

10. *If the Proposed Supervisor is to be on vacation or out of the office, Employee 1 will act as X’s interim supervisor; 

11. *The Proposed Supervisor must certify quarterly (March 31, June 30, September 30, and December 31) to the Sponsoring Firm’s compliance department that he and X are in compliance with all of the above conditions of heightened supervision to be accorded X; and 

12. *For the duration of X’s statutory disqualification, the Sponsoring Firm must obtain prior approval from Member Regulation if it wishes to change X’s responsible supervisor from the Proposed Supervisor to another person.


  • The Sponsoring Firm Has Not Made the Strong Showing Necessary for the NAC to Approve X’s Re-Entry into the Securities Industry Despite FINRA’s Recent Imposition of an Unqualified Bar on X.
  • X Consented to an AWC that Imposed an Unqualified Bar on Him for Serious Securities-Related Misconduct
  • FINRA Very Recently Imposed an Unqualified Bar on X. FINRA imposed its most serious sanction on X in January 2003. Thus, X has served his bar for less than five years before the Sponsoring Firm filed its MC-400 in this matter. NAC specifically stated that it rejected X’s argument that more time has elapsed because the misconduct occurred in 2000, and Firm 1 terminated him in 2001. NAC's calculation of time begins with the statutorily disqualifying event, which is the unqualified bar that FINRA imposed on X in the January 2003 AWC.
  • The Sponsoring Firm’s Proposed Supervisory Structure for X Is Inadequate. 

NAC focused on the fact that the Sponsoring Firm proposes that the Proposed Supervisor and the back-up supervisor, Employee 1, will be located in the Sponsoring Firm’s home office in City 1, State 1, while X works from a non-branch location in City 2. The two offices are separated by a distance of 35 miles

The Sponsoring Firm proposal that the Proposed Supervisor will visit X in City 2 “every three weeks . . . to review the activity forms and any files regarding introduced investors.” did not meet the “stringent oversight” standard required for supervision of a statutorily disqualified individual. Even given the Sponsoring Firm’s limited business model and low volume business, the NAC found it unacceptable for a person who has been unqualifiedly barred by FINRA for a securities-related violation to reenter the securities business with such minimal face-to-face supervision

The Sponsoring Firm proposed that Employee 1 will conduct only a “weekly review of all of X’s email communications” while providing immediate review of other incoming and outgoing correspondence. On its face, this proposal is inadequate, and it becomes even more so because X testified at the hearing that virtually all of his client communications are via email. Thus, the Sponsoring Firm is actually proposing only a weekly review of all of X’s written communications with his clients in addition to the absence of a daily on-site supervisor. Since X testified that he writes only 10-15 emails per day, NAC find it surprising that the Sponsoring Firm apparently considered it too burdensome to conduct a daily review of his emails. The NAC noted that the Sponsoring Firm’s 2005 LOC found deficiencies in the Sponsoring Firm’s review and approval of electronic communications.

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

A FINRA-barred applicant is required to make an extremely strong showing for us to find that approval of an application for re-entry would serve the public interest. The Ass’n of X as an Inv. Co. &.Variable Contracts Products Representative, Redacted Decision No. SD99023 at 3.

“[A]ny member wishing to employ such a [statutorily disqualified] person . . . must ‘demonstrate why the application should be granted.’”). M.J. Coen, 47 S.E.C. 558, 561 (1981)

See. Gerson Asset Mgmt., Inc., et al., Exchange Act Rel. No. 52880, 2005 SEC LEXIS 3120, at *2-3 & 11 (Dec. 2, 2005) (imposing bar on registered representative who purchased securities in an omnibus account and unfairly allocated the trades to his own and customer accounts later in the trading day); cf. Paul Joseph Sheehan, Inv. Advisors Act Rel. No. 2211, 2004 SEC LEXIS 214, at *1 (Feb. 3, 2004) (imposing bar on investment advisor for engaging in “a fraudulent, cherry-picking scheme whereby he improperly allocated profitable securities trades to his personal accounts at the expense of his clients’ accounts”); see also Andrew J. Hardin, 2007 NASD Discip. LEXIS 24, at *1 (NASD NAC July 27, 2007) (imposing sanctions on representative for exercising discretionary authority in a customer’s account without prior written authorization from the customer and written approval from the firm).

Citadel Sec. Corp., Exchange Act Rel. No. 49666, 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.”)

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