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.