Regulatory & Compliance Alert - Fall 1997

NASD Regulatory & Compliance

ALERTNASD Adopts New Code OfProcedure

National Association of Securities Dealers, Inc. Volume 11, Number 3 September 1997

On August 7, 1997, the Securities andExchange Commission (SEC orCommission) approved the NationalAssociation of Securities Dealers, Inc.’s(NASD®) new Code of Procedure. [SR-NASD-97-28, approved in Securitiesand Exchange Commission Rel. No. 34-38908 (Aug. 7, 1997).] The newCode of Procedure became effectiveimmediately, and its application to disci-plinary proceedings is described on thefollowing pages.

The SEC also approved rules relating tomembership application procedures andprocedures used to determine eligibilityquestions; impose limitations on the

operations of members; imposesummary suspensions, non-summarysuspensions, cancellations, or bars; andadjudicate denials of access. These rulesalso became effective immediately.

Immediately upon approval, these rules and an accompanying SpecialNASD Notice to Members 97-55were published electronically on the NASD Regulation, Inc., Web Site(www.nasdr.com). For members withoutaccess to the Internet, the full text of therules in printed format is available fromNASD MediaSource at (301) 590-6142.

(Continued on page 2)

NASD To Eliminate Mandatory ArbitrationOf Statutory Discrimination ClaimsThe NASD announced on August 7,1997, that it would eliminate mandatoryarbitration of statutory discriminationclaims for registered brokers. Currently,the NASD requires all registered repre-sentatives and principals, as a conditionof employment in the securities industry,to agree to arbitrate all employment andinvestor claims.

The new NASD policy would permitemployees to choose between enteringinto private arbitration agreements withtheir employers, or reserving the right to

file a case in federal or state court forstatutory discrimination claims. TheNASD’s proposed new rule will requireenhanced disclosure to employees. Theproposal also would require any broker-age firm that uses private arbitrationagreements with its employees to spec-ify an SRO or other arbitration forumthat meets certain standards similar tothose articulated in the American BarAssociation’s “Due Process Protocol.”


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National Association of Securities Dealers, Inc. September 1997

Code Of ProcedureUnder the new Code, NASDRegulationSM staff, rather than theDistrict Committees or the MarketRegulation Committee (formerly theMarket Surveillance Committee), willdetermine whether to institute a discipli-nary proceeding. The Hearing Panelissuing a decision in a disciplinary pro-ceeding will consist of two industry rep-resentatives (the Panelists) and aHearing Officer. Under the new rules,the Hearing Officer is a professionalmember of NASD Regulation’s newOffice of Hearing Officers (OHO) andchairs the Hearing Panel.

Before a case is heard, the HearingOfficer will be available to answer ques-tions and resolve procedural issues. Formost cases, the Hearing Officer willhave one or more pre-hearingconferences to address such questionsand resolve discovery and other sched-uling issues. There are new rules relat-ing to ex parte prohibitions and anexpress provision for a motions practice.After a case is heard the Hearing Panelwill issue a written decision. If notappealed or called for review by theNational Business Conduct Committee,the decision of the Hearing Panel repre-sents the final decision of the NASD.

Procedures Regarding Eligibility,Limitations On Operations,Summary And Non-SummarySuspensions, Cancellations, Bars,And Denials Of AccessThe NASD amended the proceduresrelating to eligibility, limitations onoperations, summary and non-summarysuspensions, cancellations, bars, anddenials of access to provide greaterdetail regarding the procedural rights ofa participant in a proceeding and to con-form such proceedings to the currentcorporate structure. The new rules are inthe new Rule 9400 and 9500 Series.

1 Cover Stories

NASD Adopts New Code OfProcedureNASD To Eliminate MandatoryArbitration Of StatutoryDiscrimination ClaimsNASD Regulation MediationProgram Celebrates ItsSecond Anniversary NASD Announces AuditReport Findings OfIndependent Consultant

6 Regulation

NASD Regulation NamesMary Alice Brophy ExecutiveVice President For MemberRegulationThe NASD Regulation WebSite: Communicating WithMembers And InvestorsSEC Approves AmendmentsTo The Interpretation On TheRelease Of DisciplinaryInformation

10 Technology Roundup

NASD Submits OATS Rule To The SECYear 2000 Initiative MovesForward

11 Continuing Education

Continuing Education CouncilIssues Publications

12 Compliance

Compliance Questions &Answers

13 Municipal Securities

Municipal Securities Update

14 Advertising

Member Firms Seek GuidanceOn Public Appearances “Ask The Analyst”

18 Regulatory Short Takes

NASD Regulation Seeks SECApproval Of Policy OnElectronic Delivery OfInformationMembers Reminded AboutPrompt Payments ToCustomersNew SEC Options HaircutsTake Effect September 1,1997

NASD Regulation UrgesMembers To Review Form BDAnd Update Information

20 Trading & Market Making

SEC’s “1% Rule” For CQSSecurities To Go Into EffectOn October 1, 1997 SEC Approves Anti-Intimidation/Coordination Interpretation ToConduct Rule 2110Compliance With SEC OrderHandling Rules And NasdaqTrading RulesNASD Regulation ReiteratesProper Use Of Form TPassive Market MakingProcedures And TradingRestrictions Under Regulation M

28 Corporate Financing

Corporate FinancingDepartment Review Of BridgeFinancing Arrangements

30 NASD Disciplinary Actions

Actions From April, May, June,July And August 1997

CONTENTS

NASD Adopts New Code Of Procedure, from page 1

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NASD Regulatory & Compliance Alert September 1997

Rules Regarding InvestigationsAnd Sanctions The NASD made some related changesto the Rule 8000 Series—Investigationsand Sanctions. The Rule 8000 Series arethe procedures used in NASD investiga-tions and examinations to clarify theNASD’s authority to require membersand their associated persons to testifyunder oath or affirmation and provideother information.

Effectiveness Provisions RelatingTo The Code Of ProcedureThe new Code of Procedure will applyto disciplinary proceedings as follows.

A. A 14-Calendar Day “Opt-In”Period. A respondent who is namedin a complaint that was authorizedprior to August 7, 1997, may opt tohave the disciplinary proceeding goforward under the new Code if thefirst attempted service of thecomplaint upon the respondentoccurred no earlier than 14 calendardays before August 7, 1997, i.e., July24, 1997. A respondent must notifyNASD Regulation staff in writing ofits request to have the disciplinaryproceeding administered under thenew Code prior to or on the date therespondent’s answer is due. However,in a disciplinary proceeding involvingmore than one respondent, all respon-dents must opt in for the new Code toapply.

B. Complaints, Offers OfSettlement. If a complaint was authorized prior to August 7, 1997, a respondent may not seek to obtainreconsideration of whether the com-plaint should have been authorizedunder the new Code. Otherwise, theapplication of the new Code to a com-plaint and the related disciplinary pro-

ceeding is established by determiningwhen the complaint was authorizedand when NASD staff first attemptedservice of the complaint. For completedetails of when the former or new Codeapplies to complaints; offers of settle-ments; Acceptance, Waiver and Consentproceedings; and appeals, see SpecialNASD Notice to Members 97-55.

The Case Authorization ProcessInvestigations Investigations under the new Code willbe handled in essentially the same man-ner as performed previously. At the con-clusion of an investigation, the staff willdetermine whether formal action isappropriate. In certain cases, the staffmay determine that formal disciplinaryaction is not warranted, but informalcautionary action is appropriate. In suchinstances, the staff may issue a Letter ofCaution and may also schedule a meet-ing known as a “ComplianceConference.”

Case Authorization Of A NewDisciplinary ProceedingAs of August 7, 1997, all District Officecases will be authorized by the newCase Authorization Unit (CAU) in theDepartment of Enforcement. Afterreview of the case at the District Officelevel, the recommendation to bring aformal disciplinary action will beforwarded to the CAU.

Additionally, the newly formed Officeof Disciplinary Policy (ODP) will assistin the development of overall discipli-nary policy for the organization. Onbehalf of the Office of the President ofNASD Regulation, ODP will review andapprove all recommendations by DistrictOffices to file significant or complex for-mal actions raising important regulatoryor policy issues. ODP review will be

concurrent, and in coordination withCAU review. The ODP also will providean objective review and approval ofcases that are investigated by theDepartment of Enforcement inWashington D.C., as well as those thatrelate to quality-of-market issues. Alloffers of settlement supported by thestaff will be reviewed in the same man-ner as described above for filing cases.

SummaryThe NASD urges members and theirassociated persons to review the newrules. Questions regarding the Code ofProcedure may be directed to: SharonZackula, Assistant General Counsel,Office of General Counsel, NASDRegulation, at (202) 728-8985, orKatherine Malfa, Chief Counsel,Department of Enforcement, NASDRegulation, at (202) 974-2853.Questions regarding the procedures inthe Rule 9400-9500 Series may bedirected to Mary Dunbar, AssistantGeneral Counsel, Office of GeneralCounsel, NASD Regulation, at (202)728-8252. Questions regarding the Rule8000 Series may be directed to DanielM. Sibears, Vice President, MemberRegulation, NASD Regulation, at (202)728-6911, or Mary Dunbar, at (202)728-8252. Questions regarding the caseauthorization process may be directed to William R. Schief, Vice President,Department of Enforcement, NASDRegulation, at (202) 974-2858, orLouise Corso, Senior Attorney,Department of Enforcement, NASDRegulation, at (202) 974-2835.Questions regarding the new or continu-ing membership admission processunder the Rule 1010 Series may bedirected to Daniel M. Sibears, at (202)728-6911, or Mary Dunbar, at (202)728-8252. ❏

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To help formulate this policy, NASDand NASD Regulation senior manage-ment formed an Advisory Committee onEmployment Discrimination Claims.The Advisory Committee conducted ameeting in June at which it heard fromfive panels of speakers invited from civilrights groups and the Equal EmploymentOpportunity Commission, memberfirms, attorneys who represent employ-ees, attorneys who represent broker/dealers, and employee organizations.The Advisory Committee also heardfrom experts in the employment arbitra-tion field. The Advisory Committee thendiscussed the issues with NASD seniormanagement and its views werepresented to the NASD and NASDRegulation Boards at their most recentmeetings.

Specifically, the Boards voted to takethe following actions:

Amend the NASD’s rules to removefrom the mandatory arbitration require-ment all employment discrimination andsexual harassment claims made underfederal or state statutes.

This does not require amendment tothe Form U-4 itself. The Form U-4will still require arbitration of otherdisputes among member firms andtheir employees, as well as disputesrelating to customers.

Make the rule change effective one yearafter approval by the SEC.

The one-year period will allow theNASD time to enhance the arbitra-tion forum, making it more attractiveto employees, and to produceexplanatory material for employeesand firms.

The one-year period also will givefirms and employees time toconsider their options.

Keep all other types of employment dis-putes in arbitration.

If a discrimination claim isintertwined with compensation anddefamation claims, the discrimina-tion claim can proceed in court andthe other claims must proceed inarbitration, unless the parties agreeto have all the claims decided in oneforum.

Require any arbitration agreementsused by firms to select as the arbitrationforum either an SRO or another forumthat meets certain due processstandards.

The NASD will work with memberfirms and employees to define thedetails of such standards.

Provide better disclosure to registeredpersons of their rights and of thefeatures of arbitration.

Firms that choose to use pre-disputearbitration agreements should makeemployees aware of any rights orremedies they may be giving up bysigning the agreement.

The NASD will assist firms in draft-ing disclosure forms explaining theeffect of the arbitration clause toemployees before they sign theForm U-4.

The NASD also has committed toimprove the quality of its dispute resolu-tion forum for the resolution of discrimi-nation claims through increaseddiversity on arbitration panels, special-ized training of arbitrators, and otherenhancements. The NASD also willcontinue to urge parties to mediateemployment disputes. The NASD’s vol-untary mediation program has alreadyproven to be an effective process toresolve disputes of this nature.

Of the 5,631 cases filed in the NASD’sarbitration forum last year, approximately15 percent involved disputes betweenemployees and firms. The other 85 per-cent were customer claims. Of theemployee claims, 109 alleged employ-ment discrimination of some kind. ❏

Arbitration Of Statutory Discrimination Claims, from page 1

NASD Regulation’s Mediation Programpicked up steam during its second year.The number of cases closed in the sec-ond year of operations exceeded thefirst-year total by 300 percent. Almost850 cases closed in mediation during thefirst two years (633 closed in the secondyear alone), with a settlement rate of 80percent. The number of cases in which

parties agreed to mediate has increasedin each of the last six months. Newactivity in the Midwest and Floridaregions, plus the continued momentumin the New York and Western regions,resulted in the dramatic growth.

The average mediation case is open onlytwo to three months. Quick turnaround

time and the streamlined process trans-late into savings of time and costs forparties using the mediation alternative.Moreover, parties and counsel report ahigh degree of satisfaction with theprocess. Ninety-eight percent of the par-ticipants who responded to a recent sur-vey said they would use the processagain.

NASD Regulation Mediation Program Celebrates Its Second Anniversary

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NASD Announces Audit Report Findings Of Independent Consultant

Building on the success of the program,NASD Regulation is sponsoring a sepa-rate “Settlement Week” event in each offive major cities. Settlement Week isdesigned to encourage the quick settle-ment of cases and to facilitateexploration of the benefits of mediation.To make the mediation alternative cost-effective for even more parties, NASDRegulation mediators have agreed toserve at reduced rates during SettlementWeek. The special provisions shouldencourage parties with smaller claims totake advantage of the benefits of media-tion. For claims with less than $30,000in controversy, a three-hour mediationwill be arranged for a cost of only $150per party. Unique incentives also existfor parties in larger cases duringSettlement Week. Eight hours of media-tion will cost each party $600. Half ofthe $600 will be applied toward theparty’s arbitration costs if the matter is

not resolved as a result of the mediation.The first Settlement Week was in FortLauderdale (September 8-12), to be followed by New York City (October13-17), Houston (November 10-14), Los Angeles (December 1-5), and San Francisco (December 8-12).

The Mediation Program now has almost500 mediators qualified for the NASDRegulation roster nationally. Partieschoose from lists of mediators with avariety of backgrounds.

NASD Regulation sponsors three-daymediator skills training programs cover-ing dispute resolution methods, ethicalissues confronting mediators, andimpasse-breaking techniques. The nexttraining programs are scheduled forPhoenix (October 27-29), New York(November 3-5), and Fort Lauderdale(January 1998).

The mediation alternative is here to stay.The growth trend is attributable to theeducational efforts made by NASDRegulation staff, mediators, and advo-cates. Parties save time and costs andcontrol the process and the outcome oftheir own disputes. As parties and coun-sel learn to use the flexibility that medi-ation offers, they will find more andmore cases suitable for mediation.

Questions on mediation may be directedto Kenneth L. Andrichik, Director,Mediation and Neutral Management,NASD Regulation, at (212) 858-3915.❏

The Audit Committee of the NASDBoard of Governors announced thatFrederick M. Werblow, the IndependentConsultant appointed in connection withthe NASD’s settlement last year withthe SEC, in a report forwarded to theSEC, stated that the NASD has madesubstantial improvement of its enforce-ment, surveillance, examinations, andinternal audit functions. Werblow sub-mitted his report to the NASD AuditCommittee, which in turn submitted it to the Chairman of the NASD Board of Governors and the SEC.

The NASD, according to Werblow, hasmade “substantial improvements” bybuilding an independent internal auditstaff reporting directly to the AuditCommittee; improving surveillance andexamination for compliance with theorder handling rules; improving trade

reporting through enhanced surveillance,examination, and enforcement proce-dures; upgrading the ability to enforcethe firm-quote rule by developing aprocess to address backing away com-plaints during the trading day; andaddressing improper actions by marketmakers. In addition, the report disclosesthat the NASD has developed new tech-nology to support the regulation of tradereporting, firm quote, and market makercompetitiveness requirements.

Werblow noted that while an Office ofHearing Officers has already been estab-lished and staffed, the NASD was await-ing SEC approval of its proposedchanges to the Code of Procedure beforeits professional hearing officers couldpreside over NASD disciplinaryproceedings. Code of Procedure changesalso would transfer to staff the authority

to authorize cases and process applica-tions for membership. A rule proposalwas also pending at the SEC to set outclear procedures and criteria for admis-sion to membership in the NASD.(Subsequent to Werblow’s report thenew rules became effective. See articleon page 1.)

The report also states that the NASD has established NASD Regulation, as an independent regulator responsible forday-to-day market regulation, surveil-lance, examination, and disciplinaryoversight for all member brokeragefirms and brokers; developed and implemented rules prohibiting pricingcollusion and retaliation by market mak-ers; and modified its excess spread rule.

Werblow observed that the NASD hascompleted much of the design of the


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Order Audit Trail System (OATS),pending approval by the SEC of its rulefiling. The system is not required to becompleted until August 1998.

The report makes a number of recom-mendations to the NASD in order to fur-ther enhance its regulatory and internalaudit programs. In particular, theIndependent Consultant recommendsthat the NASD provide additional sur-veillance, examination, and legalresources; implement a case-trackingsystem for the Market RegulationDepartment to ensure that cases areidentified and followed; and institute areport card system to apprise marketmakers of their level of compliance withexisting and newly created trading rules.

“The NASD has made substantialimprovements in surveillance, examina-

tion, and enforcement of order handling,trade, and quote reporting rules,”Werblow said. “The findings disclosedin the report indicate the NASD hasmade compliance with these undertak-ings a top priority.”

“On behalf of the NASD, I am pleasedto accept the findings of this report.When we look back, I believe that theNASD’s settlement with the SEC was acritical turning point in our efforts tomake Nasdaq® the fairest, most efficient,and most technologically advancedstock market in the world. The NASDhas enhanced its regulatory oversightprogram in the last year through a majorcommitment in both technological andstaff resources. We are pleased that theIndependent Consultant recognizedthose actions and we are absolutelycommitted to taking whatever steps we

find necessary to be the most effectiveand efficient self-regulatory organiza-tion in the world. In the last year alone,the NASD has implemented an array ofregulatory and market initiatives to bet-ter serve the investing public. We willcontinue to deploy resources wherevernecessary to assure the integrity of themarkets,” said Frank G. Zarb, NASDChairman, Chief Executive Officer, andPresident.

Werblow, a retired partner of PriceWaterhouse LLP, has more than threedecades of experience in the financialand securities industry. ❏

Regulation

NASD Regulation Names Mary Alice Brophy Executive VicePresident For Member RegulationVeteran securities industry executiveMary Alice Brophy has been namedExecutive Vice President for MemberRegulation. Brophy will oversee NASDRegulation’s nationwide District Officenetwork and home-office-based depart-ments responsible for examinations,testing, continuing education, compli-ance programs, member admissions, andother core regulatory programs. She willbe based in Washington and isscheduled to assume her new dutiesOctober 1, 1997.

Most recently Senior Vice President andDirector of Compliance for theMinneapolis-based brokerage firm DainBosworth, Brophy also served as SeniorVice President of Interra Financial, theentity responsible for ensuring compli-ance at all three of the company’s bro-

ker/dealer and investment advisory sub-sidiaries. She joined Dain Bosworth in1988.

From 1985 to 1988 she served as VicePresident for the privately heldMinneapolis-based ManagementCompensation Group. Earlier, she wasSenior Vice President and GeneralManager of the Eberhardt Company, alarge mortgage banker and real estatecorporation (1983-1985). From 1979 to1982, Brophy served as the MinnesotaCommissioner of Securities and RealEstate, where she played an active rolein the development of the Uniform StateSecurities Examination. Previously, shewas an Assistant Vice President forPiper, Jaffray overseeing the CorporateSyndicate Department (1970-1979). ❏

NASD Announces Audit Report Findings Of Independent Consultant, from page 5

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NASD Regulatory & Compliance Alert September 1997NASD Regulatory & Compliance Alert September 1997

A year ago, NASD Regulation launched its World Wide Web Site(www.nasdr.com). The Site has twoequally important objectives: to commu-nicate efficiently with members and toprovide tools for the ultimate protectionand benefit of the investor.

The Internet has become the fastestgrowing communications mediumtoday. Millions of pages are added eachweek, and hundreds of Web sites arecreated each day. NASD Regulation isusing this new tool to provide visitors toits Web Site with the latest regulatoryinformation, often before the printedversion is distributed. In fact, the NASDRegulation Web Site was ranked 4 outof a possible 5 by Web Magazine.

Critical Resource For MembersNASD Regulation is dedicated to pro-viding members with all its publicationson-line. The Web Site allows quick,unlimited, and free access to criticalpublications such as NASD Notice toMembers, and members also haveaccess to this newsletter—Regulatory &Compliance Alert. Compliance officerscan improve internal communications byproviding relevant parts of on-line publi-cations to registered representatives andother employees within their firms, aswell as provide up-to-date informationon critical NASD Regulation initiativesaffecting member firms.

The following are the main features ofthe NASD Regulation Web Sitedesigned for member firms:

• Publications: NASD Notice toMembers, Regulatory & ComplianceAlert, From Our View, andMembership On Your Side.

• Interpretive letters from NASDRegulation’s Office of GeneralCounsel.

• NASD Regulation project updatesand information pages: Order AuditTrail System and Central RegistrationDepository.

• Examination information and sites.

• Continuing education information.

By the fourth quarter of this year, theNASD Manual should be accessible on-line and free of charge. In the future,NASD Regulation plans to phase out theprinted version of the Manual, which isdistributed yearly in a paperbackversion.

Investor Education And Outreach ProgramThe NASD Regulation Web Site has asection dedicated to investor protectionand education. As part of its outreachprogram, NASD Regulation publishesmany guides for investors, descriptionsof its various dispute resolutionprograms, information about SEC OrderHandling Rules, and much more.

The following information is availablefor investors on the NASD RegulationWeb Site:

• Invest Carefully: Possibilities &Pitfalls (The Internet As AnInvestment Tool).

• Invest Wisely: Advice from yoursecurities regulators.

• There Are Rules To Protect You WhenStockbrokers Call.

• How The New SEC Order HandlingRules Affect Individual Investors.

• Investors And Dispute Resolution.

NASD Regulation encourages firmswith Web sites to link to the NASDRegulation Site (although outside enti-ties cannot use the NASD Regulationlogo). This provides members’ customersand other Web visitors access to a vari-

ety of regulatory services on-line. Amember firm should call the Internetstaff at (301) 590-6893 or e-mail NASDRegulation using the Site’s “Feedback”function if it plans to include a descrip-tion of the NASD Regulation Site orspecific NASD Regulation content onits own site. NASD Regulation Internetstaff will be happy to work togetherwith firms regarding information refer-ring to the NASD Regulation Web Sitebefore that information “goes live.”However, if a firm is only adding theNASD Regulation Web Site to a list oflinks, there is no need to contact theInternet staff.

Filing A Complaint Or ARegulatory TipFiling a complaint or a regulatory tipcan be accomplished by calling or writ-ing to NASD Regulation, but it is alsopossible to perform this same functionthrough the NASD Regulation WebSite. This section of the Web Site pro-vides guidelines on how to avoiddisputes and who should be filing acomplaint or a regulatory tip.

Requests For CommentsIn order to expand the pool of commentsfrom key constituents, NASD Regulationinvites member firms, investors, and thegeneral public to comment on significantrule proposals on a regular basis. TheNASD Regulation Web Site alsoprovides a link to the SEC public com-ment page, where the SEC encouragessubmission of comments on the proposedrules during the comment period.

Other Securities LinksA good Web site cannot be completewithout a set of relevant links to otherhigh-caliber sites with important infor-mation. The NASD Regulation Siteincludes one of the most comprehensivesets of securities regulators links on theWeb. This includes a Web link (or an

The NASD Regulation Web Site: Communicating WithMembers And Investors


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SEC Approves Amendments To The Interpretation On TheRelease Of Disciplinary InformationThe SEC recently approved amend-ments to the Interpretation on theRelease of Disciplinary Information,IM-8310-2, authorizing the NASD torelease to the public information on dis-ciplinary complaints and non-final disci-plinary decisions that present significantinvestor-protection issues, providedappropriate disclosures concerning thestatus of the complaint or decisionaccompany the release. Under theamendments, information will be auto-matically released to the public for com-plaints alleging violations of one ormore Designated Rules, which are listedin NASD Notice to Members 97-42 andpresent the most significant investor-protection concerns and include anti-fraud, anti-manipulation, andsales-practices rules. The amendmentsalso authorize the NASD to release pub-licly information on any complaint thatthe President of NASD Regulationdetermines should be disseminated inthe public interest.

Release of complaints will be accompa-nied by a disclosure stating: “Theissuance of a disciplinary complaint rep-resents the initiation of a formalproceeding by the Association in whichfindings as to the allegations in the com-plaint have not been made and does notrepresent a decision as to any of the alle-gations contained in the complaint.Because this complaint is unadjudicated,you are encouraged to contact therespondent before drawing any conclu-sions regarding the allegations in thecomplaint.”

Under the amendments, the NASD willalso automatically release any non-finaldecision that imposes monetary sanc-tions of $10,000 or more, or penalties ofexpulsion, revocation, suspension, or abar from being associated with memberfirms. In addition, the amendmentsrequire the release of all non-final andfinal decisions that contain an allegationof a Designated Rule, regardless of

whether any sanction had been imposed.The public policy interests that justifythe release of information at thecomplaint stage also compel a release ofinformation at the decision stage,regardless of whether the decisionresults in the finding of a violation andthe imposition of sanctions, a dismissalof the allegation, or a reversal of earlierfindings. As with the release of informa-tion with respect to complaints, theamendments require that appropriatedisclosures accompany the release ofnon-final decisions.

Questions regarding these amendmentsmay be directed to Gary L. Goldsholle,Senior Attorney, Office of GeneralCounsel, NASD Regulation, at (202)728-8104. ❏

e-mail address) to securities industrySROs in the United States and theworld. Visitors can also find other linksthat are of interest to members andinvestors, such as links to U.S. federalregulatory agencies, international regu-lators, trade associations, state securitiesregulators, and other regulatory bodies.As examples, this Web Site provideslinks to the Office of Foreign AssetsControl (OFAC) and to the Bureau ofthe Public Debt: Government SecuritiesMarket Regulation. The link to OFAC

was created to provide members withinformation about persons and entitiesidentified as “Specially DesignatedBlocked Persons and Nationals.”Through the Bureau of Public Debt WebSite, visitors can access the GovernmentSecurities Act of 1936, as well as infor-mation on frauds and scams in the gov-ernment securities market.

FeedbackNASD Regulation is always looking fornew features and ideas to add to its Web

Site, and therefore, actively solicits visi-tors’ feedback, comments, and sugges-tions. Everyone is encouraged to be partof this Web Site’s on-line focus groupand participate in the ongoing re-evalua-tion of existing and upcoming features.

NASD Regulation is committed to usingits Web Site as one of its main commu-nications tools with members andinvestors in the future and, therefore,encourages member firms to gain accessto the Internet. ❏

NASD Regulation Web Site, from page 7

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The year 2000 is coming and NASDmembers, if they have not already doneso, should initiate their own Year 2000(Y2K) projects.

Last year, recognizing the seriousness ofY2K issues, the NASD, NASDRegulation, and Nasdaq formed a Y2KExecutive Steering Committee of offi-cers representing the three NASD orga-nizations. In June 1996 the NASDestablished a centralized Y2K ProgramOffice to oversee and coordinate all ini-tiatives across the organization. As aresult of this effort, the NASD has sys-tems that have gone through the Y2Kconversion and testing process and arenow back in use.

In order to coordinate the Y2K efforts,the NASD communicates regularly with

the securities industry on how theneeded changes will be carried out.

• The NASD published information inNASD Notices to Members on thissubject. The July 1996 NASD Noticesto Members included, in the “For YourInformation” section, an alert to theupcoming efforts of the NASD andthe changes that member firms wouldhave to make. The second appearanceof Y2K information (NASD Notice toMembers 97-16) occurred in March1997 and described the NASD’s efforts,as well as responsibilities of the mem-ber firms and advice on implementingtheir own Y2K programs.

• Nasdaq Trading and Market Servicespublished an article in its June 1997Subscriber Bulletin that outlined

Nasdaq’s Y2K compliance plan,including past and current industryactivities, market participant responsi-bilities, and a system testing availabil-ity schedule.

• In May of this year Nasdaq Tradingand Market Services began includingY2K as a topic at its quarterly vendorfocus groups to ensure that those whoprovide the NASD and its subsidiarieswith data support understand how theNASD is becoming Y2K compliantand what vendors need to do to sup-port NASD efforts.

• There are Y2K Web Pages on boththe NASD Web Site (www.nasd.com)and the NASD Regulation Web Site(www.nasdr.com) to ensure that mem-bers have ready and current access tothe NASD’s Y2K efforts.

Technology Roundup

NASD Submits OATS Rule To The SEC

Year 2000 Initiative Moves Forward

The NASD filed proposed Rules 6900through 6970 with the SEC. The proposedrules will require member firms to cap-ture and report specific data elementsrelated to the handling or execution oforders in Nasdaq equity securities.

NASD Regulation’s Order Audit TrailSystem (OATS) will receive and vali-date member firm order information.NASD Regulation will use this informa-tion to recreate events in the life cycle ofan order and more completely monitortrading practices of member firms.NASD member firms will be required toreport information for orders in Nasdaqequity securities that are: received froma customer for handling or execution orreceived from another member firm forhandling or execution. In addition, the

rules would apply to proprietary ordersoriginating in-house, excluding marketmaker transactions conducted at thetrading desk.

Under the proposed rules, OATS will beimplemented in phases. By February 2,1998, member firms will be required tosynchronize the clocks used to recordthe time of reportable events to a stan-dard and within an accuracy to be deter-mined by the NASD. By August 8,1998, electronic orders received or cap-tured by member firms are proposed tobe subject to the reporting requirements.Electronic orders are defined as ordersthat are received by a firm in electronicformat, or orders that are recorded in anelectronic format upon or promptly afterreceipt. On January 1, 1999, non-elec-

tronic orders received by a marketmaker’s trading desk are proposed to besubject to the rules. By January 31,2000, all other orders and reportingevents not previously covered would besubject to the reporting requirements.

The OATS Support Center is theprimary source of OATS informationfor NASD member firms. The Center is open Monday through Friday from 8 a.m. until 6 p.m. Eastern Time. The e-mail address is [email protected];the telephone numbers are (888) 700-OATS and (301) 590-6503. Generalinformation can also be obtained fromthe OATS Web Page found at theNASD Regulation Web Site(www.nasdr.com). ❏

11


The Securities Industry/RegulatoryCouncil (Council) on ContinuingEducation recently published Examplesof Firm Element Practices and CouncilCommentary (Firm Element Practices)to illustrate a variety of approaches dif-ferent broker/dealers have taken to com-ply with the Firm Element of thecontinuing education requirements.Firm Element Practices contains theactual needs analyses and training plansof eight broker/dealers: a small, a mid-sized, and a large general securitiesfirm; a mid-sized investment bankingfirm; a mid-sized and a large insurance-affiliated broker/dealer; and a mid-sizedand a large independent contractor bro-ker/dealer. In the accompanying com-

mentary on each firm’s plan, theCouncil discusses what it considers itsstrong and weak aspects.

The Council believes that Firm ElementPractices will assist firms in meetingcontinuing education requirements byshowing how representative firms haveinterpreted the Guidelines For FirmElement Training (see NASD Notice toMembers 96-69, October 1996). It real-izes, however, that each firm has uniqueneeds and characteristics that should beidentified and addressed in that firm’sFirm Element training plan. TheCouncil recommends that every firmreview Firm Element Practices for use-ful ideas and approaches to the continu-

ing education requirements, but cautionsthat the training plans contained in FirmElement Practices do not constitute a“safe harbor” of any kind.

A Reader Survey is included in FirmElement Practices so that from yourresponses, the Council can make surethat future editions of Firm ElementPractices address your needs.

A copy of Firm Element Practices wasrecently mailed to each NASD memberaccompanied by a Special NASD Noticeto Members. Within a few months, thispublication will also be available on theNASD Regulation Internet Web Site atwww.nasdr.com. Additional printed

Continuing Education Council Issues Publications

The NASD is also a founding memberof the Y2K Exchange and UtilitySubcommittee of the Securities IndustryAssociation (SIA), along with the NewYork Stock Exchange, the AmericanStock Exchange, the National SecuritiesClearing Corporation, the DepositoryTrust Company, and the SecuritiesIndustry Automation Corporation.Nasdaq is working with these organiza-tions to establish data interchangeguidelines and to plan for unit, bilateral,and industry-wide testing.

Unit testing is described by the SIA asan exchange’s or utility’s one-on-onetesting with its participants. Bilateraltesting is described as an exchange orutility doing one-on-one testing withanother exchange or utility. This testingis expected to be completed by the endof 1998 prior to industry-wide tests,which are tentatively scheduledthroughout 1999. The June 1997Subscriber Bulletin provides a table thatoutlines when specific Nasdaq systemswill be available for unit testing of Y2Kcompliant applications and dissemina-tion services.

A major objective of the SIA Exchangeand Utility Subcommittee is to developthe means for an industry-wide test in1999. This test—which requires wide-spread cooperation among industry prin-cipals—will provide the securitiesindustry with a test market environmentto perform transaction cycle testing, andallow industry participants to synchro-nize their computers to simulate a par-ticular trading date. Subscribers will beinvited to use this test market environ-ment and conduct cycle tests as they seefit. This testing will allow the industryparticipants to ensure that their systemswill continue to operate in a Y2K envi-ronment.

In fact, the SIA recently held a Y2KSummit that outlined several areas,including the state of current Y2K initia-tives: identification of various scenarios;how to avoid and deal with potentialY2K problems; identification of specificissues, such as testing, audit objectivesand standards, international issues, dis-closure, and liquidity; preparation of keyaction lists; and discussion of prioritiza-tion, responsibilities, and next stepswithin the securities industry.

The NASD and its subsidiaries areworking closely with the SEC and theindustry to ensure that systems interfac-ing with those of the NASD willcontinue to function as we all enter theyear 2000. The NASD urges each of itsmembers to also take a serious positionon Y2K issues and act to ensure that allsystems are compliant on or beforeJanuary 1, 2000.

Questions or comments regarding theNASD Year 2000 program may bedirected to: Bill Bone, Vice President,Strategic Technology Services, NASD,at (301) 208-2951; Lyn Kelly, Director,NASD Regulation, at (301) 590-6342;Mike Buckingham, Associate Director,Operations, Planning, and Support,Nasdaq, at (203) 385-4569; Sue AnnGillespie, Director, Production Services,NASD, at (301) 590-6315; and DickBroome, Director, Systems Development,NASD Regulation, at (301) 721-1108.


Continuing Education

12


copies of Firm Element Practices maybe obtained from NASD MediaSource(301-590-6142) for $10 per copy.

Also available from NASD Media-Source is the revised version of theCouncil pamphlet The ContinuingEducation Program For SecuritiesProfessionals. This pocket-sized bookletcontains valuable information about theSecurities Industry Continuing

Education Program along with answersto frequently asked questions about con-tinuing education. Many firms havefound the pamphlet useful to distributeto their registered representatives whoare taking the Regulatory Element com-puter-based training for the first time.The pamphlet, at 35 cents per copy, may be ordered from MediaSource with a minimum order of 100 copies.

Questions or comments regarding theContinuing Education Program may bedirected to John Linnehan, Director,Continuing Education, NASDRegulation, at (301) 208-2932, FrankMcAuliffe, Vice President, MemberRegulation, NASD Regulation, at (301)590-6694, or Daniel M. Sibears, VicePresident, Member Regulation, NASDRegulation, at (202) 728-6911. ❏

The Compliance Department frequentlyreceives inquiries from members. Tokeep members informed on matters ofcommon interest, the ComplianceDepartment provides this question-and-answer feature through the Regulatory& Compliance Alert.

Regulation T

Extensions

Q. The NASD has established a limit offive Reg. T extensions that a customermay receive in a 12-month period. If acustomer does multiple trades on thesame day and requests an extension foreach, does each separate trade counttoward the limit of five Reg. T extensionsthat a customer may receive in a12-month period?

A. No. For purposes of the limit in a12-month period, the NASD’sautomated Extension Request Systemcounts extensions by “request date”rather than by trade. The NASD’s pro-cedures for granting Reg. T extensionslimit a customer to a maximum of fiveReg. T request dates per rolling12-month period for certain reasonscodes (such as “check is in the mail”).For the trades to be counted together,the customer, trade date, and reasoncode must be the same. For example, ifseven Reg. T extension requests weregranted to one customer for one trade

date for the reason “check is in themail,” this would count as one of thefive permitted request dates. Thecustomer could receive Reg. T extensionson four more request dates during therolling 12-month period.

Q. Is the limit of five Reg. T extensionsin 12 months computed by account?

A. No. Pursuant to the NASD’s proce-dures, the 12-month limit is percustomer, not per account. Customersare identified in the Extension RequestSystem by a customer number, which iseither a social security number, tax iden-tification number or foreign number (the foreign numbers are assigned by the Extension Request System). If a customer has more than one accountidentified with the same customer number (whether at the same firm or at different firms), all Reg. T extensionsentered for these accounts are aggregatedtowards the 12-month limit.

De Minimis Amount Exception

Q. If there is more than one purchasetransaction in a cash account, each withthe same Reg. T date and each creating adebit balance due under $1,000, but in theaggregate the customer owes more than$1,000 on Reg. T date, what is the broker/dealer’s obligation under Reg. T?

A. Reg. T has established a de minimisamount of $1,000 for which there is norequirement to obtain a Reg. Textension, however, the word sum insection 220.8(b)(4) is not limited toindividual transactions. Once the timeperiod for payment has expired fortransactions in the cash account, the bro-ker/dealer cannot disregard a sumexceeding the de minimis amount on aspecific day simply because the sum iscomposed of multiple late payments,each of which is below the de minimisamount. Therefore, the broker/dealermust obtain an extension for each trans-action, or promptly cancel or otherwiseliquidate each transaction that whenaggregated would exceed the deminimis amount.

Security No Longer Margin Eligible

Q. If the Federal Reserve Board (theFed) determines that a security is nolonger margin eligible and if abroker/dealer has extended credit tocustomers on that security prior to theFed’s determination, is the broker/dealer required to then issue a margincall to each customer for the amount ofcredit previously extended?

A. No. Reg. T section 220.3(c)(2)allows any credit initially extended in compliance with Reg. T to be main-tained regardless of “Any security in anaccount ceasing to be margin” eligible.

Compliance Questions & Answers

Continuing Education Council Issues Publications, from page 11

13


Partial Payments

Q. In a cash account, may a broker/dealer accept partial payment from thecustomer and not request an extensionor cancel or liquidate a transaction aslong as the amount remaining unpaid isless than the de minimis amount speci-fied in 220.8(b)(4)?

A. No. Indebtedness may bedisregarded only if it does not exceed$1,000 on trade date.

Secured Demand Notes—Withdrawal Of Excess CollateralQ. If the collateral pledged on a satis-factory subordinated Secured DemandNote increases in value, may the lenderwithdraw the excess collateral?

A. Yes. SEC Rule 15c3-1d (a)(2)(v)(D)states that the lender may withdrawexcess collateral. This language alsoappears in the subordination

agreements. If collateral is withdrawn,Schedule A of the agreement should beamended so that it correctly reflects thecollateral remaining on the agreement.

Commission Rebates ToBroker/Dealer CustomersQ. Is an introducing firm considered tobe receiving customer funds pursuant toSEC Rules 15c3-1 and 15c3-3 if the firmreceives commissions from its clearingfirm on customer trades, and rebates aportion of the commissions to specificcustomers pursuant to “commissionrecapture program” agreements withthose customers?

A. Yes. Although the funds werereceived from the clearing firm ratherthan directly from the customer, thefunds are owed to the customer pursuantto the agreement with the customer andare therefore customer funds for the pur-poses of these rules.

Foreign Equity Securities—CriteriaTo Establish A Ready MarketQ. Can transaction and quotation his-tory from a foreign equity securitiesmarket be relied upon to substantiate a“ready market,” as defined in SEC Rule15c3-1, for securities of a foreignissuer?

A. No. An equity security of a foreignissuer may only be treated as having aready market, as defined in SEC Rule15c3-1, if it is included in the FTActuaries World Indices or if it is theunderlying security for an ADR listedon a domestic national securitiesexchange or Nasdaq. Transaction andquotation history from a foreign securi-ties market may not be relied upon tosubstantiate a “ready market.”

Questions regarding this informationmay be directed to the NASDRegulation Compliance Department at(202) 728-8221. ❏

Municipal Securities UpdateNASD Regulation reminds membersabout the use of automated comparison,clearance and settlement systems, andtrade reporting for municipal securities.See MSRB Rules G-12 and G-14.

“T Input Percentages”Accurate and timely automated compar-ison of municipal trades is critical to amember firm’s successful and efficienttrade processing function. Accurate andtimely automated comparison of munic-ipal trades is also critical to the efficientand effective regulatory oversight ofinter-dealer transactions, and effectiveJanuary 1, 1998, customer transactions,including: identification of executingbroker, trade and settlement dates, tradetime, par value, yield, dollar price, andcapacity.

Municipal securities dealers must reportall transactions with other brokers, deal-ers, or municipal securities dealers to theNational Securities Clearing Corpora-tion (NSCC). NASD Regulationreceives and reviews an NSCC “regularway trade comparison analysis” for eachmember firm. This NSCC report is anumerical review of each memberfirm’s trade comparisons.

The “T Input Percentage” is the primaryindicator that NASD Regulation uses toevaluate member firm compliance withMSRB Rule G-12. An industry-widegoal is to obtain a 95% “T Input” rate.NASD Regulation is concerned that forsome members the “T Input Percentage”is less than the stated industry goal of95%. NASD Regulation has recently

communicated to many member firmsabout their low “T Input Percentage”and have solicited responses about stepsthat are being taken to improve the per-centage. NASD Regulation plans tocontinue to monitor member firm com-pliance with MSRB Rule G-12 and willconsider remedial measures for thosefirms that do not demonstrate animproved “T Input Percentage.”

Executing Broker SymbolSome member firms erroneously believethat when they are functioning as anintroducing broker they do not need asymbol unique to their firm. In order toidentify its transactions each municipaldealer—including those that function asan introducing broker—needs to obtainan executing broker symbol. Nasdaq

Municipal Securities


14


Subscriber Services (800-777-5606) willassign executing broker symbols forreporting municipal securities.

Delivery Of New Issue OfficialStatements To CustomersNASD Regulation has receivedinformation that member firms may notbe consistently complying with the offi-cial statement requirements of MSRB

Rule G-32. MSRB Rule G-32 requires,in part, that a municipal securities dealerdeliver—no later than settlement—acopy of the new issue official statement.In the event that a final officialstatement is not prepared, the dealermust provide a preliminary officialstatement accompanied by a notice thatno final official statement is being pre-pared. The NASD wishes to point out

that the requirements of MSRB Rule G-32 apply to all municipal dealers thatsell any new issue municipal security,including those dealers that are not man-aging or sole underwriters.

Questions or comments may be directedto Malcolm P. Northam, Director ofFixed Income Securities Regulation,NASD Regulation, at (202) 728-8085.

Advertising

Member Firms Seek Guidance On Public Appearances The popularity of on-line chat rooms,call-in format broadcasts, and seminarpresentations have lead to an increase inrequests by NASD member firms forguidance on public appearances by theirassociated persons. Public appearancesinclude both scripted and extemporane-ous discussions.

Overall StandardsThe standards of Rule 2210, Communica-tions with the Public, apply to all publicappearances regardless of whether thepresentation has been scripted orconsists of unrehearsed remarks inresponse to a question. Overall, thesestandards require a full and fair descrip-tion of any securities product or serviceincluding material information such asrisks or costs. For example, in responseto a caller’s question during a radiobroadcast, a representative recommendsa specific stock of local interest that istrading in the secondary market. Thisrecommendation is permitted, providedthe representative satisfies the disclosurerequirements of Rule 2210. Thus, therepresentative is required to disclosecertain material relationships betweenhis firm and the security, such as that hisfirm makes a market in the stock. Inaddition, he must provide the currentprice of the stock and mention if thereare any special risks associated with thesecurity, e.g., that the local companyissuing the stock is risky because it isstill in its start-up phase.

The rule also prohibits exaggerated,unwarranted, or misleading statementsor claims, including promises of specificfuture returns or projections of invest-ment performance. Thus, using theexample above, the representativewould be prohibited from giving assur-ances about the level of return the callercould expect from an investment in therecommended stock.

In addition, the rule calls for clear andprominent disclosure of the name of themember firm through which any securi-ties products or services under discus-sion would be offered. If a non-memberentity, such as a registered person’sinsurance agency is named in thepresentation, then the presentation mustbe clear that the securities products orservices under discussion are offered bythe NASD member firm.

Common Content ProblemsMember firms and associated personshave little control over the audience fora radio or television broadcast or an on-line chat room. In preparing and super-vising these mass media appearances,members must limit the message to oneappropriate for a broad, generalaudience. One cannot assume a specificlevel of audience knowledge, experience,or suitability. For example, high risksecurities may not be appropriate fordiscussion in a broadcast format whereany listener or viewer may tune in at anytime. Similarly, it is generally inappro-

priate to discuss securities subject toprospectus delivery in the mass mediaas the SEC strictly limits what can besaid about these products prior to deliv-ery of the prospectus.

Overly complex messages can also cre-ate problems. For example, a chart pre-sented in a 30-second televisioncommercial simultaneously with graph-ics, narration, and music may actuallyobscure rather than illustrate a particularpoint. The viewer may be unable toabsorb the meaning of the chart unlessthe presentation is simplified. In thiscase, the member could omit the chartand/or modify the narration to describeand explain the chart.

Disclosure in any type of media must beclear and understandable, and in massmedia this requirement is critical. Fineprint disclaimers are inappropriate fortelevision as they cannot appear onscreen long enough to be read; similarly,radio disclosures must be articulatedslowly enough for the listener to under-stand.

Technical terminology or jargon mayalso mislead or fail to enhance the audi-ence’s understanding of the product.While a financial professional mayunderstand that the phrase, “Subject tomarket fluctuation,” means the invest-ment can lose money, a first-timeinvestor may not.

Municipal Securities Update, from page 13

15


Who What When

Members who have never filed All Advertising* 10 days prior to first use for one year dating from the first submission

All members Options material used prior to delivery 10 days prior to first use for of the options disclosure document approval

All members CMO Advertising 10 days prior to first use for approval

All members Investment Company Advertising or 10 days prior to first use for Sales Literature that contains a ranking approvalcategory created by the member firm

All members Investment Company Advertising Within 10 days of first useand Sales Literature

All members Public Direct Participation Program Within 10 days of first useAdvertising and Sales Literature

All members Government Securities Advertising Within 10 days of first use

*Advertising is generally material that appears in media (e.g., newspaper, television, magazines), whereas sales literature ismaterial that is directed to a specific audience or group (e.g., form letters, research reports, article reprints). For complete definitions see Rules 2210(a) and 2220(a).

Approval, Recordkeeping, AndFiling Requirements For ScriptedPresentationsScripted presentations, regardless of themedium, must receive the prior, writtenapproval of a registered principal.Members must maintain copies ofscripted presentations, including whoprepared and approved the material, onfile for three years. Depending upon thecontent of the presentation, the type ofmaterial used, or the status of the mem-ber firm, scripted material may be sub-ject to filing with the AdvertisingRegulation Department. (See the chartbelow for more information on filingrequirements.)

Supervision Of ExtemporaneousPresentationsAs noted above, extemporaneouspresentations must reflect the same con-tent standards as scripted material.However, unlike scripted presentations,

members must establish their own pro-cedures for the supervision and approvalof these appearances. If memberschoose to allow this business activity totake place, they must assure that there isa mechanism for prior approval (or dis-approval) of each public appearance bya registered person. Members may alsorequire the submission of outlines orguest lists prior to approving a publicappearance by a registered person.

Procedures should provide for thereview and monitoring of appearances.For example, a firm may choose torequire its representatives to videotapetheir extemporaneous seminars for laterreview by a compliance officer.Alternatively, compliance personnelcould monitor such appearances directlyby attending the seminar(s). For broad-casts, a firm may require its representa-tives to provide tapes or transcripts of allradio or tapes of television appearances.

Another alternative would be for com-pliance personnel to listen to or watchthe broadcasts when they occur.

While a firm cannot control each andevery statement made by an associatedperson, the firm must provide clearguidance as to what may and may not bediscussed. A written list of acceptableand unacceptable presentations (i.e.,“do’s and don’ts”) can help a firmsupervise this aspect of its business.Broad general guidance can also help afirm control extemporaneous content;for example, firms should make clear to associated persons that they may not discuss products he or she is notlicensed to sell.

Questions regarding publicappearances may be directed to theAdvertising Regulation Department at (202) 728-8330. ❏

The most frequent question asked of the Advertising Regulation Department staff is, “What communications with the publicmust NASD member firms file?” The following chart summarizes the filing requirements set forth in Rules 2210(c) and2220(c):

Also click on “What’s New” to immediately findout when new online publications are available.

Visit the “Request for Comment” area on the NASDRegulation Web Site from the Home Page to tell us directly your thoughts on key NASD initiatives outlined in selected editions of Notices to Members.

From the Web Site’s Home Page, select the“Members Check Here” bar to gain quick and easyaccess to these publications and to get regularupdates of information critical to your business.

Visit NASD Regulation’s Internet Web Site atwww.nasdr.com for the latest editions of Notices to Members and the Regulatory & Compliance Alert.

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“ASK THE ANALYST”“Ask the Analyst”

provides member firms aforum to pose questions to the NASDRegulation Advertising/InvestmentCompanies Regulation Department on avariety of topics. Please note that wecannot guarantee all questions will beanswered in this publication. However,we will respond to all questions wereceive either here or by contacting youdirectly. If you have any questions orcomments, please contact theDepartment at (202) 728-8330.

Electronic Communications/Approval And RecordkeepingQ. Our brokerage firm is affiliated witha non-NASD member company thatwants to advertise brokerage services orsecurities products offered through ourfirm on its Internet site. Should we moni-tor electronic communications preparedby an affiliated non-NASD membercompany about the broker/dealerservices that we provide or the securi-ties products that we offer?

A. Yes. Advertising (or sales literature)about your firm’s brokerage services orsecurities products, whether electronicor through other media, should not beused without your firm’s knowledge andapproval. You should take reasonablesteps designed to ensure that affiliatednon-member companies, such as a bankor insurance company, receive yourfirm’s approval before advertising thebrokerage services or securities productsoffered by your firm.

Mutual FundsBy request we have updated and reprint-ed the following question and answerwhich originally appeared in the July1995 Regulatory & Compliance Alert.

Q. I recently saw a favorable article ina major magazine on a mutual fund mycompany sells. I would like to mailcopies of this article to clients, but mybranch manager won’t let me do so untilI add a lot of disclosures. Since anyonecould have read the article in the maga-zine, why do I have to add so muchinformation?

A. Unlike the original, printedmagazine article, your distribution ofthis reprint makes it sales literature asdefined in NASD Conduct Rule 2210,regarding communications with the public. Accordingly, you and your firmwill be held responsible for the contentof the article. You will need to obtainadvance, written approval by aregistered principal of your firm according to Rule 2210(b)(1). In addi-tion, since the article concerns a mutualfund, your firm must submit it to theAdvertising Regulation Departmentwithin 10 days of first use as specifiedby Rule 2210(c)(1); your firm may vol-untarily submit the article prior to use.

The article must include a balanced dis-cussion of risk and reward, and mustavoid exaggerated, misleading orpromissory statements or claims in orderto comply with Rule 2210. The rulealso requires clear and prominent disclo-sure of your NASD member firm’sname. If the article fails to disclose risksor contains exaggerated, misleading, orpromissory language, your firm mustdetermine whether the presentation canbe “cured” through additional disclosurewhich would accompany the article,such as a cover letter, or whether toavoid using the article completely.

In addition, SEC rules permit only verylimited communications about mutualfunds before prospectus delivery. If the

article contains information beyondSEC rule specifications, you must usethe piece with the prospectus for thefund. Finally, we advise obtainingappropriate permission to use the reprintin accordance with federal copyrightlaws.

Unit Investment TrustsQ. What information should memberfirms include in communications withthe public when promoting equity strat-egy unit investment trusts (UITs)?

A. Typically, equity strategy UITsinvest in stocks selected from a well-known index based on objective, easilyverifiable criteria. For example, the UITmay purchase the 10 stocks from anindex that yielded the highest dividendsover the preceding year. The UIT holdsthe stocks for a short term (one or twoyears) and then dissolves. The sponsormay offer successive trusts with similarportfolios thereby allowing the investorto pursue the strategy over a number ofyears. In order to fairly describe theseproducts as required by Rule2210(d)(1)(A), communications withthe public should clearly explain:

• the investment is a fixed portfolio ofsecurities with a one-year life (orother set term);

• the strategy is a long-term one and,therefore, investors should considertheir ability to pursue investing insuccessive trusts; and,

• the tax consequences associated withrolling over an investment from onetrust to the next.

Marketing materials for these UITs fre-quently illustrate how the strategywould have performed historically overthe long-term (e.g., the previous 15


RE

18


years), including time periods prior tothe existence of the UIT or the series ofUITs. This type of “strategy performance”is permitted where the strategy reflectsobjective, easily verifiable criteria.However, to clearly explain this hypo-thetical performance, the communica-tion must disclose:

• that the strategy performance is hypo-thetical and not indicative of the per-formance of a specific trust;

• strategy performance that reflects thefees and charges associated with theUIT; and

• the percentage amount of all salescharges (including deferred charges).

Comparisons of the hypothetical perfor-mance to the index would requiredisclosure that in any given year thestrategy may lose money or underper-form the index. Also, if cumulative or

average annual total return performanceis compared, then year-by-year data (orother consecutive time periods reflectiveof the UIT’s term) for both the strategyand the index must be included. o

NASD Regulation filed a proposed rulechange with the SEC seeking approvalof a policy regarding the electronicdelivery of information between mem-bers and their customers as required orpermitted by NASD rules (File No. SR-NASD-97-57). The SEC will seek com-ment on the proposal throughpublication in the Federal Register.

The SEC has issued two interpretivereleases that establish a frameworkunder which broker/dealers and othersmay use electronic media as an alterna-tive to paper-based media to satisfydelivery obligations under the federalsecurities laws. The SEC indicated inthe releases that an electronic communi-cation from a customer to a broker/dealer generally will satisfy the require-ments for written consent or acknowl-

edgment under these laws. [The releasesappeared in the Federal Register onMay 15, 1996 (61 FR 24644) andOctober 13, 1995 (60 FR 53458).]

The proposed policy submitted to theSEC states that use of electronic mediais permitted provided members complywith the standards contained in the SECreleases. These standards address,among other things, notice, access, evi-dence to show delivery, communicationof personal financial information, andconsent. The policy contains a list ofcurrent NASD rules that require or per-mit communications between membersand their customers for which electronicdelivery may be used in accordancewith the standards contained in the SECreleases. The draft policy states thatelectronic delivery also may be used for

a new rule or an amendment to an exist-ing rule that requires or permits commu-nications between members and theircustomers unless NASD Regulationspecifies otherwise.

The SEC recently approved a New YorkStock Exchange (NYSE) proposed rulechange seeking approval of a similarNYSE policy regarding electronic deliv-ery of information to customers [62 FR32848 (June 17, 1997)].

Questions concerning the proposal maybe directed to Mary Revell, AssistantGeneral Counsel, Office of GeneralCounsel, NASD Regulation, at (202)728-8203. ❏

Regulatory Short Takes

NASD Regulation Seeks SEC Approval Of Policy On ElectronicDelivery Of Information

The year 2000 will be upon us in less than two and a half

years, and all NASD member firms will have to ensure that

their automated systems will continue to operate

successfully. The NASD has instituted a Year 2000 (Y2K)

Program to address the unique challenges this coming cen-

tury poses for our date-sensitive systems. The NASD urges

all of its members to initiate a Y2K project as well.

Computer failures related to Y2K problems generally will be

considered neither a defense to violations of a firm’s regula-

tory or compliance responsibilities nor a mitigation of sanc-

tions for such violations. Remember, the deadline is

January 1, 2000, and there are no extensions!

Members Be Advised

“Ask The Analyst,” from page 17

19


Members Reminded About Prompt Payments To CustomersNASD Regulation reminds membersthat their payment policies must dealfairly with customers. Recent complaintsfrom investors voice concerns that theyare not receiving their interest and divi-dend payments on a timely basis.

Broker/dealers are required to makeinterest and dividend payments to cus-tomers promptly upon receipt. Thesepayments may not be deferred, even for a monthly disbursement, unless customers were given the opportunity in advance to choose immediate ratherthan deferred payment.

In a 1978 SEC release (SecuritiesExchange Act Release No. 15194) stillrelevant today, the SEC states that “theimposition of a system of deferred pay-ments without informed and timelynotice to customers is inconsistent witha broker/dealer’s obligation to dealfairly with its customers and is inconsis-tent with just and equitable principles oftrade.”

NASD Regulation urges all members toreview their procedures for makinginterest and dividend payments to cus-tomers and ensure that they are consis-tent with the views promulgated by the

SEC in its 1978 release. During routineexaminations, NASD Regulation staffwill be alert to compliance in this area.Any instances of unfair payment prac-tices will be subject to appropriate disci-plinary action.

Questions concerning this matter maybe addressed to Samuel Luque, Jr.,Associate Director, ComplianceDepartment, NASD Regulation, at (202)728-8472, or Susan DeMando, DistrictCoordinator, Compliance Department,NASD Regulation, at (202) 728-8411.❏

The SEC recently adopted changes tothe treatment of options and options-related inventory positions in SEC Rule15c3-1, the Net Capital Rule. EffectiveSeptember 1, 1997, broker/dealers mayno longer rely on the strategy-basedhaircuts in Section (c)(2)(x) of the Ruleor haircuts pursuant to an SEC No-Action Letter to the Securities IndustryAssociation dated October 23, 1985. In addition, the haircuts contained inAppendix A are modified significantly.

Instead, broker/dealers now may useapproved theoretical options pricingmodels to determine haircuts on listedoptions and related positions for futures,

options on futures, foreign currency, andforward contracts. For broker/dealers,especially those doing a limited optionsbusiness, that do not want to use pricingmodels, the SEC included an “AlternativeStrategy-Based Methodology” in theRule.

Other amendments include a change inthe time frame, from the end of the busi-ness day to noon of the next day, withinwhich broker/dealers must take net capi-tal charges on the options specialist’strading positions that they carry; and theelimination of subparagraph (a)(7)regarding requirements for self-clearingoptions specialists, which are no longer

applicable since the haircuts in Section(c)(2)(x) have been eliminated.

Questions concerning these changesmay be directed to Samuel Luque, Jr.,Associate Director, Compliance, NASDRegulation, at (202) 728-8472, or SusanDeMando, District Coordinator,Compliance, NASD Regulation, at(202) 728-8411. ❏

New SEC Options Haircuts Take Effect September 1, 1997

20


The SEC announced that the “1% Rule”for CQS (Consolidated QuotationSystem) securities will be implementedon October 1, 1997 (see SEC ReleaseNo. 38870, July 24, 1997). The “1%Rule,” which is part of the SEC’s OrderHandling Rules first adopted onSeptember 6, 1996, provides that anyCQS market maker that accounts forone percent or more of the trading vol-ume in any exchange-listed securitymust publicly disseminate quotations inthat security. Presently, CQS marketmakers in Rule 19c-3 securities mustpublicly disseminate quotes if theyaccount for one percent or more of thevolume in the security. In conjunctionwith adoption of the 1% Rule, the SECalso amended the term “OTC marketmaker” to include dealers that internal-ize their order flow or who hold them-selves out only to particular firms.Accordingly, with respect to exchange-listed securities, a firm is now obligatedto publicly quote a security if its volume

exceeds one percent of the total volumein the security, even if its volume wasattributable to internalized order flow.Following is a summary of the scope ofthe 1% Rule, the methodology firmsshould use to calculate their volumeunder the Rule, and issues associatedwith the withdrawal of quotations underthe Rule.

Scope Of The Rule

• The 1% Rule applies to all exchange-listed securities; it does not apply toNasdaq-listed securities. While theSEC has proposed extending the 1%Rule to Nasdaq-listed issues, it hasnot yet acted on this proposal.

• The 1% Rule does not apply to firmsthat are acting solely as blockpositioners in exchange-listed issues.SEC Rule 11Ac1-1(a)(13) providesthat the term OTC market maker“shall mean any dealer who holdsitself out as being willing to buy from

and sell to its customers, or otherwise,a covered security for its own accounton a regular or continuous basis other-wise than on an exchange in amountsof less than block size.” Accordingly,block positioners, to the extent theyare not also simultaneously holdingthemselves out as market makers fororders less than block size, are noteffected by the 1% registrationrequirement. In this connection, SECstaff has stated that while they do notbelieve that executing orders for lessthan block size on an infrequent basiswould necessarily constitute holdingoneself out as a market maker, “a firmmust evaluate whether it is in factholding itself out as willing to buyfrom and sell to its customers, or oth-erwise, on a regular or continuousbasis, in other than block size even ifit is primarily engaged in transactionswith customers of block size.”

• Firms that effect trading strategies thatinvolve executions in more than one

SEC’s “1% Rule” For CQS Securities To Go Into Effect OnOctober 1, 1997

Trading & Market Making

NASD Regulation Urges Members To Review Form BD And Update InformationArticle III of the NASD By-Lawsrequires that members ensure informa-tion reported on the Form BD is keptcurrent. Members are obliged underSection 1(d) to file the updated informa-tion within 30 days after learning of thefacts and circumstances giving rise tothe amendment. Among the items some-times overlooked include the firm’smain and mailing addresses and otheradministrative information found inItems 1, 2, and 3 on the Form BD.Failure to keep this as well as branchoffice information (Schedule E to FormBD) could result in missing important

communications from the NASD andother regulatory authorities.

Current Items 7, 8, 10, 11, and 12 con-tain details about the firm’s manner andcategories of business that could triggerregistration implications when circum-stances change. Changes in the firm’sownership, control, and senior manage-ment are reported on Schedule C toForm BD and under the NASD’s newRule 1010 Series generally somecircumstances must be reported to thefirm’s District Office in advance. (Seerecently revised Membership and

Registration Rule 1018.) You areencouraged to review all Items listed onthe Form BD periodically to identifyany outdated information. Except for theSchedule E, all amendments to FormBD must be under cover of a properlynotarized Page 1.

Member firms should contact theirassigned Quality & Service Team toobtain a blank Form BD and completemailing instructions or call (301) 590-6500. The local District Office shouldbe contacted regarding changes in own-ership, control, or operations. ❏

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security may qualify for the “blockpositioner” exemption from the SEC’smarket maker definition. SEC staff hasstated that it believes “that the blockpositioner exception would permit afirm to aggregate the number of sharesor market value of individual securi-ties where the executions in thesesecurities are part of one transaction,such as a program trade. However, aparticular trading strategy would haveto be evaluated to determine whetherthe firm is trading in a manner consis-tent with such exemption.”

Calculation Of Volume Under The Rule

• SEC staff has issued an interpretiveletter that provides that “if a firm actsin the capacity of an OTC marketmaker in a security, it must includefor purposes of the 1% calculation allvolume executed by the entire firm inthat security, unless it can demonstratethat the particular trades that it wishesto exclude from the 1% calculationwere wholly separate from the firm’sOTC market making activities in thatsecurity and the firm implements andutilizes an effective system of internalcontrols, such as appropriate ‘ChineseWalls,’ to maintain this functionalseparation. If, for example, a firmdemonstrates that 15% of its tradingin a particular security was donethrough part of the firm that had nointeraction with the firm’s OTC mar-ket making activities, then that 15%

of the firm’s volume need not becounted for purposes of calculatingthe 1% volume threshold.”

• A firm holding itself out as a marketmaker in a CQS issue should evaluatewhether it has exceeded the 1% vol-ume threshold on a quarterly basis.Specifically, at the end of a particularcalendar quarter, a market maker mustdetermine whether its total tradingvolume exceeded 1%. If so, within 10business days thereafter, the marketmaker must register as a CQS marketmaker with Nasdaq and commencequoting regular and continuous two-sided markets in that issue.

• To calculate its volume in a particularissue, a market maker must add all ofits proprietary volume in the stock,regardless of whether the tradesoccurred in the third market or on anexchange and regardless of whetherthe firm had a trade reporting obliga-tion with respect to the trades. Forexample, if a firm bought 20,000shares in the third market, sold 20,000shares in the third market, bought20,000 shares on an exchange, andsold 20,000 shares on an exchange, itstotal volume in the stock would be80,000 shares.

• A firm may be required to register asa CQS market maker even though it ismerely internalizing its own customerorder flow. The SEC’s approval orderfor the 1% registration requirementstates that “dealers that internalize

customer order flow . . . would fallwithin the definition [of an OTC mar-ket maker] even though they do nothold themselves out to all other mar-ket participants.” Similarly, firms thathold themselves out to only particularfirms as being willing to receive andexecute customer order flow on a reg-ular and continuous basis would fallwithin the definition of an OTC mar-ket maker.

• It is ultimately the obligation of amarket maker to determine whether ithas exceeded the 1% volume thresh-old, although Nasdaq and NASDRegulation will be monitoring mem-bers’ trading activities in CQS securi-ties to ensure compliance with theRule.

Withdrawal Of Quotations

• SEC staff has stated that “the require-ment to provide quotations in a sub-ject security shall terminate 10business days after the occurrence oftwo successive calendar quarters inwhich the firm’s trading volume forsuch subject security is less than 1%of the aggregate trading volume.”

A CQS market maker is not precludedfrom withdrawing from a security inwhich it has exceeded the 1% volumethreshold during the preceding calendarquarter; however, if it does so, it mustcease holding itself out as a marketmaker in the issue. ❏

SEC Approves Anti-Intimidation/Coordination Interpretation To Conduct Rule 2110On July 17, 1997, the SEC approved anew interpretation under Conduct Rule2110 (IM-2110-5) regarding anti-intimi-dation/coordination activities of memberfirms and persons associated with mem-ber firms (SEC Rel. No. 34-38845).This rule interpretation defines certain

conduct that is inconsistent with just andequitable principles of trade, and setsforth specific exclusions which identifybona fide commercial activities by andamong member firms. The interpretationidentifies three general areas of conductthat are prohibited and apply to primary

market as well as secondary tradingactivities.

The first part of the interpretation pro-hibits coordinating activities by memberfirms involving quotations, prices,trades, and trade reporting. Conduct


22


Compliance With SEC Order Handling Rules And Nasdaq Trading RulesThe NASD reviews member firm com-pliance with the SEC Order HandlingRules and with Nasdaq trading rules.The NASD takes this opportunity toreemphasize the application of severalrules and system changes and to remindmembers of their responsibilities in cer-tain areas. Several of these topics havebeen addressed in the more than 50faxes that have been sent to head tradersand others at member firms sinceJanuary 1997. Responsible Nasdaqdepartments are listed below, withappropriate contacts and telephone num-bers.

Members That Use SelectNetBroadcast Must Comply With ECN RulesIn the stocks covered by the SEC OrderHandling Rules (the SEC Rules), a mar-ket maker is required to reflect all orders(customer and proprietary) placed in

an electronic communications network(ECN) in its quote unless the ECN’s dis-play is included in the Nasdaq systemand there is access to that ECN. Select-NetSM is not a linked or eligible ECNunder the SEC Rules in that SelectNetorders are not reflected in the Nasdaqquote montage and, accordingly, marketmakers may not use SelectNet Broad-cast to reflect orders priced better thantheir own displayed quotes, without also adjusting their quotes.

ECN Rules1) A market maker that broadcasts aSelectNet order must reflect that order inits own quote if the order is priced betterthan its quote, whether the marketmaker is at the inside or not. For exam-ple, if a market maker broadcasts aSelectNet order to buy 1,000 shares at20, the market maker must change itsNasdaq bid to 20 for 1,000 shares.

2) If a market maker is at the inside andplaces a customer order into SelectNetBroadcast that represents a size greaterthan 10 percent of its quote size, themarket maker must increase its dis-played size in its quote. For example, if the market maker referenced abovebroadcasts a customer order inSelectNet to buy 5,000 shares at 20, themarket maker must change its Nasdaqbid to 6,000 shares. (It is not necessaryto change a market maker’s quote sizeto reflect a proprietary order.)

3) Before Nasdaq moved to displayquotes in 1/16s, a market maker couldbroadcast an order in SelectNet priced1/16 better than its displayed quotewithout changing its quote in Nasdaq,but since the change on June 2, 1997,this is no longer permissible. Marketmakers may continue to preferenceorders to other market makers or ECNs

covered by this prohibition wouldinclude, but not be limited to,agreements to report trades late or inaccurately, or agreements to maintaincertain minimum spreads or quote sizesabove the legal minimums.

The second part of the interpretationprohibits “directing or requesting”another member to alter prices or quota-tions. This includes situations in which amarket maker requests another marketmaker to move or adjust its displayedquotations to accommodate the request-ing market maker. This prohibition doesnot extend to activity that permits amember to route customer orders tomarket makers for handling or permits acorrespondent firm of the member to aska market maker to represent an order inthe market maker’s quote.

The third part of the interpretationrelates to conduct that threatens,harasses, coerces, intimidates, or other-wise attempts improperly to influenceanother member in a manner that inter-feres with or impedes the forces of com-petition among member firms in TheNasdaq Stock MarketSM. This part of theprohibition is intended to reach conductthat goes beyond legitimate bargainingamong member firms. This conduct mayinclude, among other things, refusals totrade, improper systems messages, trad-ing in odd lots, and other conduct intend-ed to influence a member to engage inimproper market activity or refrain fromlegitimate market activity. However,members are not prohibited from takingunilateral action in selecting with whomto trade and under what terms, based onlegitimate market and commercial crite-ria (e.g., credit exposure). In addition,

this interpretation does not prohibit amarket maker from contacting anothermarket maker in a locked or crossedmarket situation to attempt to unlock oruncross the market.

The NASD issued this interpretation tocodify long-standing policy and to com-ply with certain undertakings includedin an SEC Order (SEC Rel. No. 34-37538) of August 8, 1996, in which theCommission made specific findings ofcertain anti-competitive behavior ofNasdaq market makers in The NasdaqStock Market.

Questions regarding this interpretationmay be directed to David A. Spotts,Senior Attorney, Office of GeneralCounsel, NASD Regulation, at (202)728-8014. ❏

SEC Approves Anti-Intimidation/Coordination Interpretation To Conduct Rule 2110, from page 21

23


via the SelectNet preference servicewithout changing their quotes.

4) A market maker that broadcasts anall-or-none (AON) SelectNet orderpriced superior to its quote must stillupdate its quote to reflect the better-priced SelectNet order.

Market Makers Must ReflectCustomer Limit Orders In QuotesIn all stocks covered by the SEC Rules,customers are not required to requestthat their limit orders be displayed in amarket maker’s quote. All customerorders that are priced better than a mar-ket maker’s quote or that add size to themarket maker’s quote at the inside priceare required to be displayed, unless anexception applies. Exceptions include:block size orders (e.g., 10,000 shares or$200,000 market value); odd-lots; all-or-none orders; those executed immedi-ately upon receipt, sent to anothermarket maker or a linked ECN; or thoserequested by the customer not to be dis-played. Customers do not have to askfor their limit orders to be displayed—itis the obligation of the market maker todisplay the orders, unless instructed oth-erwise by the customer.

Market Makers Must DisplayCustomer OrdersThe SEC Rules require members to dis-play customer limit orders as soon aspossible, within 30 seconds of receipt innormal market conditions. The 30-sec-ond rule does not apply at market open-ings or shortly thereafter, when tradingreopens after a trading halt, or when aninitial public offering (IPO) first beginstrading, but it does apply at all othertimes. Members are reminded of theirobligation to comply with the 30-secondtime frame.

Members Must Comply With LimitOrder Protection RulesWhether or not a stock is subject to theSEC Rules, a member’s obligation toprotect a customer limit order does notcease when the order is sent to an ECNor a market maker for execution. The

limit order protection obligations(Manning Rules) apply to all customerlimit orders sent to an ECN or a marketmaker, and the member sending orreceiving the order cannot trade aheadof that order. Members must monitor thestatus of the order and not trade ahead ofit until the order has been executedwithin the ECN or by the market maker.

For example, in an instance where amember receives a customer limit order,sends it to an ECN for execution, andsubsequently receives a market order,the SEC has stated that the market ordermust be given the improved price of thelimit order. A member’s obligation toprotect the limit order and to improvethe price of an incoming market orderdoes not end when the limit order is sentto another entity for execution.

Market Makers Should Review “No Dec” FeatureNasdaq has given market makers theoption to prevent their displayed quotesize from being decremented followingan execution in the Small OrderExecution System (SOESSM) (no dec),provided that their published quote sizeis equal to or greater than the SOES tiersize. This qualification on the use of nodec has been put into place to ensurethat market makers who do not wanttheir quote size diminished will continueto provide liquidity of at least the SOEStier size. Accordingly, while it ispermissible under the rules to quote thefirst 50 pilot stocks in proprietary sizesless than the SOES tier size, it is notpermissible to do this while using the nodec feature.

The NASD recognizes a very limitedexception to the use of the no dec fea-ture when a market maker uses no decwhile quoting smaller size in conjunc-tion with the operation of the marketmaker’s own auto-quote system.Specifically, market makers may reflectcustomer limit orders in sizes lower thanSOES tier size while using the no decfeature, but they must immediately rein-state the SOES tier size using their own

automated quote update systems follow-ing the execution of the customer limitorder.

Market makers are not permitted to con-tinue to quote at less than the SOES tiersize in any stock while using no dec.

Members Must MaintainAppropriate Size QuotesWith the implementation of the SECRules, market makers began reflectingcustomer limit orders in their quotes,regardless of the minimum quote sizesrequired by Nasdaq. The SEC allowedthe first 50 pilot stocks to be quoted inactual size, as low as 100 shares, andNasdaq began decrementing the size ofmarket makers’ quotes followingunpreferenced SOES executions.Accordingly, market makers for the firsttime have been required to activelymonitor their posted size to make surethat they are complying with the variousnew rules and system features.

Size Obligations1) Market makers are permitted to quoteactual size in the first 50 pilot stocks,unless they are using the no dec feature.

2) For stocks that are phased in underthe SEC Rules, market makers arerequired to reflect better priced customerlimit orders in their quotes, and toincrease their size if they are at theinside and the customer order representsat least 10 percent of the market maker’squote size. Market makers may volun-tarily choose to reflect customer limitorders in their quotes for stocks thathave not yet been phased in under theSEC Rules.

3) Market makers who have their sizedecremented following a SOES execu-tion may remain at that size until otherSOES executions reduce their size tozero. When a quote is decremented tozero size, the Nasdaq automated quoterefresh feature will refresh the marketmaker’s quote to tier size if the marketmaker has chosen this feature. A marketmaker may also use its own manual or


24


automated update system to refresh itsquote to tier size or customer limit ordersize. If none of these alternatives isused, the market maker will be placed ina SOES closed status and would bedeemed to have withdrawn from thestock if it has not refreshed its quoteafter five minutes.

4) Market makers who have had theirsize decremented by a SOES executionand who voluntarily update their pricemust also update their size to the SOEStier size at that time. Market makersmay not update their price and leave lessthan the SOES tier size displayed. Thenew Quick Quote Update feature, avail-able since June 24, 1997, with theWorkstation 4/5 release, now permitsmarket makers to update the size of theirquotes quickly for this purpose.

Aggregated Size Of CustomerLimit Orders Anytime a market maker is at the inside,or the inside market moves to the mar-ket maker’s quote, the market maker’sdisplayed price and size must reflect theaggregated size of all of its customers’limit orders.

For example, if a market maker receivesthree customer limit orders priced at 20for 1,000, 2,000, and 1,000 shares, theSEC Rules require these orders to be

displayed. If 20 becomes the inside bidand the market maker is quoting 20, themarket maker must update its quote sizeto at least 4,000 shares, reflecting theaggregation of the limit order sizes.

Market Makers May Not Lock OrCross The MarketMarket makers are obligated to use rea-sonable means not to lock or cross themarket, whether through their own quoteor by sending an order into an ECN.“Reasonable means” has beeninterpreted to include a SelectNet orderpreferenced to the firm(s) at the bid oroffer. This is especially important at theopening, and it is important thatmembers monitor their quotes as well asany orders placed in ECNs to avoidlocking or crossing the market during theopening. If these orders in the ECN aremarket maker orders, it is the obligationof the market maker to attempt to contactthe other side prior to sending the orderinto the ECN and locking or crossing themarket. ECNs are also required to usereasonable means to avoid locking orcrossing the market, especially when theorders sent into Nasdaq emanate from anon-market maker or non-member.

Members Must Mark ACT Reports Since all market makers are nowprimary market makers and exemptfrom the short sale rule for Nasdaq

National Market® securities, when mar-ket makers effect a short sale using theirprimary market maker exemption, theymust mark their Automated Confirma-tion Transaction Service (ACTSM)reports with “short sale exempt.”

Requests For Excused WithdrawalStatusMarket makers that call Nasdaq MarketOperations for an excused withdrawalshould maintain, as a part of theirrecordkeeping requirements, supportingdocumentation for the reason they haverequested the withdrawal. NASDRegulation examiners will request andreview such documentation for excusedwithdrawal requests.

Questions regarding this information ormarketplace rules in general may bedirected to: Nasdaq MarketWatch at(800) 211-4953; Nasdaq Office ofGeneral Counsel at (202) 728-8294, orNASD Regulation, Market Regulationat (301) 590-6410.

Questions regarding system operationsmay be directed to: Nasdaq MarketOperations at (800) 481-2732, orNasdaq Trading and Market Services at(202) 728-8805. ❏

NASD Regulation Reiterates Proper Use Of Form TRecently, NASD Regulation staff hasdetected an increase in the improper useof Form T to report transactions inNasdaq, over-the-counter equity, andlisted securities. The staff reminds mem-bers that NASD rules provide that aForm T be used “exclusively as a back-up mode whenever electronic entry oftrade data into ACT is not feasible dueto system malfunctions or other unusualconditions.” In the situation where there

is not a system malfunction or otherunusual condition, a member is able toand should use ACT to report a transac-tion as late as 1:30 p.m. Eastern Time onthe next business day (T+1). Therefore,the use of Form T should be a rareoccurrence. To the extent that a memberclaims that system malfunctions orunusual conditions prevented the mem-ber from reporting a trade reportelectronically into ACT, the member

should document each such malfunctionand condition contemporaneously withits occurrence.

The staff has also detected an increasein untimely Form T filings by members.NASD rules provide that all membersmust report on Form T, on a weeklybasis, last sale reports of transactions inNasdaq, over-the-counter equity, andlisted securities that were not reported to

Compliance With SEC Order Handling Rules And Nasdaq Trading Rules, from page 23

25


ACT, “for whatever reason.” Thus, ininstances where a member executes atransaction on Monday and, forwhatever reason, did not report thetransaction into ACT by 1:30 p.m.Eastern Time on T+1, the member mustreport the transaction to NASDRegulation’s Market RegulationDepartment on Form T on or before thefollowing Monday (this same Form Tcould also be used to report any othertransactions executed by the member inthe prior week but not reported to ACT,for whatever reason). A Form T filedwith the Market Regulation Departmenton the following Tuesday, or any daythereafter reporting that transaction,could be viewed as conduct inconsistentwith NASD trade reporting rules.

Lastly, NASD Regulation staff hasdetected an increase in incomplete and

inaccurate Form T filings by the mem-bers. A filed Form T takes the place of atransaction report transmitted throughACT. As such, a properly completedForm T must include all of the informa-tion that would otherwise be included inthe electronic trade report, had it beenelectronically reported. This informationincludes, but is not limited to: the secu-rity symbol; the number of shares; theunit price (excluding commissions,markups, or markdowns); the date andtime of execution; a symbol indicatingwhether the member represents the mar-ket-maker side or the order-entry side; asymbol indicating whether the transac-tion is a buy, sell, sell short, sell shortexempt, or cross; a symbol indicatingwhether the transaction is as principal oragent; the contra side executing broker;and other applicable trade-reportingmodifiers. To the extent that a member

report uses a Form T to report the modi-fication of a prior transaction (whether itwas originally reported electronically toACT or on Form T), all informationconcerning both the original transactionand modified portion must be clear onthe Form T. The filing of a Form T in noway relieves a member of compliancewith all applicable trade reporting,record keeping, and confirmation rulesand regulations for the transactionsreported thereon. NASD Regulationdeems a Form T “reported” when it isreceived by the Market RegulationDepartment, not when it is transmitted,sent, or telecopied by the member.

Questions regarding the proper use of Form T may be directed to PeterSantori, Market Regulation, at (301) 208-2935. ❏

Rule 103 of Regulation M, which hasbeen in effect since March 4, 1997,maintains the core provisions of formerSEC Rule 10b-6A relating to passivemarket making. In surveilling passivemarket making, NASD Regulation’sMarket Regulation Department staff hasfound several instances where firms arenot adhering to the requirements setforth under Rule 103, which may resultin disciplinary action. Accordingly, inorder to help ensure member firm com-pliance with Regulation M, NASDRegulation reminds members of the fol-lowing procedures and trading restric-tions related to passive market making.

Member firms that wish to be designatedas a passive market maker must beaware of the following procedures. First,pursuant to NASD Rule 2710(b)(11), todetermine whether a member is eligibleto be a passive market maker, the man-aging underwriter must submit a request

for an Underwriting Activity Report to the NASD Regulation CorporateFinancing Department. An UnderwritingActivity Report must be requested forany Nasdaq security that is part of a dis-tribution subject to Regulation M. If thesecurity is subject to a one- or five-dayrestricted period according to theUnderwriting Activity Report, then thedistribution participants may be eitherexcused from trading that particularstock during the restricted period or bedesignated as a passive market makerand comply with the passive marketmaking restrictions for the duration ofthe restricted period. No later than theday prior to commencement of therestricted period, NASD Rule4619(d)(1) requires the managing under-writer of a distribution to submit aRestricted Period CommencementNotification to Nasdaq MarketOperations and NASD Regulation’sMarket Regulation Department indicat-

ing whether distribution participants willbe excused or designated as passivemarket makers. In addition, pursuant to NASD Rules 4623 and 2710(b)(12),the managing underwriter is required to submit a Regulation M TradingNotification to NASD Regulation’sMarket Regulation and CorporateFinancing Departments (whether a no-, one-, or five-day restricted periodapplied) no later than the close of businesson the day the distribution is completed.

There are many rules and restrictionsplaced on passive market makers thatrequire special attention during the trad-ing day. Following are some of thoserestrictions:

1. No Purchases Above The HighestIndependent Bid—Unless one of theexceptions noted in item 7 (listed below)applies, a passive market maker shallnot execute a purchase at a price that

Passive Market Making Procedures And Trading RestrictionsUnder Regulation M


26


exceeds the highest independent bid atthe time of the transaction. This rule alsoapplies to purchases on ECNs. A firmmay purchase stock above the highestindependent bid if the firm is left aloneat the inside bid after the independentmarket makers in the issue have movedtheir bids down. In this instance, the pas-sive market maker must effect such pur-chases at a price no higher than itsquoted bid price. In addition, the passivemarket maker may only purchase anamount up to twice the maximum SOESorder size applicable to the issue (e.g., 2 x 200, 2 x 500, 2 x 1000 shares) atsuch price level and must thereaftermove its bid down to a level no higherthan the highest independent bid. Also,if another passive market maker is set-ting the inside bid by itself, the firm maynot purchase at the inside market andmust only execute purchases at levelsnot exceeding the highest independentbid. Therefore, it is recommended thatfirms disable “preferences” on automaticexecution systems (e.g., ACES®

[Advanced Computerized ExecutionSystem®], SOES, or internal systems),since traders are not aware of executionsthrough such automated systems untilafter the trade is completed and theyreceive an execution report. Each firmhas the capability to disable preferencesin ACES and SOES for individualstocks.

2. No Improper Upticks—A passivemarket maker shall not enter a bid at alevel that exceeds the highest indepen-dent bid. Thus, a trader may not initiatea new bid above the highest independentbid or join another passive market makerat a level above the highest independentbid.

3. No Improper Downticks—Any timea passive market maker downticks, thetrader shall not enter a bid at a level thatexceeds the highest independent bid. Apassive market maker should be awareof the level of the highest independentbid at all times and continue to movedown to a level equal to or below thehighest independent bid, even if there is

another passive market maker at a levelabove the highest independent bid.

4. No Untimely Downticks—If a pas-sive market maker is left at the insidebid, the passive market maker may stayat that level until the firm purchases upto twice the maximum SOES order sizeapplicable to that issue. Once the passivemarket maker has equaled or exceededthis limit, the market maker must imme-diately lower its bid to a level notexceeding the highest independent bid.

5. Exceeding 30% ADTV Limit—There is a net purchase limitation placedon each passive market maker. At anytime during the trading day, a passivemarket maker shall not equal or exceedits net purchase limit (which iscalculated to be 30% of the firm’sAverage Daily Trading Volume[ADTV] for the covered security or aminimum of 200 shares) without takingimmediate action. If the 30% ADTVlimit is equaled or exceeded, the passivemarket maker must either: (1) immedi-ately withdraw its quotation fromNasdaq and contact the MarketRegulation Department, or (2) immedi-ately execute a sale that would bring thefirm’s net position for the trading daybelow the 30% ADTV limit. Undereither event, the trader must take actionwithin 30 seconds of exceeding the 30%ADTV limit.

6. No High Bid At Open—A passivemarket maker shall not quote a bidhigher than the highest independent bidat the market open and should periodi-cally review its quote level before themarket opens.

7. Exceptions To The Passive MarketMaking Requirements Issued By TheSEC—In addition to the restrictions discussed above, the SEC has issued twointerpretive letters (dated July 19, 1995,and November 22, 1996) that permitpassive market makers to effectpurchases above the highest independentbid if the purchase is necessary to com-ply with the NASD’s Limit Order

Protection Rule or the SEC’s LimitOrder Display Rule. First, a passivemarket maker may reflect a customerlimit order in its bid pursuant to theSEC’s limit order display rule that cre-ates a new inside bid higher than thehighest independent bid and effect pur-chases at such price up to the size of thedisplayed limit order. After the customerorder has been filled, however, the pas-sive market maker must immediatelylower its bid to a level not exceeding thehighest independent bid. Second, a pas-sive market maker may effect purchasesat a price above the highest independentbid in order to fulfill its Manning obliga-tion, provided the passive market makerdoes not solicit any limit or marketorders during the “qualifying period”and does not effect any transactions onthe sell side of the market that wouldcreate, directly or indirectly, an obliga-tion to purchase the security at a priceabove the highest independent bid. Inthis connection, however, SEC staff hasstated that a passive market maker mustcross any market order to buy, except amarket order executed through SOES,with any non-displayed limit order tosell priced between the bid and ask thatit holds before it may sell to the marketorder as principal.

Firms are urged to fully educate tradersand others responsible for passive mar-ket making activity and compliance onthe complete nature and scope of theserules. In this regard, members shouldreview SEC Release No. 34-38067adopting Regulation M and SECRelease No. 34-38399 adopting theNASD amendments related to Regula-tion M. Also, members may refer toNASD Notice to Members 97-10(March 1997) for additional details.Questions regarding Regulation M may be directed to NASD Regulation’sMarket Regulation Department at (301) 590-6080. ❏

Passive Market Making Procedures And Trading Restrictions Under Regulation M, from page 25

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■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■ ■

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Corporate Financing Department Review Of Bridge Financing ArrangementsThe Corporate Financing Department(the Department) wants members actingas underwriters to be aware of theDepartment’s concern over the increas-ing number of bridge financing transac-tions occurring prior to the filing ofIPOs. These bridge financings typicallyinvolve partners, shareholders, subordi-nated lenders, or “preferred customers”of the member firm arranging the bridgeloan and proposing to underwrite thepublic offering, and result in the bridgelenders receiving significant amounts ofsecurities or rights to acquire securitiesof the issuer. The Department believesthat the compensation received for pro-viding bridge loans is often dispropor-tionate relative to the perceived risks forproviding such short-term financing, andmay result in disparate treatment of cus-tomers who are bridge lenders and pub-lic investors who purchase securities atthe public offering price that have beengrossly diluted by the bridge transaction.The Department also believes the loansmade by bridge lenders should be recog-nized as business arrangements depen-dent on the member completing thepublic offering and creating a tradingmarket for the securities received by thebridge lenders, rather than a bona fideinvestment in the issuer.

The Department’s approach to thereview of bridge financing transactionshas been to carefully consider whetherbridge lenders should be deemed to bewithin the definition of “underwriter andrelated persons” in the CorporateFinancing Rule. The scope of the defini-tion of “underwriter and relatedpersons” is intended to facilitate themandate of the NASD to set standardsof fairness and reasonableness in con-nection with a member’s activities asthey relate to public offerings of securi-ties. The Corporate Financing Ruledefines “underwriter and relatedpersons” as “underwriters, underwriter’s

counsel, financial consultants and advi-sors, finders, members of the selling ordistribution group, any member partici-pating in the public offering, and anyand all other persons associated with orrelated to and members of the immedi-ate family of any of the aforementionedpersons.”

The NASD’s filing with the SEC on the Corporate Financing Rule in 1991indicates that the question of whether a person is “related to” any of the enu-merated persons in the definition of “underwriter and related persons” is “determined by whether there is aninvestment or business relationshipbetween the parties and is based onobjective facts.” Therefore, personswith an equity or creditor relationshipwith the member such as shareholders,partners, or subordinated lenders areconsidered underwriters and related persons.

The Department, in consultation withthe Corporate Financing Committee(Committee), wants to clarify for members and their counsel that bridgelenders may be considered to have abusiness or investment relationship witha member if they repeatedly receivesecurities of issuers underwritten by themember at prices below the publicoffering price. Any determination thatbridge lenders have a business or invest-ment relationship with a member, andare therefore deemed to be underwriterand related persons, would be based onthe repeated participation in loans nec-essary to facilitate a contemplated pub-lic offering. A course of conductcharacterized by participation in multi-ple loan transactions is viewed by theCommittee as a logical basis for deter-mining that bridge lenders have estab-lished a business relationship with amember and should be deemed under-writer and related persons. Additionally,

the fact that bridge lenders receive“cheap stock” and “in the money” war-rants of the issuer prior to the filing ofan offering means that the NASD has abasis under the Corporate FinancingRule for examining the circumstances ofthe acquisition, the identity of the partic-ipants, and their relationships with theunderwriter.

Once bridge lenders are identified asunderwriter and related persons, theDepartment must analyze the factors inthe Corporate Financing Rule for deter-mining whether compensation receivedby underwriters and related personsshould be considered underwriting com-pensation. The factors include: the tim-ing of the transaction; the details of theservices provided for which thecompensation was received and the rela-tion of the services to the public offer-ing; the presence or absence of arm’slength bargaining; the disparity betweenthe price paid for the securities and thepublic offering price; the amount ofinvestment risk assumed; and the rela-tionship of the receipt of the securities topurchases by unrelated purchasers onsimilar terms at the same time.

After an analysis of these factors, theDepartment may find that the compen-sation received by the bridge lendersshould be considered underwriting com-pensation received in connection withthe public offering. In fact, Section(c)(4) of the Corporate Financing Ruleincludes a presumption that all securitiesacquired by underwriter and related per-sons within six months of the filing of aregistration statement are underwritingcompensation. The presumption may berebutted by providing informationrelated to the factors that support a find-ing that the securities should not be con-sidered an item of compensation.

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Members should note that if the amountof securities acquired by bridge lendersthat are found to be underwriting com-pensation, together with any other secu-rities proposed to be received by theunderwriter (such as underwriter’s war-rants), exceeds the 10% StockNumerical Limitation of the CorporateFinancing Rule, they must be returnedto the issuer at cost and without recoursebefore the Department will issue an

opinion of “no objections” in connectionwith the offering.

Finally, members are reminded that anytransactions engaged in for the benefit ofbridge lenders/selling security holdersthat involve distributing securities “offthe shelf” on a delayed or continuousbasis pursuant to SEC Rule 415 consti-tutes participation in a public offering.Registration statements relating to these

transactions are subject to filing with the Department (see NASD Notice toMembers 88-101).

Questions on the Department’s reviewof bridge financing arrangements maybe directed to Richard J. Fortwengler,Associate Director, CorporateFinancing, NASD Regulation, at (202) 974-2700. ❏

Confirmation Disclosures: Payment-For-Order-FlowPractices And Yield-To-Maturity Calculations On Treasury Bills, Bonds, And NotesSEC Rule 10b-10 (the Rule) requiresthat all purchase or sale transactionseffected with or for customers be con-firmed in writing. The rule alsomandates that certain disclosures bemade in this confirmation process.Broker/dealers are required to make cer-tain disclosures regarding theirpayment-for-order-flow practices andyield-to-maturity calculations onTreasury securities.

The following information may be help-ful to members in determining whethertheir confirmation disclosures are incompliance with the Rule.

Payment For Order FlowDisclosureIn October 1995, the SEC amended theRule to require additional confirmationdisclosures indicating whether the bro-ker/dealer receives payment for orderflow in connection with the transactionand that the source and amount of thepayment for order flow received in con-nection with the transaction will be fur-nished upon request of the customer.

The Rule allows members to use a“back-of-confirmation” disclosure thatis generic, yet affirmative, in tone. The

following examples show how onestatement satisfies the requirements ofthe Rule, while the other does not.

Example 1

“The firm receives remuneration fordirecting orders in equity securities toparticular broker/dealers or marketcenters for execution. Such remunera-tion is considered compensation to thefirm, and the source and amount ofany compensation received by thefirm in connection with your transac-tion will be disclosed upon request.”

Example 2

“In some cases your broker receivesremuneration for the equity order flowit routes for customer orders. Thesource and nature, if any payment fororder flow is received, will bedisclosed upon written request.”

Example 1 would satisfy Rule 10b-10disclosure requirements because the firstsentence is a definitive statement that“the firm receives remuneration...”. Thesecond sentence “qualifies” the first sen-tence, stating that the source and amountof any compensation received will bedisclosed to the customer upon request.If the firm did not receive payment for

order flow on the particular transaction,it would simply report “zero” compen-sation in response to the customer’sinquiry.

Example 2 would not satisfy Rule 10b-10 disclosure requirements because thefirst sentence is not definitive.Statements such as “In some cases yourbroker receives...” or “Your broker mayreceive...” are not affirmative and there-fore do not comply with the Rule.

Members that do not want to use ageneric back-of-confirmation statementhave the option of identifying each tradesubject to payment-for-order-flow andusing a “front-of-confirmation” disclo-sure that specifically identifies the tradeas one for which payment-for-order-flow was received. An affirmative state-ment may be made on the front of theconfirmation, e.g., “We receivedpayment-for-order-flow on this transac-tion. The source and nature of the pay-ment will be disclosed upon writtenrequest.”; or, the confirmation may con-tain a code that refers to a similarlydefinitive statement on the back of theconfirmation.


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Broker/dealers that never receive pay-ment-for-order-flow have no disclosurerequirement under SEC Rule 10b-10.However, the broker/dealer would stillbe required to comply with the disclo-sure requirements of SEC Rule 11Ac1-3. Rule 11Ac1-3 requires a broker/dealer to disclose to its customers thefirm’s policies as they pertain topayment-for-order-flow. This disclosuremust be made at the time the account isopened and annually thereafter.

Yield-To-Maturity Calculation OnTreasury Bills, Bonds, And NotesA question recently arose concerningwhether Rule 10b-10 requires a broker/dealer to factor the markup/markdownor commission charged into the yield-to-maturity displayed on the confirmation.

Subsection (a)(5), which addresses debtsecurities transactions effected exclusive-ly on the basis of a dollar price, requiresthat the yield-to-maturity be displayed

on the confirmation unless there is anexception provided in subsection(a)(5)(ii). Treasury bills, bonds andnotes do not qualify for an exception.

Subsection (a)(6), which addresses debtsecurities transactions effected on thebasis of yield, requires that the currentyield, yield-to-maturity, or yield-to-call be displayed on the confirmation unlessthere is an exception provided in subsec-tion (a)(6)(iii). Treasury bills, bonds, andnotes do not qualify for an exception.

In addition, subsection (a)(6) requires thatif the transaction is effected on a basisother than yield-to-maturity and the yield-to-maturity is lower than the representedyield, then both the yield-to-maturity andthe represented yield must be disclosed.

Therefore, members are required to factor compensation (i.e., markup,markdown, or commission) on Treasury bills, bonds, and notes into

the yield-to-maturity calculation for dis-closure on the confirmation.

Members should note that this does notaffect the requirement that the commis-sion charged on an agency transactionon Treasury bills, notes, and bonds mustbe disclosed separately on the confirma-tion. Conversely, the markup/markdowncharged on these same securities doesnot have to be disclosed separately onthe confirmation.

Members are urged to review their con-firmation disclosures for compliancewith Rule 10b-10.

Questions concerning this informationmay be directed to Samuel Luque, Jr.,Associate Director, Compliance, NASDRegulation, at (202) 728-8472, or SusanDeMando, District Coordinator,Compliance, NASD Regulation, at(202) 728-8411. ❏

In April, May, June, July, and August 1997, the NASD announced the following disciplinaryactions against these firms and individuals.Publication of these sanctions alerts members and their associated persons to actionable behavior and the penalties that may result.

District 1—Northern California (the counties ofMonterey, San Benito, Fresno, and Inyo, and theremainder of the state north or west of such counties),northern Nevada (the counties of Esmeralda and Nye,and the remainder of the state north or west of suchcounties) and Hawaii

April ActionsEric Andre Clemons (Registered Representative, Irvine,California) was fined $65,000 and barred from associationwith any NASD member in any capacity. The NBCCimposed the sanctions following appeal of a San FranciscoDistrict Business Conduct Committee (DBCC) decision.The sanctions were based on findings that Clemons effect-ed unauthorized transactions in customer accounts.Clemons also failed to follow a customer’s instructionsregarding the purchase of stock and provided a customerwith an account statement that falsely reflected the accountbalance.

May ActionsNone

June ActionsElliot Krausz Adler (Registered Representative, SanFrancisco, California) was fined $25,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Adler received fundstotaling $1,350 from a public customer for the purchase ofsecurities and failed to use the proceeds to purchase securi-ties. Adler also failed to respond to NASD requests forinformation.

Robert Ignacio Burnham (Registered Representative,San Francisco, California) was fined $10,000. The sanc-tion was based on findings that Burnham signed the namesof public customers to a delivery receipt and to checkstotaling $24,908.83 and submitted them to an insurancecompany.

John Thomas Higley (Registered Representative,Folsom, California) was fined $20,000 and barred fromassociation with any NASD member in any capacity. TheNBCC affirmed the sanctions following appeal of a SanFrancisco DBCC decision. The sanctions were based onfindings that Higley failed to respond to NASD requestsfor information

Hayden James Lockhart, III (Registered Representative,Mililani, Hawaii) was fined $25,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Lockhart created afictitious insurance application for a public customer,forged an insurance agent’s signature to the application,and submitted the application to his member firm.Furthermore, Lockhart forged a public customer’s name to

an insurance application and submitted the application tohis member firm. Lockhart also failed to respond to NASDrequests for information.

William David Stephens (Registered Representative,Redwood City, California) was fined $220,000, barredfrom association with any NASD member in any capacity,and ordered to pay $41,585.98 in restitution to a memberfirm or customers. The sanctions were based on findingsthat Stephens received $41,585.98 from public customersand misappropriated and converted the funds to his ownuse and benefit. Stephens also failed to respond to NASDrequests for information.

Windsor Reynolds Securities, Inc. (New York, NewYork) was fined $10,000. The sanction was based on find-ings that the firm opened 97 customer accounts in its NewYork office and effected 98 purchases and sales on behalfof customers before receiving required approval from theNASD to change its business.

July Actions Michael Kenneth Anderson (Registered Representative,San Jose, California) was fined $70,468 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Anderson participat-ed in the sale of promissory notes to investors withoutgiving prior written notification to his member firm.

First California Capital Markets, Inc. (San Francisco,California) and Gerald Beldon Porter, Jr. (RegisteredPrincipal, San Rafael, California) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which they

NASD DISCIPLINARY ACTIONS

Confirmation Disclosures, from page 29

31


were fined $27,000, jointly and severally. Without admit-ting or denying the allegations, the respondents consentedto the described sanction and to the entry of findings thatthe firm, acting through Porter, effected sales of securitiesto customers at prices that were not fair and reasonabletaking into consideration all relevant circumstances. Thefindings also stated that Porter acted, and the firm permit-ted him to act, as a municipal securities principal withoutbeing registered as such.

James Thomas Shanley (Registered Principal, OldBridge, New Jersey) submitted an Offer of Settlementpursuant to which he was fined $10,000. Without admit-ting or denying the allegations, Shanley consented to thedescribed sanction and to the entry of findings that a mem-ber firm, acting through Shanley, opened 97 customeraccounts and effected purchases and sales on behalf of thepublic customers prior to receiving required approval fromthe San Francisco DBCC to change its business.

August ActionsNone

District 2—Southern California (that part of the statesouth or east of the counties of Monterey, San Benito,Fresno, and Inyo) and southern Nevada (that part of thestate south or east of the counties of Esmeralda andNye), and the former U.S. Trust territories.

April ActionsLouis Fratkin (Registered Representative, ThousandOaks, California) was fined $27,853.60, barred from asso-ciation with any NASD member in any capacity, andordered to pay $5,570.72 in restitution to a member firm.The NBCC imposed the sanctions following appeal of aLos Angeles DBCC decision. The sanctions were based onfindings that Fratkin forged a customer’s signature on cer-tain documents to generate the surrender of the customer’sinsurance policy and converted $5,570.72 in proceeds forhis own benefit.

Daniel C. Montano (Registered Principal, Orange,California) was fined $10,000 and ordered to requalify byexam as a general securities principal. The NBCC imposedthe sanctions following appeal of a Los Angeles DBCCdecision. The sanctions were based on findings thatMontano appeared on a television program and made rec-ommendations regarding a stock while failing to provide asound basis for evaluating the facts in regards to the stock,made exaggerated and unwarranted claims, and usedunwarranted superlatives. Montano also made unwarrantedforecasts of future events, made forecasts of future eventsthat were not clearly labeled as forecasts, referred toresults of previous specific recommendations, and impliedcomparable future results concerning his recommendationto short the stock.

This action has been appealed to the SEC and the sanc-tions are not in effect pending consideration of the appeal.

May ActionsDuSean Berkich (Registered Principal, Irvine,California) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $2,500 and sus-pended from association with any NASD member in anycapacity for 30 business days. Without admitting or deny-ing the allegations, Berkich consented to the describedsanctions and to the entry of findings that a former mem-ber firm, acting through Berkich, determined that customerfunds would be used to offset receivables from a generalpartner of an issuer instead of forwarding the fundspromptly to the issuer. According to the findings, the fundswere intended for investment in a limited partnership butinstead, were deposited into the firm’s general account.

Gregory J. Vislocky (Registered Representative, LakeOswego, Oregon) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$3,500 and ordered to disgorge $31,472.06. Without

admitting or denying the allegations, Vislocky consentedto the described sanctions and to the entry of findings thathe violated of the Board of Governors’ Interpretation onFree-Riding and Withholding by failing to notify the insur-er of an offering that he was associated with his memberfirm, by failing to notify his member firm that he had pur-chased shares in the conversion offering, and by sellinghalf of his shares and transferring the other half within 150days of the conclusion of the conversion offering. Thefindings also stated that Vislocky bought and sold shares inthree other conversion offerings through privately negoti-ated transactions with a public customer and other partiesand repaid personal loans made to him by the customerfrom the profits that resulted when those shares were latersold.

Frederick M. Woolley (Registered Representative,Redlands, California) submitted an Offer of Settlementpursuant to which he was fined $30,000, suspended fromassociation with any NASD member in any capacity forsix months, and required to requalify by exam as a generalsecurities representative. Without admitting or denying theallegations, Woolley consented to the described sanctionsand to the entry of findings that he forged his manager’ssignatures on six separate documents.

June ActionsCoastline Financial, Inc. (Mission Viejo, California)and Donald Allyson Williams (Registered Principal,Mission Viejo, California) were fined $50,000, jointly andseverally. In addition, the firm was expelled from NASDmembership and ordered to repay, with interest, any notesmentioned in the complaint that remain outstanding.Williams was barred from association with any NASDmember in any capacity. The National Business ConductCommittee (NBCC) imposed the sanctions followingappeal of a Los Angeles District Business ConductCommittee (DBCC) decision. The sanctions were based onfindings that the firm, acting through Williams, inducedthe purchase of 63 secured promissory notes totaling$1,101,260.89 in violation of Section 10(b) of theSecurities Exchange Act of 1934 and Rule 10b-5 promul-gated thereunder.

The action has been appealed to the Securities andExchange Commission (SEC) and the sanctions, other thanthe expulsion and bar, are not in effect pending considera-tion of the appeal. However, the firm is permitted to effectunsolicited transactions on behalf of its existing customersduring the pendency of the appeal.

July Actions Amerivet-Dymally Securities, Inc. (Inglewood,California) and Elton Johnson, Jr. (RegisteredPrincipal, Panorama City, California) submitted anOffer of Settlement pursuant to which they were fined$20,250, jointly and severally. In addition, the firm wassuspended of all underwriting activities for 30 days andJohnson was ordered to requalify by exam as a financialand operations principal. Without admitting or denying theallegations, the respondents consented to the describedsanctions and to the entry of findings that the firm, actingthough Johnson, effected transactions in securities andinduced the purchase or sale of securities when the firmfailed to have and maintain sufficient net capital. The find-ing also stated that the firm, acting through Johnson, failedto file in a timely manner MSRB Form G-37 in connectionwith four municipal securities underwritings sold by thefirm on a firm commitment basis.

Benjamin Antonio Chacon (Registered Representative,Dana Point, California) submitted an Offer of Settlementpursuant to which he was fined $10,000 and barred fromassociation with any NASD member in any capacity.Without admitting or denying the allegations, Chacon con-sented to the described sanctions and to the entry of find-ings that he caused the surrender of $10,145.74 worth ofpaid-up additional insurance on the life insurance policy ofa public customer and forged the customer’s endorsementon the surrender check without the customer’s knowledgeor consent. The findings also stated that Chacon submitted

an application in the customer’s name for a variable appre-ciable life policy that was not signed by the customer andapplied $2,385.89 of the proceeds from the surrendercheck toward the policy, thereby generating a commission.

Lo-Shan Lee (Registered Representative, San Diego,California) submitted an Offer of Settlement pursuant towhich he was fined $1,000 and suspended from associationwith any NASD member in any capacity for 30 days.Without admitting or denying the allegations, Lee consent-ed to the described sanctions and to the entry of findingsthat he opened a securities account with a member firmwithout informing his member firm of the existence of theaccount and/or the trading in the account and withoutinforming the other firm of his association with his mem-ber firm.

Daniel C. Montano (Registered Principal, Orange,California) submitted an Offer of Settlement pursuant towhich he was fined $102,500 and suspended from associa-tion with any NASD member in any capacity for twoyears. Without admitting or denying the allegations,Montano consented to the described sanctions and to theentry of findings that he engaged in a course of conductthat resulted in his member firm’s mishandling and/or mis-using funds entrusted to the firm by prospective registeredrepresentatives that the firm agreed to sponsor for the pur-pose of their applying to take certain securities exams. Thefindings also stated that a member firm, acting under thedirection and control of Montano, effected securities trans-actions while failing to maintain sufficient net capital.

August ActionsYana Michelle Epstein (Registered Representative,Dove Canyon, California) submitted an Offer ofSettlement pursuant to which she was fined $5,000 andsuspended from association with any NASD member inany capacity for one year. Without admitting or denyingthe allegations, Epstein consented to the described sanc-tions and to the entry of findings that she provided falseand misleading information to the NASD in response toNASD’s request for information concerning the possiblemisuse of a customer’s insurance proceeds.

District 3—Alaska, Arizona, Colorado, Idaho, Montana,New Mexico, Oregon, Utah, Washington, and Wyoming

April ActionsRobert Lloyd DenHerder (Registered Representative,Helena, Montana) was fined $27,549.41, suspended fromassociation with any NASD member in any capacity for 30business days, and required to requalify by exam. TheNBCC affirmed the sanctions following appeal of a SeattleDBCC decision. The sanctions were based on findings thatDenHerder recommended and executed on behalf of apublic customer the purchase and sale of securities in thecustomer’s account without having reasonable grounds forbelieving such transactions were suitable for the customer.DenHerder recommended to and purchased on behalf of apublic customer shares of a fund without affording thecustomer the benefit of letter of intent and breakpoint andinter-family discounts. Furthermore, DenHerder guaran-teed the customer against loss by providing the customerwith a $39,059 promissory note as reimbursement for loss-es incurred by the customer in connection with his invest-ments.

DenHerder appealed this action to the SEC and the sanc-tions are not in effect pending consideration of the appeal.

James R. Stock (Registered Representative, Gresham,Oregon) was fined $17,500 and suspended from associa-tion with any NASD member in any capacity for one year.The sanctions were based on findings that Stock preparedand disseminated sales literature that failed to conform tostandards regarding communications with the public.

Gary S. Trammell (Registered Representative, WestLinn, Oregon) submitted an Offer of Settlement pursuantto which he was fined $85,000 and barred from association

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with any NASD member in any capacity. Without admit-ting or denying the allegations, Trammell consented to thedescribed sanctions and to the entry of findings that hereceived a $20,000 check from a public customer for thepurchase of a variable annuity, deposited the check into hisbank account, and used only $7,000 of the funds to pur-chase the annuity for the customer. The findings also statedthat Trammell failed to respond to NASD requests forinformation.

May ActionsTwila Lee Cherry (Registered Representative, Littleton,Colorado) was fined $15,000 and barred from associationwith any NASD member in any capacity. The sanctionswere based on findings that Cherry filed a Form U-4 withthe NASD in which she failed to disclose a felony convic-tion.

Ronald Flateau (Registered Representative, Phoenix,Arizona) was fined $120,000 and barred from associationwith any NASD member in any capacity. The sanctionswere based on findings that Flateau obtained $45,756.64from public customers for investment purposes but onlyinvested $28,000 of these funds as directed by thecustomers. Furthermore, Flateau obtained $1,500 from apublic customer by stating that the customer owed him aservice fee for his efforts in canceling the customer’sannuity and investing the proceeds into another invest-ment, when in fact, Flateau’s member firm assessed nosuch charge for this service. Flateau also failed to respondto NASD requests for information.

Mark Wallace (Registered Representative, Ballwin,Missouri) was fined $10,000 and required to requalify byexam. The sanctions were based on findings that Wallaceeffected purchases of stock in the accounts of public cus-tomers without their authorization.

June ActionsMark P. Augustine (Registered Principal, Englewood,Colorado) was fined $5,000, jointly and severally, with amember firm, suspended from association with any NASDmember as a financial and operations principal for 10 days,and required to requalify by exam as a financial and opera-tions principal. The NBCC imposed the sanctions follow-ing appeal of a Denver DBCC decision. The sanctionswere based on findings that a member firm, acting throughAugustine, conducted a securities business while failing tomaintain its minimum required net capital and filed aninaccurate FOCUS Part I report.


Robert F. Blake (Registered Representative, Evergreen,Colorado) submitted an Offer of Settlement pursuant towhich he was fined $7,500 and suspended from associationwith any NASD member in any capacity for five businessdays. Without admitting or denying the allegations, Blakeconsented to the described sanctions and to the entry offindings that he disseminated sales literature that failed toconform with the standards for communications with thepublic. The findings also stated that Blake made misrepre-sentations, exaggerated and unwarranted statements andclaims, and omitted to disclose risks associated withinvestments in the stock and warrants of a drug company.

Blake’s suspension will commence June 30, 1997 and willconclude July 7, 1997.

Wayne D. Butler (Registered Representative, Tualatin,Oregon) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $15,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Butler consented to the described sanctions and to theentry of findings that he recommended and sold to a publiccustomer shares of stock and in connection with suchsales, failed to provide prior written notice to his memberfirm describing in detail the proposed transactions and hisproposed role therein and stating whether he had or might

receive selling compensation in connection with the trans-actions.

Brian L. Gibbons (Registered Principal, Scottsdale,Arizona) was fined $10,000 and suspended from associa-tion with any NASD member in any capacity for 30 days.The U.S. Court of Appeals affirmed the sanctions follow-ing appeal of a May 1996 SEC decision. The sanctionswere based on findings that Gibbons provided inaccurateand misleading information to the NASD staff in responseto NASD requests for information.

Harrison Douglas, Inc. (Aurora, Colorado), DouglasWayne Schriner (Registered Principal, Aurora,Colorado), and Stephen John Hrynik (RegisteredPrincipal, Aurora (Colorado) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which theywere fined $15,000, jointly and severally, and required tooffer recession of monies raised from five non-accreditedinvestors. Without admitting or denying the allegations,the respondents consented to the described sanctions andto the entry of findings that, in connection with a privateoffering for which the firm acted as underwriter, the firm,acting through Schriner and Hrynik, failed to sell exclu-sively to accredited investors as required under the exemp-tion from registration in Section 4(2) and 4(6) of theSecurities Act of 1933. The findings also stated that thefirm, acting through Schriner and Hrynik, failed to disclosein the private offering memorandum that Hrynik, whosigned the review contained in the memorandum, was notindependent because he was employed at the firm as itschief financial officer.

David J. Ramsdale (Registered Representative, Aurora,Colorado) was fined $675,000, barred from associationwith any NASD member in any capacity, and ordered topay $135,000 in restitution to customers. The sanctionswere based on findings that Ramsdale obtained funds total-ing $135,000 from public customers for investment pur-poses, failed to follow the customers’ instructions topurchase securities and, instead, used the funds for his ownbenefit. Furthermore, Ramsdale reimbursed a public cus-tomer with a promissory note for losses incurred in thecustomer’s securities account. Ramsdale also failed torespond to NASD requests for information.

William G. Sellens (Registered Representative, Greeley,Colorado) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $6,250, suspendedfrom association with any NASD member in any capacityfor 10 business days, and required to pay $4,987.75 inrestitution to a customer. Without admitting or denying theallegations, Sellens consented to the described sanctionsand to the entry of findings that he recommended to a pub-lic customer the purchase of securities on margin whensuch recommendation was not suitable for the customergiven her financial situation, needs, and investment objec-tives.

Robert L. Stark (Registered Representative, Scottsdale,Arizona) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $100,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Stark consented to the described sanctions and to the entryof findings that he deposited public customers’ funds total-ing $494,329.67 into a personal savings account that hemaintained for his benefit.

July ActionsRoger L. Zarling (Registered Representative, Tacoma,Washington) was fined $160,000, barred from associationwith any NASD member in any capacity, and required topay $32,000 in restitution to a member firm. The sanctionswere based on findings that Zarling received checks total-ing $32,000 from public customers intended for invest-ment in mutual funds, and instead, endorsed the checksand deposited the proceeds into his personal bank account.

August ActionsA.G. Edwards & Sons, Inc. (St. Louis, Missouri) andBruce Reed (Registered Principal, Las Cruces, NewMexico) submitted a Letter of Acceptance, Waiver andConsent pursuant to which they were fined $15,000, joint-ly and severally. Reed also was required to requalify byexam as a branch manager by taking the Series 8 exam.Without admitting or denying the allegations, the respon-dents consented to the described sanctions and to the entryof findings that the firm, acting through Reed, failed tosupervise a registered representative in a manner designedto achieve compliance with NASD Rules pertaining toprivate securities transactions.

Alden Capital Markets, Inc. (Denver, Colorado) andRobert Thayer (Registered Principal, Denver,Colorado) submitted a Letter of Acceptance, Waiver andConsent pursuant to which they were fined $10,000, joint-ly and severally. Without admitting or denying the allega-tions, the respondents consented to the described sanctionsand to the entry of findings that the firm, acting throughThayer, conducted a securities business while failing tomaintain its required net capital.

Roy C. Cook (Registered Representative, Albuquerque,New Mexico) submitted an Offer of Settlement pursuantto which he was fined $5,000 and suspended from associa-tion with any NASD member in any capacity until herequalifies by exam in any representative or principalcapacity. Without admitting or denying the allegations,Cook consented to the described sanctions and to the entryof findings that he signed firm documents without the sig-natories’ authorization and consent.

Charles William Duquette (Registered Representative,Beaverton, Oregon), Lewis H. Aytes (RegisteredRepresentative, Medford, Oregon), and William AlanSmith (Registered Principal, Central Point, Oregon)submitted Letters of Acceptance, Waiver and Consentpursuant to which Duquette was fined $50,000 and sus-pended from association with any NASD member in anycapacity for 18 months. Aytes was fined $100,000 andsuspended from association with any NASD member inany capacity for 18 months and Smith was fined $20,000and required to provide certification from his member firmthat he has undergone additional training to meet hissupervisory responsibilities.

Without admitting or denying the allegations, the respon-dents consented to the described sanctions and to the entryof findings that Duquette and Aytes recommended andsold limited partnership units to public customers at pricessubstantially in excess over the prices at which they wereable to obtain the units. Furthermore, the NASDdetermined that, in connection with their solicitation ofcustomers and recommendations to them, Duquette andAytes failed to disclose material information to the cus-tomers about the offering. The findings also stated thatSmith failed to reasonably review Duquette and Aytes’activities to ensure their compliance with the applicableNASD Rules.

Duquette’s suspension began January 6, 1996 and con-cluded July 6, 1997.

Aytes’ suspension began February 15, 1996 and concludedAugust 15, 1997.

Matthew Alan Goldberg (Registered Representative,Glendale, Arizona) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$35,000 and barred from association with any NASDmember in any capacity. Without admitting or denying theallegations, Goldberg consented to the described sanctionsand to the entry of findings that he engaged in businessoutside of the scope of his employment with his memberfirm. The NASD found that Goldberg engaged in the offerand sale of securities without providing prior written dis-closure to his member firm describing the proposed trans-actions and his role therein. The findings also stated thatGoldberg disclosed inaccurate information on his Form U-4.

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Gary A. Hill (Registered Representative, Rio Rancho,New Mexico) was fined $2,500 and suspended from asso-ciation with any NASD member in any capacity for sixmonths. The sanctions were based on findings that Hillreceived from public customers funds totaling $630 forinsurance premium payments and failed to forward thefunds to his member firm.

Patrick Charles Lawrence (Registered Representative,Bellevue, Washington) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$60,000 and barred from association with any NASDmember in any capacity. Without admitting or denying the allegations, Lawrence consented to the described sanc-tions and to the entry of findings that, by using false book-keeping entries to the books and records of his memberfirm, he caused $12,000 of the firm’s monies to be deposit-ed into securities accounts under his control, and usedthose monies for personal purposes, all without the knowl-edge or consent of the firm.

Taek Yung Lee (Registered Representative, Houston,Texas) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $17,500 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Lee consented to the described sanctions and to the entryof findings that he solicited a customer to provide a $3,500check for the purpose of purchasing securities in an initialpublic offering. The NASD found that Lee personallyretrieved the check from the customer, signed andendorsed the check, deposited it into his brother’s bankaccount, and made use of the customer’s funds in a mannerthat was contrary to the customer’s intention.

Robert W. Lewis (Registered Principal, Englewood,Colorado) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was barred from associationwith any NASD member in any representative capacity,with the right to reapply after one year, and barred fromassociation with any NASD member in any principal orproprietary capacity, with a right to reapply after twoyears. Without admitting or denying the allegations, Lewisconsented to the described sanctions and to the entry offindings that he used funds belonging to his member firmto which he may not have been entitled under his employ-ment agreement with the firm.

John F. Long (Registered Representative, Thornton,Colorado) submitted an Offer of Settlement pursuant towhich he was fined $5,000 and suspended from associationwith any NASD member in any capacity for five businessdays. Without admitting or denying the allegations, Longconsented to the described sanctions and to the entry offindings that he opened accounts and executed transactionsin the accounts pursuant to the instructions from a thirdparty without having the authorization of the beneficialowners of the accounts. The findings also stated that Longcompleted new account cards with information that heknew or should have known to be inaccurate.

Sheila Marlene Mehrens (Registered Representative,Tucson, Arizona) submitted an Offer of Settlement pur-suant to which she was fined $65,000 and barred fromassociation with any NASD member in any capacity.Without admitting or denying the allegations, Mehrensconsented to the described sanctions and to the entry offindings that she obtained checks totaling $13,000 madepayable to a public customer, endorsed the checks,deposited them to a bank account under her control, andconverted the funds to her personal use.

Dennis Charles Murphy (Registered Representative,Boise, Idaho) submitted a Letter of Acceptance, Waiverand Consent pursuant to which he was fined $40,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Murphy consented to the described sanctions and to theentry of findings that he participated in securities transac-tions and failed to provide written notice to his memberfirm describing in detail the proposed transaction, his pro-posed role therein, and whether he had received or mayreceive selling compensation in connection with the trans-

action. The findings also stated that Murphy failed torespond to NASD requests for information.

Peter A. Provence (Registered Principal, Pasadena,California) submitted an Offer of Settlement pursuant towhich he was fined $10,000 and suspended from associa-tion with any NASD member in any principal capacity forone year. Without admitting or denying the allegations,Provence consented to the described sanctions and to theentry of findings that he failed to supervise a registeredrepresentative in a reasonable manner.

Robert M. Samardich (Registered Representative,Missoula, Montana) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$350,000, barred from association with any NASD member in any capacity, and required to pay restitution.Without admitting or denying the allegations, Samardichconsented to the described sanctions and to the entry offindings that he obtained possession of customer funds inexcess of $70,000 intended for investment in certificates ofdeposit. The NASD determined that Samardich put thefunds to his own use and not for the purpose intended bythe customers involved.

Yee, Desmond, Schroeder and Allen, Inc. (Phoenix,Arizona), Stanley J. Allen, Jr. (Registered Principal,Scottsdale, Arizona), and James F. Desmond(Registered Principal, Phoenix, Arizona) submitted anOffer of Settlement pursuant to which they were fined$10,000, jointly and severally. In addition, the firm andAllen were fined $7,500, jointly and severally. Withoutadmitting or denying the allegations, the respondents con-sented to the described sanctions and to the entry of find-ings that the firm, acting through Allen, participated in thedistribution of and accepted payment for securities in anoffering made subject to a minimum purchase contingencyand failed to forward payments to an escrow account thatsatisfied the requirements of SEC Rule 15c2-4.Furthermore, the NASD determined that the firm, actingthrough Allen and Desmond, failed to supervise registeredand associated persons reasonably and failed to establish,maintain, and enforce adequate written supervisory proce-dures.

District 4—Iowa, Kansas, Minnesota, Missouri,Nebraska, North Dakota, and South Dakota

April ActionsHarold Nicholas Girrens (Registered Representative,Wichita, Kansas) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Girrens failed torespond to NASD requests for information about his termi-nation from a member firm.

Jon Alan Hinman (Registered Representative, DesMoines, Iowa) was fined $9,654.95, barred from associa-tion with any NASD member in any capacity, and orderedto pay $1,930.99 in restitution. The sanctions were basedon findings that Hinman signed four checks drawn on thesecurities account of public customers and converted$1,930.99 for his own use and benefit without the knowl-edge or consent of the customers.

Roger Dale Meyer (Registered Representative, Joplin,Missouri) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $13,500 and sus-pended from association with any NASD member in anycapacity for 45 days. Without admitting or denying theallegations, Meyer consented to the described sanctionsand to the entry of findings that he engaged in a privatesecurities transaction without prior written notice to andapproval from his member firm.

Mavis Chweelianneo Tan (Registered Representative,North Hollywood, California) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which shewas fined $12,250. Without admitting or denying the alle-gations, Tan consented to the described sanction and to theentry of findings that she failed to notify her member firm

that she had opened a securities account with anothermember firm. The findings also stated that Tan purchasedshares of stock in contravention of the Board ofGovernors’ Interpretation with respect to Free-Riding andWithholding.

Jerry Mark Tuinenga (Registered Representative,Mound, Minnesota) was fined $250,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that, without the knowl-edge or consent of customers, Tuinenga converted$41,762.89 and misused $21,151.38 of their funds byeither intercepting the funds or redeeming mutual fundshares and forging the customers’ endorsements on theredemption checks. Tuinenga also failed to respond toNASD requests for information.

May ActionsDale Lavern Bartz (Registered Representative,Marshall, Minnesota) submitted a Letter of Acceptance,Waiver and Consent pursuant to which she was fined$42,500 and barred from association with any NASDmember in any capacity. Without admitting or denying theallegations, Bartz consented to the described sanctions andto the entry of findings that she received from a publiccustomer three checks totaling $8,500 made payable to hermember firm with instructions to apply the proceeds of thechecks to the purchase of single premium annuitycontracts. The NASD found that Bartz did not apply thefunds as directed by the customer, and instead, without theknowledge or consent of the customer, wrongfully deposit-ed the checks into her business bank account until sherepaid the funds in full with interest at a later date.

Donald Eugene Childers (Registered Representative,Leawood, Kansas) was barred from association with anyNASD member in any capacity. The sanction was basedon findings that he received a $63,550 check from publiccustomers made payable to a corporation he owned andcontrolled with instructions to invest the funds in securitiesproducts. Without the customers’ knowledge and consent,Childers converted $10,250 of the funds to his own useand benefit by paying various expenses of the corporation.

Gary Richard Keller (Registered Representative, AppleValley, Minnesota) submitted an Offer of Settlement pur-suant to which he was fined $15,000 and suspended fromassociation with any NASD member in any capacity for 30days. Without admitting or denying the allegations, Kellerconsented to the described sanctions and to the entry offindings that he failed to respond timely to NASD requestsfor information. The findings also stated that Kellerengaged in private securities transactions without givingprior written notice to and/or receiving approval from hismember firm. Furthermore, the NASD determined thatKeller altered a document in response to an NASD requestfor information.

Douglas W. Minshall (Registered Representative,Macon, Missouri) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$5,000 and barred from association with any NASD mem-ber in any capacity. Without admitting or denying the alle-gations, Minshall consented to the described sanctions andto the entry of findings that he submitted fictitious applica-tions for life insurance.

Patrick Blane Mueller (Registered Representative,Overland Park, Kansas) was fined $20,000 and barredfrom association with any NASD member in any capacity.The sanctions were based on findings that Mueller failed torespond to NASD requests for information and to appearfor an on-the-record interview.

Samuel Gordon Smith, Jr. (Registered Representative,Lincoln, Nebraska) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$93,974.45 and barred from association with any NASDmember in any capacity. Without admitting or denying theallegations, Smith consented to the described sanctions andto the entry of findings that he received five checks totaling$18,794.89 from a public customer with instructions to

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apply the proceeds of the checks to the purchase of vari-able products. The NASD found that Smith failed to applythe funds as instructed, and instead, without the customer’sknowledge or consent, deposited the checks into his per-sonal bank account and misused the customer’s funds.

June ActionsEdward Stevenson Kirris, III (RegisteredRepresentative, Minneapolis, Minnesota) submitted anOffer of Settlement pursuant to which he was fined$25,000 and barred from association with any NASDmember in any capacity. Without admitting or denying theallegations, Kirris consented to the described sanctions andto the entry of findings that he failed to respond timely toNASD requests for information. The findings also statedthat Kirris engaged in private securities transactions with-out giving prior written notice to and receiving priorapproval from his member firm.

Kevin Patrick Lynch (Registered Representative,Onalaska, Wisconsin) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$5,000 and suspended from association with any NASDmember in any capacity for 15 days. Without admitting ordenying the allegations, Lynch consented to the describedsanctions and to the entry of findings that he affixed thesignatures of public customers on an annuity applicationand a financial planning agreement without the customers’knowledge or consent. The findings also stated that Lynchfailed to disclose to the beneficiaries of the estate of a pub-lic customer the fees associated with preparing a financialplan and that by consenting to a financial plan, the amountof the beneficiaries’ gifts would be reduced by said fees.

July ActionsKay Leroi Walker (Registered Representative, Nauvoo,Illinois) submitted an Offer of Settlement pursuant towhich he was fined $7,000, suspended from associationwith any NASD member in any capacity for six months,and required to requalify by exam as a general securitiesrepresentative. Without admitting or denying the allega-tions, Walker consented to the described sanctions and tothe entry of findings that he failed to timely respond toNASD requests for information. The findings also statedthat Walker received a $10,000 check from a public cus-tomer for investment purposes, failed to apply the funds asintended, and instead, misused the customer’s funds with-out the knowledge or consent of the customer.

Tomer Matthew Yuzary (Registered Principal,Brooklyn, New York) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$10,000, suspended from association with any NASDmember in any capacity for 30 days, and required to pay$50,114 in restitution to public customers. Without admit-ting or denying the allegations, Yuzary consented to thedescribed sanctions and to the entry of findings that heplaced an order to buy or sell securities without the knowl-edge or consent of public customers for whom the orderswere placed. Furthermore, the NASD found that Yuzarymade assurances to his member firm that order tickets forpurchases submitted by another representative to his mem-ber firm were for actual customer accounts, although hehad not personal knowledge on which to base such assur-ances. The findings also stated that Yuzary recommendedand placed orders for purchases and sales of securities forpublic customers without having a reasonable basis forbelieving that the recommendations were suitable for thecustomers in light of their investment objectives, financialsituations, and needs.

August ActionsPeter Lloyd Anderson (Registered Representative,Shoreview, Minnesota) submitted an Offer of Settlementpursuant to which he was fined $10,000. Without admit-ting or denying the allegations, Anderson consented to thedescribed sanction and to the entry of findings that heengaged in improper outside business activity in that hesold and received compensation for insurance products

offered by non-approved insurance companies withoutgiving prompt written notice to his member firm.

Dickinson & Co. (Des Moines, Iowa), TheodoreMarshall Swartwood (Registered Principal, New York,New York), and Thomas M. Swartwood (RegisteredPrincipal, Des Moines, Iowa) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which thefirm was fined $10,000 and fined $1,000, jointly and sever-ally, with another respondent. In addition, the firm,Theodore Swartwood, and Thomas Swartwood were fined$10,000, jointly and severally. Without admitting or deny-ing the allegations, the respondents consented to thedescribed sanctions and to the entry of findings that thefirm, acting through Theodore and Thomas Swartwood,filed a proposed public offering of securities of its parentcorporation with the NASD for review, and failed to time-ly appoint a public director to the parent corporation’sboard of directors and audit committed within 12 monthsof the effective date of the offering.

The findings also stated that the firm acted as placementagent for offerings and, during the contingency period ofthe offering, contravened SEC Rule 15c2-4 in thatinvestors’ monies were transmitted to the issuer’s law firmand deposited in an account under the control of the issuer.Furthermore, the NASD determined that the firm sold unitsof an offering and omitted to state the material fact that thecommon stock and warrants of the offering were in jeop-ardy of being delisted from Nasdaq due to the offering’sdeteriorating financial condition.

Gary Lester Eilefson (Registered Representative, NewBrighton, Minnesota) submitted an Offer of Settlementpursuant to which he was fined $10,000. Without admit-ting or denying the allegations, Eilefson consented to thedescribed sanction and to the entry of findings that heengaged in improper outside business activity withoutgiving prompt written notice to his member firm.

Everest Securities, Inc. (Minneapolis, Minnesota) andJeanne Alyce Kunkel (Registered Principal,Minneapolis, Minnesota) were fined $10,000, jointly andseverally, and required to pay $22,500 in restitution.Kunkel was barred from association with any NASDmember in a principal capacity and required to requalifyby exam as a registered representative. The U.S. Court ofAppeals sustained the sanctions following appeal of anAugust 1996 SEC decision. The sanctions were based onfindings that the firm and Kunkel offered and sold securi-ties using documents that were misleading. The firm, act-ing through Kunkel, also failed to maintain accurate booksand records.

Eddie Samuel Freeman, II (Registered Principal, St.Louis, Missouri) submitted an Offer of Settlement pur-suant to which he was barred from association with anyNASD member as a financial and operations principal.Without admitting or denying the allegations, Freemanconsented to the described sanction and to the entry offindings that a member firm, acting through Freeman,made erroneous computations in computing its specialreserve requirement and contravened SEC Rule 15c3-3 bywithdrawing funds from its special reserve account with-out an accompanying reserve computation upon which thewithdrawal was based. The findings also stated that thefirm, acting through Freeman, conducted a securities busi-ness while failing to maintain its minimum required netcapital and failed to prepare its books and records properly.

Richard William Kelley (Registered Principal, Omaha,Nebraska) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $10,000, suspend-ed from association with any NASD member as a generalsecurities principal for two years, and required to requalifyby exam as a general securities principal. Without admit-ting or denying the allegations, Kelley consented to thedescribed sanctions and to the entry of findings that hefailed to supervise a registered representative adequatelyand properly to assure compliance with applicable rulesand regulations.

Kent Wade Larsen (Registered Representative,Nevada, Iowa) submitted a Letter of Acceptance, Waiverand Consent pursuant to which he was fined $20,000 andsuspended from association with any NASD member inany capacity for two years. Without admitting or denyingthe allegations, Larsen consented to the described sanc-tions and to the entry of findings that he forged customers’signatures on forms relating to securities and non-securi-ties insurance products without their knowledge or con-sent.

Prime Investors, Inc. (Overland, Kansas), KennethJames Wright (Registered Principal, Olathe, Kansas),and Michael Lyn Johnson, (Registered Principal, Lee’sSummit, Missouri). The firm and Wright were fined$150,000, jointly and severally. In addition, the firm wasexpelled from National Association of Securities Dealers,Inc. (NASD) membership and Wright was barred fromassociation with any NASD member in any capacity.Johnson was fined $50,000 and barred from associationwith any NASD member in any capacity, with the right toreapply after two years. The Securities and ExchangeCommission (SEC) affirmed the sanctions followingappeal of a September 1995 National Business ConductCommittee (NBCC) decision.

The sanctions were based on findings that the firm, actingthrough Wright and Johnson, sold unregistered securitiesand made material misrepresentations and omissions offact in connection with the sale of those securities. Thefirm, acting through Wright, also misused customers’funds and engaged in several improper extensions of cred-it, including day trading in cash accounts and the use of afictitious account to “park” stock to avoid sellout.Furthermore, the firm, acting through Wright and Johnson,sold securities that were not registered or exempt fromregistration and made material misstatements or omissionsof fact in selling these securities. Moreover, the firm, act-ing through Wright, misused offering funds raised by plac-ing monies in personal securities accounts, lending thosemonies to friends, employees, and customers, and usingabout $77,000 of the monies to cover a debit balance owedby Wright and co-investors in a third-party securitiesaccount.

Randall Arthur Radunz (Registered Representative,Minneapolis, Minnesota) was barred from associationwith any NASD member in any capacity. The sanctionwas based on findings that Radunz engaged in a privatesecurities transaction without prior written notice to andapproval from his member firm.

James Alan Randall (Registered Representative,Bellevue, Nebraska) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$5,000 and suspended from association with any NASDmember in any capacity for 60 days. Without admitting ordenying the allegations, Randall consented to the describedsanctions and to the entry of findings that he affixed thesignatures of public customers on forms without theirknowledge or consent.

Mark Scott Savage (Registered Representative,Plymouth, Minnesota) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$10,000 and suspended from association with any NASDmember in any capacity for 25 days. Without admitting ordenying the allegations, Savage consented to the describedsanctions and to the entry of findings that he executedsecurities transactions in the accounts of public customerswithout their knowledge or consent of the customers.

James Patrick Suiter (Registered Representative,McCook, Nebraska) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$10,000, suspended from association with any NASDmember in any capacity for two years, and required to pay$250,000 in restitution to investors. Without admitting ordenying the allegations, Suiter consented to the describedsanctions and to the entry of findings that he participated inprivate securities transactions without written notificationto and approval and/or acknowledgment from his memberfirm.

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Andrew Shih Wang (Registered Representative,Holmdel, New Jersey) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was barred fromassociation with any NASD member in any capacity.Without admitting or denying the allegations, Wang con-sented to the described sanction and to the entry of find-ings that, without the knowledge or consent of publiccustomers, he requested loans totaling $10,512.03 from thecustomers’ insurance policies, forged the customers’ nameon the checks, and deposited the checks into his personalbank account.

Paul Martens Winn (Registered Representative,Branson, Missouri) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Winn failed torespond to NASD requests for information.

Robin Eric Yessen (Registered Representative,Wellington, Kansas) was fined $40,000, barred fromassociation with any NASD member in any capacity, andrequired to pay $208,750 in restitution. The sanctions werebased on findings that, without the knowledge or consentof a public customer, Yessen misused customer fundstotaling $208,750 for his personal use by withdrawing thefunds from the customer’s account and making the checkspayable to himself rather than for the purposes intended bythe customer. Yessen also failed to respond to NASDrequests for information.

District 5—Alabama, Arkansas, Kentucky, Louisiana,Mississippi, Oklahoma, and Tennessee

April ActionsPatricia R. Duke (Registered Representative, Bastrop,Louisiana) was fined $183,000, barred from associationwith any NASD member in any capacity, and required topay $32,577.16 in restitution. The sanctions were based onfindings that Duke received funds totaling $7,000 from apublic customer for investment in a mutual fund, failedand neglected to execute the purchase on the customer’sbehalf, and instead, invested the funds in an annuity with-out the customer’s knowledge or consent. Furthermore,Duke received $32,577.16 from public customers forinvestment purposes, failed to execute the purchases on thecustomer’s behalf, and instead converted the funds for herown use and benefit without the customers’ knowledge orconsent. Duke also failed to respond to NASD requests forinformation.

Arno O. Mayer (Registered Principal, Deerfield Beach,Florida) submitted an Offer of Settlement pursuant towhich he was fined $10,000. Without admitting or denyingthe allegations, Mayer consented to the described sanctionand to the entry of findings that, in connection with a pro-motion, he prepared and distributed a sales script that wasmisleading and inaccurate and failed to adequately dis-close to the investing public in correspondence and othercommunications his association with his member firm.

May ActionsJames C. Arnold (Registered Representative, Starkville,Mississippi) was fined $100,0000, barred from associationwith any NASD member in any capacity, and required topay $50,957.93 in restitution. The NBCC imposed thesanctions following appeal of a New Orleans DBCC deci-sion. The sanctions were based on findings that Arnoldeffected unauthorized transactions in customer accountsand converted customer funds totaling $50,957.93 to hisown use and benefit without the knowledge or consent ofthe customers. Furthermore, Arnold misused $2,000 incustomer funds without the knowledge or consent of thecustomers.

George W. Cole (Registered Representative, OklahomaCity, Oklahoma) submitted an Offer of Settlement pur-suant to which he was fined $15,000, suspended fromassociation with any NASD member in any capacity forfour weeks, and required to pay $13,298 in restitution to acustomer. Without admitting or denying the allegations,

Cole consented to the described sanctions and to the entryof findings that he failed to exercise due diligence in theoffering of certain non-rated municipal bonds to two pub-lic customers by failing to ensure that the price paid for thesecurities was fair and reasonable in relation to the prevail-ing market conditions. The findings also stated that Colerecommended and engaged in certain purchase and saletransactions in the account of a public customer withouthaving reasonable grounds for believing that the recom-mendations and resultant transactions were suitable for thecustomer on the basis of the customer’s financial situation,investment objectives, and needs. Furthermore, the NASDfound that Cole sent sales literature to prospective cus-tomers that had not been approved by a principal of hisfirm.

Donald D. LaCoste (Registered Representative,Lafayette, Louisiana) submitted an Offer of Settlementpursuant to which he was fined $3,000,000, barred fromassociation with any NASD member in any capacity, andrequired to pay $593,377.67 in restitution. Without admit-ting or denying the allegations, LaCoste consented to thedescribed sanctions and to the entry of findings that heconverted $421,451.69 in customer funds to his own useand benefit and forged customer names to checks, changeof address forms, surrender request forms, and insurancepolicy change forms. The findings also stated that LaCostesent to a public customer a false confirmation reflecting thepurchase of municipal bonds and misleading correspon-dence falsely describing a purchase of municipal bonds bythe customer. Furthermore, the NASD determined thatLaCoste altered documents to falsely reflect that certainmunicipal bonds had been purchased for a public customerand failed to amend his Form U-4 to reflect his affiliationwith three member firms.

Alfred E. Landolph, Jr. (Registered Representative, LosAngeles, California) submitted an Offer of Settlementpursuant to which he was fined $20,455. Without admit-ting or denying the allegations, Landolph consented to thedescribed sanction and to the entry of findings that, in con-travention of the Board of Governors’ Free-Riding andWithholding Interpretation, Landolph purchased shares ofstock in initial public offerings in accounts in which he hada beneficial interest that traded at a premium in the sec-ondary market. The findings also stated that Landolphfailed to notify his member firm in writing that he hadestablished and maintained 30 securities accounts with 16different member firms.

Robert W. Morris (Registered Representative,Birmingham, Alabama) submitted an Offer of Settlementpursuant to which he was fined $10,000. Without admit-ting or denying the allegations, Morris consented to thedescribed sanction and to the entry of findings that he sentcorrespondence to public customers that contained falseand misleading information. The findings also stated thatMorris disseminated misleading municipal securities offer-ing sheets to various member firms that falsely indicatedthat he was a member of the municipal bond department ofhis member firm.

June ActionsGuy G. Clemente (Registered Representative, NewYork, New York) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$10,000 and suspended from association with any NASDmember in any capacity for one week. Without admittingor denying the allegations, Clemente consented to thedescribed sanctions and to the entry of findings that heshared in losses incurred in the account of a public cus-tomer.

Ramon Guichard, Jr. (Registered Representative,Gretna, Louisiana) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$7,500, barred from association with any NASD memberin any capacity, and required to pay $1,457 in restitution.Without admitting or denying the allegations, Guichardconsented to the described sanctions and to the entry offindings that he received $1,457 from public customers asinsurance premiums, failed to submit these funds to his

member firm on the customers’ behalf and, instead, con-verted the funds to his own use and benefit without thecustomers’ knowledge or consent.

Jeffrey J. Haddad (Registered Representative, OldBridge, New Jersey) submitted an Offer of Settlementpursuant to which he was fined $5,100 and suspendedfrom association with any NASD member in any capacityfor one week. Without admitting or denying the allega-tions, Haddad consented to the described sanctions and tothe entry of findings that he executed unauthorized transac-tions in the account of a public customer.

Hartland Financial Management Corporation (Austin,Kentucky) and Paul C. Hayden (RegisteredRepresentative, Glasgow, Kentucky) submitted an Offerof Settlement pursuant to which the firm was expelledfrom NASD membership and Hayden was fined $30,000and barred from association with any NASD member inany capacity. Without admitting or denying theallegations, the respondents consented to the describedsanctions and to the entry of findings that the firm, actingthrough Hayden, conducted a securities business whilefailing to maintain its minimum required net capital.Furthermore, the NASD determined that, in an attempt tobring the firm’s net capital into compliance, Hayden madecapital contributions from his personal bank account whenhe did not have sufficient funds in his account. The find-ings also stated that Hayden became the sole shareholderand president of the firm and failed to become registered asa general securities principal within the requisite time peri-od. Hayden also failed to respond to NASD requests forinformation.

James R. Hayes (Registered Representative, Kingston,Tennessee) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $10,000 and sus-pended from association with any NASD member in anycapacity for one week. Without admitting or denying theallegations, Hayes consented to the described sanctionsand to the entry of findings that, in connection with thepurchase of a variable appreciable life insurance contract,he sent correspondence to public customers that misrepre-sented that the premiums on the insurance contract wouldbe paid for with the cash value and dividends from thecustomer’s other insurance policies, when in fact, addition-al premium payments might have been required in thefuture. The findings also stated that Hayes submitted dis-bursement request forms to his member firm on behalf of apublic customer and signed the customer’s name to theforms without the customer’s knowledge or consent.

Jeffrey M. Schoenfield (Registered Representative,Kodak, Tennessee) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$10,000, barred from association with any NASD memberin any capacity, and required to pay $7,431.11 in restitu-tion. Without admitting or denying the allegations,Schoenfield consented to the described sanctions and tothe entry of findings that he recommended and engaged inthe purchase of securities in the account of a public customerand failed to disclose to the customer that the investmentscarried contingent deferred sales charges. The findings alsostated that Schoenfield failed to fully, completely, and timelyrespond to NASD requests for information.

July ActionsSammy T. Dean (Registered Representative,Ridgeland, Mississippi) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$5,000 and suspended from association with any NASDmember in any capacity for two weeks. Without admittingor denying the allegations, Dean consented to thedescribed sanctions and to the entry of findings that heengaged in outside business activities without prior writtennotice to or approval from his member firm.

August ActionsJohn P. Goldsworthy (Registered Representative,Harahan, Louisiana) was fined $50,000, barred fromassociation with any NASD member in any capacity, and

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required to pay $499,744 in restitution to a member firm.The NBCC imposed the sanctions following appeal of aNew Orleans DBCC decision. The sanctions were basedon findings that Goldsworthy engaged in private securitiestransactions without providing prior written notice to andobtaining approval from his member firm.

This action has been appealed to the SEC and the sanc-tions, other than the bar, are not in effect pending consider-ation of appeal.

Ronald E. Overstreet (Registered Representative,Hattiesburg, Mississippi) was fined $75,000 and barredfrom association with any NASD member in any capacity.The sanctions were based on findings that Overstreetreceived from a public customer an $11,000 check as pay-ment for insurance premiums, failed to submit these fundsto his member firm on the customer’s behalf, endorsed thecheck, and deposited the funds into his personal bankaccount, thereby converting the funds to his own use andbenefit without the customer’s knowledge or consent.Overstreet also failed to respond to NASD requests forinformation.

District 6—Texas

April ActionsBradford John Titus (Registered Principal, West DesMoines, Iowa) and Marcie Anne Milner (RegisteredPrincipal, Phoenix, Arizona) were fined $15,000, jointlyand severally, and Titus was suspended from associationwith any NASD member in any capacity for 10 days. TheSEC affirmed the sanctions following appeal of aDecember 1995 NBCC decision. The sanctions were basedon findings that Titus and Milner failed to establish, main-tain, and enforce required supervisory procedures.

May ActionsKenneth Winston Wainscott (Registered Representative,Pflugerville, Texas) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Wainscott failed torespond to NASD requests for information.

June ActionsHartman Securities, Inc. (Houston, Texas) and AllenRobert Hartman (Registered Principal, Houston,Texas) were fined $20,000, jointly and severally. In addi-tion, the firm was suspended from NASD membership fortwo weeks and Hartman was suspended from associationwith any NASD member in any capacity for two weeks.The NBCC imposed the sanctions following appeal of aDallas DBCC decision. The sanctions were based on find-ings that the firm, acting through Hartman, failed todeposit and retain all customer funds in an escrow accountduring the offering of limited partnership interests until thecontingencies specified in the offering memorandum hadbeen met. Furthermore, the firm, acting through Hartman,violated its restrictive agreement with the NASD by effect-ing securities transactions in limited partnerships and con-ducting a securities business when it had agreed not to.

Rogelio Davila Salazar (Registered Representative,Harlingen, Texas) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was barred fromassociation with any NASD member in any capacity.Without admitting or denying the allegations, Salazar con-sented to the described sanction and to the entry of find-ings that he effected a private securities transaction andfailed to timely and completely respond to NASD requestsfor information.

July ActionsJulius Berman (Registered Representative, Austin,Texas) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $20,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,

Berman consented to the described sanctions and to theentry of findings that he failed to respond to NASDrequests for information.

Joseph John Janczycki (Registered Representative,Chandler, Texas) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Janczycki failed torespond to NASD requests for information.

Bennett Lee Jones (Registered Representative, Bedford,Texas) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $2,500, suspendedfrom association with any NASD member in any capacityfor five business days, and ordered to disgorge $1,159.05in commissions. Without admitting or denying the allega-tions, Jones consented to the described sanctions and to theentry of findings that he exercised discretionary powerwith respect to trading in option contracts in a customer’saccount without prior written authorization from the cus-tomer or written acceptance of such a discretionaryaccount by a registered options principal.

Richard Jon Zimmer (Registered Representative,Plano, Texas) was fined $20,000 and barred from associa-tion with any NASD member in any capacity. The sanc-tions were based on findings that Zimmer failed to respondto NASD requests for information.

August ActionsSteven Tetsuo Miller (Registered Representative,Irvine, California) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$8,711 and suspended from association with any NASDmember in any capacity for five business days. Withoutadmitting or denying the allegations, Miller consented tothe described sanctions and to the entry of findings that heparticipated in outside business activities and failed toprovide prompt written notice to his member firm of suchactivities.

District 7—Florida, Georgia, North Carolina, SouthCarolina, Puerto Rico and the Canal Zone, and theVirgin Islands

April ActionsJeffrey L. Schnell (Registered Representative, Belleair,Florida) was fined $20,000 and barred from associationwith any NASD member in any capacity. The NBCCaffirmed the sanctions following appeal of an AtlantaDBCC decision. The sanctions were based on findings thatSchnell failed to respond to an NASD request for informa-tion.

David A. Swanson (Registered Representative,Melbourne, Florida) was fined $10,000 and suspendedfrom association with any NASD member in any capacityfor 30 days. The NBCC imposed the sanctions followingappeal of an Atlanta DBCC decision. The sanctions werebased on findings that Swanson solicited and executed thepurchase of investment company shares for public cus-tomers without disclosing to the customers that they wouldbe required to pay a four percent sales charge.

May ActionsAragon Financial Services, Inc. (Brea, California),Douglas L. Lish (Registered Principal, Anaheim,California), and Thomas Cannon (RegisteredRepresentative, Pembroke Pines, Florida) submittedOffers of Settlement pursuant to which the firm and Lishwere fined $10,000, jointly and severally, and Lish wasrequired to requalify by exam as a general securities prin-cipal. In addition, the firm was required to retain an inde-pendent consulting firm to conduct a review of itscompliance and supervisory procedures to determine theiradequacy. Cannon was suspended from association withany NASD member in any capacity for three months,required to requalify by exam as a general securities repre-sentative, and required to disgorge $3,000 in commissions

to a public customer. Without admitting or denying theallegations, the respondents consented to the describedsanctions and to the entry of findings that Cannon recom-mended securities transactions to a public customer with-out having reasonable grounds for believing suchrecommendations were suitable for the customer based onfacts disclosed by the customer regarding her tax status,investment objectives, financial situation, and needs. Thefindings also stated that Lish failed to detect that Cannonhad made a series of allegedly unsuitable recommenda-tions to a public customer. Furthermore, the NASD deter-mined that the firm, acting through Lish, failed to establishor maintain adequate written supervisory procedures per-taining to the oversight of sales practices involving unsuit-able recommendations.

Robert E. Chason (Registered Representative, Orlando,Florida) was fined $20,000 and suspended from associa-tion with any NASD member in any capacity for 90 daysand thereafter suspended until he requalifies by exam. Thesanctions were based on findings that Chason made repre-sentations to a public customer and on behalf of a publiccustomer regarding the value of the customer’s accountwithout having a factual basis for such representations.

Richard D. Collner (Registered Principal, CapeCanaveral, Florida) submitted an Offer of Settlementpursuant to which he was fined $25,000, suspended fromassociation with any NASD member in any capacity for 10days, suspended from soliciting or effecting retail tradesfor six months, and required to requalify by exam as ageneral securities representative. Without admitting ordenying the allegations, Collner consented to the describedsanctions and to the entry of findings that he recommendedthat public customers embark on a series of trades in theirtrust account without having reasonable grounds forbelieving that the recommendations were suitable based onthe facts they disclosed as to their tax status, investmentobjective, financial situation, and needs.

Collner’s suspensions began May 5, 1997. The 10-daysuspension concluded May 14, 1997, and the 6-monthsuspension will conclude November 5, 1997.

Crisanto M. Delgado (Registered Representative,Alpharetta, Georgia) was fined $108,000, barred fromassociation with any NASD member in any capacity, andrequired to pay $17,644.81 plus interest in restitution to acustomer. The sanctions were based on findings thatDelgado converted customer funds totaling $17,644.81 tohis own use and benefit. Delgado also failed to respond toan NASD request for information.

Mark H. A. Drucker (Registered Representative,Henderson, Nevada) was fined $60,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Drucker converted$8,000 in customer funds to his own use and benefit.Drucker also failed to respond to NASD requests for infor-mation.

Craig S. Fischer (Registered Representative, BocaRaton, Florida) was fined $20,000 and barred from asso-ciation with any NASD member in any capacity. The sanc-tions were based on findings that Fischer failed to respondto NASD requests for information.

H. Richard Gibbs-Tompkins (RegisteredRepresentative, Pensacola, Florida) was fined $20,000and barred from association with any NASD member inany capacity. The sanctions were based on findings thatGibbs-Tompkins failed to respond to an NASD request forinformation.

Martin J. Heninger (Registered Representative, Atlanta,Georgia) was fined $20,000, suspended from associationwith any NASD member in any capacity for 30 days,required to pay $25,000 in restitution to a customer, andrequired to requalify by exam as a general securities repre-sentative. The sanctions were based on findings thatHeninger made false representations to a customer inresponse to concerns raised by the customer about an invest-ment Heninger had recommended in a private offering.

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William J. Jackob, Jr. (Registered Principal, Marietta,Georgia) was fined $20,000 and barred from associationwith any NASD member in any capacity. The sanctionswere based on findings that Jackob failed to respond to anNASD request for information.

Seyed Hassan Jahanmiry (Registered Representative,Casselberry, Florida) was fined $1,000, suspended fromassociation with any NASD member in any capacity for 90days, and ordered to requalify by exam as an investmentcompany and variable contracts products representative.The sanctions were based on findings that Jahanmiry, dur-ing the course of taking the Series 7 exam, had in his pos-session unauthorized materials containing formulas andother information relating to the subject matter areas cov-ered by the exam.

Jason MacKenzie Securities, Inc. (Atlanta, Georgia), J.Paul Jason (Registered Principal, Atlanta, Georgia) andJames S. Heitzer (Registered Principal, Atlanta,Georgia) submitted an Offer of Settlement pursuant towhich the firm and Jason were fined $60,000, jointly andseverally, and the firm, Jason, and Heitzer were ordered tooffer refunds to customers of excess markups. Jason wasbarred from association with any NASD member in anyprincipal or supervisory capacity, with the right to reapplyafter five years, and Heitzer was fined $10,000. Withoutadmitting or denying the allegations, the respondents con-sented to the described sanctions and to the entry of find-ings that the firm, acting through Jason, conducted asecurities business while failing to maintain its minimumrequired net capital, failed to maintain complete, current,and accurate books and records, and filed materially inac-curate FOCUS reports. The NASD also determined thatthe firm, acting through Jason, prepared inaccurate netcapital computations, filed late annual audited financialreports, and failed to give notice to the NASD and the SECof its net capital deficiencies. The findings also stated thatthe firm, acting through Jason, made improper use of cus-tomer funds, failed to timely transmit payment for a cus-tomer’s securities purchases, failed to transmit promptlycustomer payment of mutual fund shares, and failed tosupervise the pricing of customer purchases adequately.

Furthermore, the NASD found that the firm, actingthrough Jason, failed to disclose on customer confirma-tions the markups charged to customers with respect to 35principal transactions, failed to record on order ticketseither the time of entry or the time of execution, or both,failed to prepare order memoranda, and participated in 58firm commitment underwritings in contravention of theterms of its restriction agreement with the NASD. Thefindings also stated that the firm, acting through Jason,failed to supervise a registered representative who effectedtransactions in his personal account that were beyond hisfinancial means and that resulted in substantial violationsof Regulation T and NASD margin rules. The NASD alsofound that the firm, acting through Heitzer, effected salesof common stock to public customers at unfair prices.

Noble International Investments, Inc. (Boca Raton,Florida) submitted a Letter of Acceptance, Waiver andConsent pursuant to which the firm was fined $5,000 andordered to pay $24,167.33 in restitution to customers.Without admitting or denying the allegations, the firmconsented to the described sanctions and to the entry offindings that it effected 11 principal transactions with pub-lic customers involving foreign corporate bonds at prices,with markups ranging from 5.53 to 90 percent, that wereunfair and excessive taking into consideration all relevantcircumstances.

Darryl M. Osler (Registered Representative, PalmBeach Gardens, Florida) submitted an Offer ofSettlement pursuant to which he was fined $3,500 andsuspended from association with any NASD member inany capacity for three months. Without admitting or deny-ing the allegations, Osler consented to the described sanc-tions and to the entry of findings that he failed to respondto NASD requests for information.

Frank S. Pellichino (Registered Representative,Augusta, Georgia) was fined $10,000 and suspended from

association with any NASD member in any capacity forsix months. The sanctions were based on findings thatPellichino signed, without customer authorization, thesignatures of public customers to forms that are used toevidence the customer’s authorization for an agent toreceive trailing commissions on property and casualtypolicies that had been assigned to but not initially sold bythe agent.

Michael A. Solomon (Registered Representative,Tamarac, Florida) was fined $30,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Solomon failed topay an arbitration award and failed to respond to an NASDrequest for information.

Kenneth T. Tripoli (Registered Representative, BocaRaton, Florida) submitted an Offer of Settlement pursuantto which he was fined $2,500 and suspended from associa-tion with any NASD member in any capacity for 30 days.Without admitting or denying the allegations, Tripoli con-sented to the described sanctions and to the entry of find-ings that he failed to respond timely to an NASD requestfor information.

June ActionsJerry A. Hurni, Jr. (Registered Representative,Melbourne, Florida) was fined $15,000, suspended fromassociation with any NASD member in any capacity for 30days, and ordered to requalify by exam. The NBCCimposed the sanctions following appeal of an AtlantaDBCC decision. The sanctions were based on findings thatHurni made recommendations to a public customer thatwere not suitable for the customer based upon the factsdisclosed by the customer as to his tax status, investmentobjective, financial situation, and needs. Furthermore, con-trary to a public customer’s instructions, Hurni utilizedmargin in the customer’s account to purchase additionalshares of stock without the customer’s knowledge orauthorization.

The action has been appealed to the SEC and the sanctionsare not in effect pending consideration of the appeal.

July ActionsBruce Abramson (Registered Representative, CoconutCreek, Florida) submitted a Letter of Acceptance, Waiverand Consent pursuant to which he was fined $17,785 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Abramson consented to the described sanctions and to theentry of findings that he participated in private securitiestransactions and failed to give prior written notice to andobtain prior written authorization from his member firm toeffect these transactions.

Louis T. Buonocore (Registered Representative, StatenIsland, New York) was fined $15,000 and suspendedfrom association with any NASD member in any capacityfor one year. The NBCC imposed the sanctions followingappeal of an Atlanta District Business Conduct Committee(DBCC) decision. The sanctions were based on findingsthat Buonocore failed to respond to NASD requests toappear and give testimony.


Falcon Trading Group, Ltd. (Boca Raton, Florida) andThomas W. Hands (Registered Principal, Boca Raton,Florida) submitted an Offer of Settlement pursuant towhich they were fined $10,000, jointly and severally. Inaddition, the firm was fined $2,500, jointly and severallywith another respondent and Hands was required to requal-ify by exam as a financial and operations principal.Without admitting or denying the allegations, the respon-dents consented to the described sanctions and to the entryof findings that the firm, acting through Hands, conducteda securities business while maintaining insufficient netcapital. The findings also stated that the firm, actingthrough Hands, filed an inaccurate FOCUS Part IIA report,

prepared an inaccurate net capital computation, and failedto give telegraphic notice of its net capital deficiency.Furthermore, the NASD determined that the firm breachedits restrictive agreement.

Bernard E. Ribordy (Registered Representative, St.Petersburg, Florida) submitted an Offer of Settlementpursuant to which he was fined $5,000 and suspendedfrom association with any NASD member in any capacityfor 60 days. Without admitting or denying the allegations,Ribordy consented to the described sanctions and to theentry of findings that he forged a public customer’s signa-ture on a change of representative form and submitted theform to his member firm without the knowledge or autho-rization of the customer.

Michael John Vertin (Registered Principal, Roswell,Georgia) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was suspended from associ-ation with any NASD member in any capacity for 10 daysand required to requalify by exam as an investment com-pany and variable contracts products principal. Withoutadmitting or denying the allegations, Vertin consented tothe described actions and to the entry of findings that hefailed to provide prompt written notice to his member firmof his association with another company. The NASD alsofound that Vertin failed to provide his member firm withwritten notice of transactions with public customersthrough the other company.

August ActionsKevin Thomas Calderbank (Registered Representative,New Port Richey, Florida) was fined $20,000 and barredfrom association with any NASD member in any capacity.The sanctions were based on findings that Calderbankfailed to respond to NASD requests for information.

Victor Capote (Registered Representative, West PalmBeach, Florida) submitted a Letter of Acceptance, Waiverand Consent pursuant to which he was fined $20,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Capote consented to the described sanctions and to theentry of findings that he forged the signatures of publiccustomers on insurance applications and submitted theseapplications to his member firm. The NASD also foundthat Capote submitted a starter check with the customer’sforged signature representing the initial premium paymentfor the policies.

Nathan Cohen (Registered Representative, Hollywood,Florida) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $2,400 and sus-pended from association with any NASD member in anycapacity for 30 days. Without admitting or denying theallegations, Cohen consented to the described sanctionsand to the entry of findings that he participated in privatesecurities transactions and failed to give prompt writtennotice to and obtain written approval from his memberfirm to participate in the transactions.

Thomas Diggs, Jr. (Registered Principal, Hampton,Georgia) was fined $5,000 and suspended from associa-tion with any NASD member in any capacity for 10 days.The sanctions were based on findings that Diggs effectedthe purchase of shares of stock in the securities accounts ofpublic customers without their prior knowledge or autho-rization.

Richard E. Epstein (Registered Representative, CoralSprings, Florida) submitted an Offer of Settlement pur-suant to which he was fined $5,000 and suspended fromassociation with any NASD member in any capacity for 15business days. Without admitting or denying the allega-tions, Epstein consented to the described sanctions and tothe entry of findings that he participated in private securi-ties transactions without giving prior written notice to hismember firm.

Jack E. John (Registered Representative, Raleigh,North Carolina) was fined $25,000 and barred from asso-ciation with any NASD member in any capacity. The sanc-

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tions were based on findings that John obtained$12,512.06 from a public customer intended for the pur-chase of securities and instead misused the funds withoutthe knowledge or authorization of the customer. John alsofailed to respond to NASD requests for information.

James G. Patton (Registered Representative, Duluth,Georgia) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was barred from associationwith any NASD member in any capacity. Without admit-ting or denying the allegations, Patton consented to thedescribed sanction and to the entry of findings that he rec-ommended a series of equity transactions, including mar-gin transactions in the investment account of a publiccustomer that were not suitable based upon the customer’sfinancial objectives and investment experience. The find-ings also stated that Patton entered a purchase order onmargin for shares of stock in the account of a public cus-tomer when the margin agreement was not on file for thecustomer, and that he signed the agreement for the cus-tomer without the customer’s consent.

George L. Pelaez (Registered Representative, Tampa,Florida) and Robert J. Pelaez (Registered Principal,Tampa, Florida) were fined $80,000, jointly and several-ly, and barred from association with any NASD member inany capacity. The NBCC imposed the sanctions followingreview of an Atlanta DBCC decision. The sanctions werebased on findings that a member firm, acting through thePelaezes, submitted materially inaccurate FOCUS Part Iand IIA reports and prepared inaccurate general ledger,trial balance, and net capital computations. In addition, thefirm, acting through the Pelaezes, conducted a securitiesbusiness while failing to maintain its minimum requirednet capital. Furthermore, after being asked by the NASD toprovide documentation substantiating the addition to theirfirm’s capital as reflected on a FOCUS report, the Pelaezessubmitted two forged documents.

Daniel S. Regan (Registered Representative, Atlanta,Georgia) was fined $20,000 and barred from associationwith any NASD member in any capacity. The sanctionswere based on findings that Regan failed to respond toNASD requests for information.

Alan C. Robert (Registered Representative, CoconutCreek, Florida) was fined $26,000, barred from associa-tion with any NASD member in any capacity, and orderedto pay $1,200 in restitution to a member firm. The sanc-tions were based on findings that Robert obtained a blankcheck from his member firm, forged the signature of thebranch manager, and converted the proceeds to his ownuse and benefit. Robert also failed to respond to an NASDrequest for information.

Thomas L. Thomson, Jr. (Registered Representative,Coral Springs, Florida) was fined $58,750 and barredfrom association with any NASD member in any capacity.The sanctions were based on findings that Thomsonobtained from a public customer $7,750 intended as insur-ance policy premiums and converted said funds to his ownuse and benefit. Thomson also failed to respond to NASDrequests for information.

Mack H. Uhl (Registered Representative, Grayland,Washington) submitted an Offer of Settlement pursuantto which he was fined $25,000, required to pay $10,000 inrestitution to a customer, and barred from association withany NASD member in any capacity. Without admitting ordenying the allegations, Uhl consented to the describedsanctions and to the entry of findings that he conducted aprivate securities transaction and failed to provide writtennotice to or obtain approval from his member firm.

District 8—Illinois, Indiana, Michigan, part of upstateNew York (the counties of Livingston, Monroe, andSteuben, and the remainder of the state west of suchcounties), Ohio, and Wisconsin

April ActionsMichael Hamil (Registered Representative, ProspectHeights, Illinois) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$10,000. Without admitting or denying the allegations,Hamil consented to the described sanction and to the entryof findings that he guaranteed a customer against loss inhis account.

May ActionsAlaron Securities Corporation (Chicago, Illinois),Henry J. Coleman, IV (Registered Principal, Chicago,Illinois), Michael A. Greenberg (Registered Principal,Chicago, Illinois), and Steven Greenberg (AssociatedPerson, Winnetka, Illinois) submitted Offers ofSettlement pursuant to which the firm was fined $25,000.S. Greenberg was fined $10,000 and suspended from asso-ciation with any NASD member in any capacity for 30days, and M. Greenberg was fined $50,000, suspendedfrom association with any NASD member in any capacityfor five years, and barred from association with any NASDmember in any principal capacity. Coleman was fined$100,000 and barred from association with any NASDmember in any capacity. Without admitting or denying theallegations, the respondents consented to the describedsanctions and to the entry of findings that the firm, actingthrough Coleman and M. Greenberg, effected securitiestransactions while failing to maintain its minimumrequired net capital and allowed individuals to engage inthe securities business without proper qualifications orregistration. The NASD also found that the firm, actingthrough M. Greenberg and Coleman, failed to establish,maintain, and enforce adequate supervisory procedures.The findings also stated that the firm, acting throughColeman, maintained inaccurate net capital computations,filed inaccurate FOCUS Part I and II reports, and failed toabide by the terms of its restrictive agreement with theNASD in that the firm failed to receive approval from theNASD to change its clearing arrangements.

Furthermore, the NASD determined that the firm, actingthrough Coleman, failed to execute customers’ orders topurchase or sell securities; failed to execute customers’trades at the prices, on the dates, or for the number ofshares ordered by the customers; and falsely confirmedboth verbally and in writing to the customers that theirtrades were executed as ordered. Moreover, the NASDfound that the firm, acting through Coleman, charged cus-tomers commissions on trades that were not executed andmargin interest calculated on money balances for tradesthat were not executed, misused customer funds by taking$61,843.02 out of customers’ accounts without theirknowledge or consent, and used the funds for some pur-pose other than for the benefit of the customers. The find-ings also stated the firm, acting through Coleman, failed tocomply with Securities and Exchange Commission (SEC)Rule 15c3-3 in that it accepted and held customer fundswithout setting up or making deposits in a special reservebank account for the exclusive benefit of customers, andfailed to notify the NASD or SEC of its failure to maintainsuch an account or to prepare a reserve computation. TheNASD also determined that the firm, acting throughColeman, used letterhead that violated NASD standardsand S. Greenberg engaged in the securities business with-out being qualified and registered.

Richard Michael Berlin (Registered Representative,West Bloomfield, Michigan) submitted an Offer ofSettlement pursuant to which he was fined $140,795,barred from association with any NASD member in anycapacity, and required to pay $24,159 in restitution.Without admitting or denying the allegations, Berlin con-sented to the described sanctions and to the entry of find-ings that he obtained customer checks totaling $25,019.02intended for the purchase of insurance policies, butretained the funds by signing the customers’ names to thechecks and deposited the funds in a bank account withouttheir knowledge or consent. The findings also stated thatBerlin failed to respond to NASD requests for information.

Kerri A. Cox (Associated Person, Brooklyn, New York)was fined $2,000 and suspended from association with anyNASD member in any capacity for six months. The sanc-tions were based on findings that Cox failed to respond toNASD requests for information and to appear for an on-the-record interview.

David W. Dunlap (Registered Representative,Hammond, Indiana) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Dunlap failed torespond to NASD requests for information.

Daniel F. Gallagher (Registered Representative, Joliet,Illinois) was fined $30,500 and barred from associationwith any NASD member in any capacity. The sanctionswere based on findings that Gallagher received a $2,100check from a public customer with instructions to investthe funds in a mutual fund. Gallagher failed to purchaseshares of the mutual fund and instead, deposited the fundsin an account with his member firm in which he had a ben-eficial interest and used the funds for some purpose otherthan for the benefit of the customer. Gallagher also failedto respond to an NASD request for information.

Samantha R. Gallant (Registered Representative,Ferndale, Michigan) was fined $6,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Gallant participatedin the offer and sale of securities to a public customer on aprivate basis and failed to give prior written notice to andobtain prior written authorization from her member firm toengage in such activities.

Hamilton Investments, Inc. (Chicago, Illinois) was fined$10,000. The National Business Conduct Committee(NBCC) imposed the sanction following appeal of aChicago District Business Conduct Committee (DBCC)decision. The sanction was based on findings that the firmfailed to supervise a registered representative properly.

Richard Allen Hill (Registered Representative, St. ClairShores, Michigan) was fined $21,547.17 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that, without the knowl-edge or consent of public customers, Hill submitted to hismember firm applications for life insurance in thecustomers’ names and disbursement request forms autho-rizing his member firm to disburse funds in the form ofloans from existing policies to pay premiums on new poli-cies. Hill also failed to respond to NASD requests forinformation.

David P. Kleber (Registered Principal, Miami, Florida);Helmut Meister (Registered Principal, Sands Point,New York); John P. McAuliffe (Registered Principal,Rochester, New York); Dennis J. Keohane (RegisteredRepresentative, San Francisco, California); Innocent K.Okeke (Registered Principal, Plano, Texas); Lindsey C.Riley (Registered Principal, Huntington Beach,California); Ignacio R. Failla (RegisteredRepresentative, Astoria, New York); Zeeshan S. Ali(Registered Representative, Iselin, New Jersey); TerryN. Johnson (Registered Representative, Forest Hills,New York); David N. Slavny (Registered Principal,Atlanta, Georgia); Victor S. Delucie (RegisteredRepresentative, San Francisco, California); ChristopherS. Boggs (Registered Principal, San Francisco,California); Mark F. Reber (Registered Representative,West Chester, Pennsylvania); Thomas R. Garcia(Registered Representative, Grand Prairie, Texas); andSean P. Nevett (Registered Representative, LaJolla,California) submitted Offers of Settlement pursuant towhich Kleber was fined $10,000, suspended from associa-tion with any NASD member in any capacity for fourmonths, barred from association with any NASD memberin any principal or supervisory capacity with a right toreapply after one year, and undertakes that even if he suc-cessfully reapplies, he will never act as a supervisor oftraders or trading at any member firm. Meister was fined$8,000, suspended from association with any NASD mem-ber in any capacity for five business days, and required torequalify as a general securities principal. McAuliffe was

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fined $7,500 and suspended from association with anyNASD member in any capacity for five business days.Keohane was fined $7,000 and suspended from associationwith any NASD member in any capacity for three businessdays. Okeke was fined $5,000 and suspended from associ-ation with any NASD member in any capacity for fivebusiness days. Riley, Failla, Ali, Johnson, Slavny, Delucie,Garcia, and Boggs were each fined $2,500 and suspendedfrom association with any NASD member in any capacityfor three business days. Reber was fined $5,000 and sus-pended from association with any NASD member in anycapacity for six months. Nevett was fined $4,000 and sus-pended from association with any NASD member in anycapacity for four business days.

Without admitting or denying the allegations, the respon-dents consented to the described sanctions and to the entryof findings that Meister, McAuliffe, Keohane, Okeke,Riley, Failla, Ali, Garcia, Johnson, Slavny, Delucie,Boggs, and Nevett charged certain retail customers unfairprices, that included excessive markups and gross commis-sions or sales credits in connection with sales of securitiesand received gross commissions or sales credits exceeding10 percent of the total dollar amount paid by the customersin the transactions. The findings also stated that Kleber andMeister failed to establish, implement, and enforce reason-able procedures designed to prevent the firm’s retail cus-tomers from being charged unfair and fraudulentlyexcessive markups and markdowns, and unfair and exces-sive gross commissions or sales credits in common stocksand warrants. Furthermore, the NASD determined thatReber failed to respond to NASD requests for information.

Timothy Andrew Minich (Registered Representative,W. Lafayette, Indiana) was fined $20,000 and barredfrom association with any NASD member in any capacity.The sanctions were based on findings that Minich failed torespond to NASD requests for information.

Charles Eugene Porter (Registered Representative,Bloomington, Indiana) submitted an Offer of Settlementpursuant to which he was fined $2,000,000, barred fromassociation with any NASD member in any capacity, andrequired to pay $389,891.95 in restitution. Without admit-ting or denying the allegations, Porter consented to thedescribed sanctions and to the entry of findings that heobtained checks totaling $299,891.95 made payable topublic customers and without the authorization, knowl-edge, or consent of the customers, he signed or causedtheir names to be signed to the checks, deposited thechecks in an account in which he had an interest or con-trolled, and used the funds for some purpose other than forthe benefit of the customers. The findings also stated thatPorter received $114,874.95 from public customers forinvestment purposes and, instead, without the knowledgeor consent of the customers, used the funds for some pur-pose other than for the benefit of the customers.Furthermore, the NASD found that Porter failed to respondto NASD requests for information.

Carl W. Spoerer, II (Registered Representative, Tolono,Illinois) was fined $5,000, suspended from associationwith any NASD member in any capacity for one year,ordered to disgorge $8,122.50 to the NASD, and requiredto requalify by exam. The sanctions were based on find-ings that Spoerer purchased for his account shares ofstocks that traded at a premium in the immediate aftermar-ket in contravention of the Board of Governors’Interpretation on Free-Riding and Withholding. Spoereralso opened securities accounts with various member firmsand began purchasing and selling securities in the accountswhile failing and neglecting to give written notice to hismember firms that he was opening the accounts and failedto give written notice of his association with his memberfirms.

Spoerer’s suspension began January 1,1995, and conclud-ed December 31, 1995.

Nancy A. Swoffer (Registered Representative, LakeOrion, Michigan) submitted a Letter of Acceptance,Waiver and Consent pursuant to which she was fined$50,000 and barred from association with any NASD

member in any capacity. Without admitting or denying theallegations, Swoffer consented to the described sanctionsand to the entry of findings that she participated in privatesecurities transactions and failed to give written notice toand receive written approval from her member firm priorto engaging in such activities.

Kathleen Vanhof (Registered Representative, GrandRapids, Michigan) submitted a Letter of Acceptance,Waiver and Consent pursuant to which she was fined$145,000, barred from association with any NASD mem-ber in any capacity, and required to pay $24,820.05 inrestitution. Without admitting or denying the allegations,Vanhof consented to the described sanctions and to theentry of findings that she wrongfully obtained $24,820.05from the accounts of a public customer by obtaining twocompleted certificate of deposit/withdrawal forms with thecustomer’s signature without the customer’s knowledge orconsent. The NASD found that Vanhof thereafter depositedthe funds in an account in which she had a beneficial interestand used the funds for some purpose other than for the bene-fit of the customer. The findings also stated that Vanhoffailed to respond to NASD requests for information.

David Duane White (Registered Representative, BlackEarth, Wisconsin) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$259,000 and barred from association with any NASDmember in any capacity. Without admitting or denying theallegations, White consented to the described sanctionsand to the entry of findings that he obtained $51,828.38from public customers by directing certain bank employ-ees to issue to him or an investment club partnership ofwhich he was a partner, and over whose funds he had con-trol, cashier’s checks or money orders from portions ofcustomer funds entrusted to him for investment withoutthe knowledge or consent of the customers.

World Equity Group, Inc. (Arlington Heights, Illinois)and John H. Mathues (Registered Principal, LakeZurich, Illinois) submitted a Letter of Acceptance, Waiverand Consent pursuant to which they were fined $18,000,jointly and severally. Without admitting or denying theallegations, the respondents consented to the describedsanction and to the entry of findings that the firm, actingthrough Mathues, engaged in sales of common stock topublic customers, failed to obtain signed suitability state-ments from the customers, and failed to provide risk dis-closure documents to customers. The findings also statedthat the firm, acting through Mathues, failed to establish,maintain, and enforce written supervisory procedures toprevent a violation of SEC Rule 15g.

June ActionsDonald Peter Carnaghi (Registered Representative,Clinton Twp., Michigan) submitted an Offer ofSettlement pursuant to which he was fined $40,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Carnaghi consented to the described sanctions and to theentry of findings that he participated in private securitiestransactions and failed and neglected to give prior writtennotice to and obtain written authorization from his memberfirm to engage in such activities.

Thomas James Clem (Registered Representative, Mt.Clemens, Michigan), Thomas Roy Mazza (RegisteredRepresentative, Clinton Twp., Michigan), Brian JeromeKurtz (Registered Representative, Sterling Hts.,Michigan), and Michael Anthony Duby (RegisteredPrincipal, Brighton, Michigan). Clem was fined $47,100and barred from association with any NASD member inany capacity. Mazza was fined $56,300 and barred fromassociation with any NASD member in any capacity.Kurtz was fined $19,800 and barred from association withany NASD member in any capacity. Lastly, Duby wasfined $38,050 and barred from association with any NASDmember in any capacity.

The sanctions were based on findings that Clem, Mazza,Kurtz, and Duby participated in private securities transac-tions and failed to give prior written notice to and obtain

written authorization from their member firm to engage insuch activities.

Michael L. Cooperstock (Registered Representative,Whitmore Lake, Michigan) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which hewas barred from association with any NASD member inany capacity. Without admitting or denying theallegations, Cooperstock consented to the described sanc-tion and to the entry of findings that he participated in pri-vate securities transactions and failed and neglected to giveprior written notice to and obtain written authorizationfrom his member firm to engage in such activities.

Joseph M. Darovec (Registered Representative,Bloomingdale, Illinois) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$25,000 and suspended from association with any NASDmember in any capacity for 30 days. Without admitting ordenying the allegations, Darovec consented to thedescribed sanctions and to the entry of findings that heparticipated in outside business activities while failing togive prompt written notice to his member firm of his par-ticipation in such activities.

D.H. Brush & Associates, Inc. (Chicago, Illinois) andRobert John Uhe (Registered Principal, Winnetka,Illinois) submitted a Letter of Acceptance, Waiver andConsent pursuant to which they were fined $97,000, joint-ly and severally. Without admitting or denying the allega-tions, the respondents consented to the described sanctionsand to the entry of findings that the firm, acting throughUhe, allowed associated persons to be actively involved inthe securities business without proper registration. Thefindings also stated that the firm retained $72,000 in grosscommissions generated by the associated persons.

Herbert G. Frey (Registered Principal, Cincinnati,Ohio) was suspended from association with any NASDmember in any capacity for 180 days. The NBCC imposedthe sanction following appeal of a Cleveland DBCC deci-sion. The sanction was based on findings that Frey failedto pay an arbitration award entered in 1990.


Hagos Kafil (Registered Representative, Kalamazoo,Michigan) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $125,000, barredfrom association with any NASD member in any capacity,and required to pay $21,000 in restitution. Without admit-ting or denying the allegations, Kafil consented to thedescribed sanctions and to the entry of findings that hereceived checks totaling $21,107.20 from public customersfor investment purposes, failed to follow the customers’instructions, and used the funds for some purpose other thanthe benefit of the customers. The findings also stated thatKafil failed to respond to NASD requests for information.

Joseph Frank Lerario (Registered Principal,Bloomingdale, Illinois) submitted an Offer of Settlementpursuant to which he was fined $20,000 and barred fromassociation with any NASD member in any capacity.Without admitting or denying the allegations, Lerario con-sented to the described sanctions and to the entry of find-ings that he failed to respond to NASD requests forinformation.

Steven F. Perdie (Registered Principal, Port JeffersonStation, New York) submitted an Offer of Settlementpursuant to which he was fined $7,000 and required to pay$15,000 in restitution to public customers. Without admit-ting or denying the allegations, Perdie consented to thedescribed sanctions and to the entry of findings that heparticipated in private securities transactions and failed togive prior written notice to and obtain written authoriza-tion from his member firm to engage in such activities.The findings also stated that Perdie failed to give promptwritten notice to his member firms that he was employedby and/or accepted compensation from outside businessactivities. Furthermore, the NASD determined that Perdie

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failed to promptly and accurately update his Form U-4 toreflect liens or unsatisfied judgments entered against him.

PFS Investments, Inc. (Duluth, Georgia) submitted anOffer of Settlement pursuant to which the firm was fined$25,000. Without admitting or denying the allegations, thefirm consented to the described sanction and to the entry offindings that it failed to establish, maintain, and/or enforceadequate written procedures that were reasonably designedto achieve compliance with NASD rules concerning pri-vate securities transactions or to otherwise supervise ade-quately its registered representatives and associatedpersons.

Todd Scheel (Registered Representative, Orland Park,Illinois) submitted an Offer of Settlement pursuant towhich he was fined $22,500 and barred from associationwith any NASD member in any capacity. Without admit-ting or denying the allegations, Scheel consented to thedescribed sanctions and to the entry of findings that hepermitted an individual to engage in the securities businessand paid commissions to the individual when the individ-ual was not effectively registered with the NASD. Thefindings also stated that Scheel failed to respond to NASDrequests for information.

Schonfeld Securities, Inc. (Jericho, New York) submit-ted a Letter of Acceptance, Waiver and Consent pursuantto which the firm was fined $9,700, ordered to remit$8,115 in profits relating to transactions, and required torevise its written supervisory procedures relating to short-sale rules and conduct training sessions on the revisedprocedures with all relevant personnel after they have beendeveloped. Without admitting or denying the allegations,the firm consented to the described sanctions and to theentry of findings that it failed to designate sales as shortsales and failed to indicate on order tickets that these trans-actions were short sales.

Gerald D. Vesner (Registered Representative,Doylestown, Ohio) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$88,000, barred from association with any NASD memberin any capacity, and required to pay $17,570.84 in restitu-tion to a member firm. Without admitting or denying theallegations, Vesner consented to the described sanctionsand to the entry of findings that he received checks totaling$17,570.84 payable to a public customer representingwithdrawals from two variable annuity contracts and pay-ment from an insurance policy maintained by thecustomer. The NASD found that Vesner endorsed hisname or that of the customer on the checks, failed to remitthe proceeds to the customers, and instead, retained thefunds for his own use and benefit.

July ActionsClaudio M. Balestra (Associated Person, Somerville,New Jersey) was fined $25,000 and barred from associa-tion with any NASD member in any capacity. The sanc-tions were based on findings that Balestra misusedcustomer funds totaling $168 intended for the payment ofan insurance premium. Balestra also failed to respond toNASD requests for information.

Eric R. Bauer (Registered Representative, Cincinnati,Ohio) was barred from association with any NASD mem-ber in any capacity. The sanction was based on findingsthat Bauer failed to respond to NASD requests for infor-mation.

Raymond C. Bochert, Sr. (Registered Representative,Cortland, Ohio) was fined $25,000 and barred from asso-ciation with any NASD member in any capacity. The sanc-tions were based on findings that Bochert received $236from public customers as insurance premium paymentsand failed to apply the funds as instructed by the customersor in any other manner for the benefit of the customers.Bochert also failed to respond to NASD requests for infor-mation.

Rodney W. Causey (Registered Representative, Peoria,Illinois) was fined $175,000 and barred from association

with any NASD member in any capacity. The sanctionswere based on findings that Causey obtained $21,000 froma public customer for the purchase of a certificate ofdeposit, failed to follow the customer’s instructions, andused the funds for some purpose other than for the benefitof the customer. Furthermore, Causey participated in pri-vate securities transactions without giving prior writtennotice to and receiving written approval from his memberfirm to engage in such activities. Causey also failed torespond to NASD requests for information.

Matthew M. Chornoby (Registered Principal, SterlingHeights, Michigan) was fined $100,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Chornoby received$19,000 in personal checks from a public customer withinstructions that the funds be held in a special account andreturned to the customer upon request. Chornoby failed tofollow said instructions, in that he deposited the funds inan account in which he had a beneficial interest and usedthe funds for some purpose other than the benefit of thecustomer.

Raymond Richard India (Registered Representative,Chicago, Illinois) submitted an Offer of Settlement pur-suant to which he was fined $5,000, suspended from asso-ciation with any NASD member in any capacity for 10business days, and required to requalify by exam. Withoutadmitting or denying the allegations, India consented tothe described sanctions and to the entry of findings that heexecuted, on a discretionary basis, index options transac-tions in a customer’s account without obtaining writtenauthorization from the customer to exercise discretion inhis account. The findings also stated that Indiarecommended and effected index options transactions inthe customer’s account in the absence of a reasonable basisfor believing that the recommendations were suitable forthe customer in light of the customer’s investment objec-tives, experience, financial situation, or needs.

Atif A. Joseph (Registered Representative, New York,New York) was fined $20,000 and barred from associationwith any NASD member in any capacity. The sanctionswere based on findings that Joseph failed to respond toNASD requests for information and to appear for an on-the-record interview.

Vladik Kaminsky (Registered Representative,Brooklyn, New York) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Kaminsky failed torespond to NASD requests for information.

William H. Westerman (Registered Representative,Rosedale, Indiana) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Westerman received$111 from a public customer for the purchase of a lifeinsurance policy and failed to follow the customer’sinstructions in that he used at least $39 of the funds forpurpose other than for the benefit of the customer.Westerman also failed to respond to NASD requests forinformation.

August ActionsDaniel John Knight (Registered Representative,Noblesville, Indiana) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Knight failed torespond to NASD requests for information.

District 9—Delaware, District of Columbia, Maryland,southern New Jersey (the counties of Atlantic,Burlington, Camden, Cape May, Cumberland,Gloucester, Mercer, Ocean, and Salem), Pennsylvania,Virginia, and West Virginia

April ActionsMark A. Shear (Registered Representative, StatenIsland, New York) was fined $7,500 and barred from

association with any NASD member in any capacity. TheNBCC imposed the sanctions following appeal of aPhiladelphia DBCC decision. The sanctions were based onfindings that Shear knowingly provided false and mislead-ing information in response to an NASD request for infor-mation.

Shear appealed this action to the SEC and the sanctions,other than the bar, are not in effect pending considerationof the appeal.

Jerry L. Sickels (Registered Representative, Pittsburgh,Pennsylvania) was fined $5,000, suspended from associa-tion with any NASD member in any capacity for sixmonths, and required to requalify by exam as an invest-ment company and variable contracts products representa-tive. The NBCC imposed the sanctions following appeal ofa Philadelphia DBCC decision. The sanctions were basedon findings that Sickels sold life insurance policies to twopublic customers, reflected on the application that anotheragent was the agent who made the sale, and submitted theapplications to his member firm without disclosing that hehad in fact sold the insurance policies and had signed theagent’s name on the applications. Furthermore, Sickelsreceived four checks issued by his member firm to theother agent representing commissions and, without theagent’s knowledge or consent, signed the agent’s name onthe checks, negotiated the checks, and used the funds forhis own benefit.

Sickels’ suspension commenced August 3, 1994, and con-cluded February 3, 1995.

May ActionsDavid A. Arnold (Registered Representative, Wexford,Pennsylvania) submitted an Offer of Settlement pursuantto which he was fined $100,000 and barred from associa-tion with any NASD member in any capacity. Withoutadmitting or denying the allegations, Arnold consented tothe described sanctions and to the entry of findings that hefalsely represented to customers that a mailing address hehad established was the business address of his employer.Furthermore, the NASD found that Arnold affixed to threewithdrawal request forms a public customer’s signature,without authorization, and thereafter submitted therequests to his member firm. The findings also stated thatArnold falsified a public customer’s endorsement onchecks totaling $14,900 and deposited the checks in hispersonal bank account. Arnold also failed to respond toNASD requests for information.

J. Paul Boyle (Registered Principal, Bala Cynwyd,Pennsylvania) was fined $30,000, suspended from associ-ation with any NASD member in all securities principalcapacities for two years, and required to requalify by examas a general securities principal. The NBCC imposed thesanctions following appeal of a Philadelphia DBCC deci-sion. The sanctions were based on findings that Boylefailed to exercise reasonable care to verify his memberfirm’s purported capital contributions and assets thatresulted in the filing of inaccurate FOCUS Part I and IIAreports with the NASD. Moreover, Boyle failed to givetimely notice of his firm’s net capital deficiencies, failed totimely retain a financial and operations principal for hisfirm, and failed to file a Form U-5 for an individual withinthe required 30-day period.

Christopher M. Finan (Registered Representative,McLean, Virginia) was fined $10,000 and required torequalify by exam as a general securities representative.The sanctions were based on findings that Finan executedunauthorized transactions in the accounts of public cus-tomers.

Mark C. Goldner (Registered Representative,Larksville, Pennsylvania) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which hewas fined $125,000 and barred from association with anyNASD member in any capacity. Without admitting ordenying the allegations, Goldner consented to thedescribed sanctions and to the entry of findings that, with-out the authorization or consent of public customers, he

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caused his member firm to issue policy loan and dividendchecks against the insurance policies of the customers,forged the purported endorsements of the customers on thechecks, and deposited the checks in his bank account. Thefindings also stated that Goldner caused the address ofrecord for the insurance policies of public customers to bechanged to that of the office in which he was employed.The NASD also determined that Goldner forged theendorsement of a former employee of his member firm oncommission checks, and negotiated such checks withoutthe employee’s knowledge or authorization. Furthermore,the NASD found that Goldner forged a public customer’ssignature on applications for a life insurance policy and forthe conversion of the customer’s existing policies, withoutthe authorization or consent of the customer.

Eliezer Gurfel (Registered Representative, Washington,DC) was barred from association with any NASD memberin any capacity. The sanction was based on findings thatGurfel forged an individual’s endorsement on four checks,negotiated the checks, and converted the proceeds to hisown use and benefit.

David B. Kistler (Registered Representative, Jacobus,Pennsylvania) submitted an Offer of Settlement pursuantto which he was fined $10,000 and barred from associationwith any NASD member in any capacity. Without admit-ting or denying the allegations, Kistler consented to thedescribed sanctions and to the entry of findings that heforged signatures purporting to be those of a customer ontwo letters authorizing $500 in payments to him by aninsurance company.

Jay D. Lebowitz (Registered Representative,Pittsburgh, Pennsylvania) submitted an Offer ofSettlement pursuant to which he was fined $30,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Lebowitz consented to the described sanctions and to theentry of findings that he participated in private securitiestransactions without providing written notice to his memberfirm describing the transactions, his role therein, and statingwhether he would receive selling compensation. The find-ings also stated that Lebowitz failed to respond to NASDrequests for information.

Michael G. Murphy (Registered Representative, PineHill, New Jersey) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$10,000 and required to requalify by exam as a generalsecurities representative. Without admitting or denying theallegations, Murphy consented to the described sanctionsand to the entry of findings that he recommended to publiccustomers and effected in their account purchases of secu-rities that were speculative in nature without having a rea-sonable basis to believe the securities were suitable for thecustomers. The findings also stated that Murphy failed todisclose various risks associated with the securities andmade a statement regarding future appreciation in the priceof a security for which there was no reasonable basis infact.

June ActionsJohn D. Attalienti (Registered Representative, Mt.Kisco, New York), Havard H. Lee (RegisteredPrincipal, Clarksburg, New Jersey), Randolph E.Beimel (Registered Principal, N. Kingstown, RhodeIsland), Rodney D. Cooper (Registered Representative,Olivette, Missouri), and Brendan D. Hart (RegisteredPrincipal, Norwood, Massachusetts) submitted Offers ofSettlement pursuant to which Attalienti was fined$100,000 and barred from association with any NASDmember in any capacity, Lee was fined $250,000 andbarred from association with any NASD member in anycapacity, Beimel was fined $150,000 and barred fromassociation with any NASD member in any capacity,Cooper was fined $100,000 and barred from associationwith any NASD member in any capacity, and Hart wasfined $150,000 and barred from association with anyNASD member in any capacity.

Without admitting or denying the allegations, the respon-dents consented to the described sanctions and to the entryof findings that Lee, Beimel, Cooper, and Hart recruitedand trained inexperienced registered representatives toaggressively telemarket low-priced, speculative securitiesrecommended by their member firm to the public.According to the findings, Attalienti, Lee, Beimel, Cooper,and Hart then directed, fostered, or induced the registeredrepresentatives to engage in abusive sales practices byincluding baseless price predictions about the stock, mak-ing material misrepresentations and omitting negativematerial information during sales presentations tocustomers, discouraging or prohibiting registered represen-tatives from independently researching the stocks, and bydiscouraging or prohibiting registered representatives fromprocessing unsolicited customer sell orders. Moreover, theNASD found that Beimel, Cooper, and Hart individuallyengaged in the abusive sales practices during presentationsto their customers. The findings also stated that Lee,Beimel, and Hart directed registered representatives whomthey supervised to engage in unauthorized trading andBeimel and Hart directly engaged in unauthorized trading.The NASD also determined that Lee, Beimel, Cooper, andHart failed to establish, implement, and enforce reasonableprocedures to deter or prevent the abusive sales practicesby the registered representatives.

Covato/Lipsitz, Inc. (Pittsburgh Pennsylvania) andAlfred I. Lipsitz (Registered Principal, Pittsburgh,Pennsylvania) submitted a Letter of Acceptance, Waiverand Consent and an Offer of Settlement pursuant to whichthey were fined $40,000, jointly and severally. In addition,Lipsitz was barred from association with any NASD mem-ber in any principal capacity and from performing anyprincipal, supervisory, or managerial functions with anyNASD member. Lipsitz is also barred from maintaining aproprietary interest in any NASD member except that hemay maintain (1) a non-controlling, investment interest ina member whose stock is publicly traded and subject to thereporting requirements of Section 12(g) of the SecuritiesExchange Act of 1934, (2) an investment interest in anemployee stock ownership plan or similar plan which doesnot confer voting rights upon individual participants in theplan or provided he relinquishes any individual votingrights, and (3) a non-voting interest in Covato/Lipsitz, Inc.or any successor to the firm if he sells or transfers a portionof the stock of the firm representing total voting control ofthe corporation to another person or entity and if he is stillthe sole owner of the stock, he is required to place all ofthe stock in a voting trust. Furthermore, Lipsitz mustrequalify by exam as a general securities representative.

Without admitting or denying the allegations, the respon-dents consented to the described sanctions and to the entryof findings that the firm, acting through Lipsitz, effectedsecurities transactions when the firm failed to maintain itsminimum required net capital, failed to reflect certain lia-bilities on its books and records, prepared an inaccurate netcapital computation, and filed inaccurate FOCUS Part Ireports. Furthermore, the NASD found that the firm, actingthrough Lipsitz, failed to timely notify the SEC or theNASD on each occasion when it failed to maintain theminimum required net capital and engaged in a fraudulentcourse of conduct whereby they intentionally or recklesslyfailed to record on the firm’s books and records the out-standing balance on a line of bank credit the firm main-tained. The NASD also found that the firm, acting throughLipsitz, failed to record on its books and records the exis-tence of and balance in a bank account, failed to reflect onits books and records that the bank held a security interestin a $37,000 CD as collateral for advances made to thefirm on the line of credit it maintained at the bank, andfailed to properly treat the face amount of the encumberedCD as a non-allowable asset in preparing the firm’s month-ly net capital computations. The findings stated that thefirm, acting through Lipsitz, failed to disclose in an offer-ing memorandum or in any supplement thereto that thegeneral partner and/or affiliates of the general partnercould purchase units in the offering, the maximum amountof units the general partner could purchase or that purchas-es by the general partner and/or affiliates of the generalpartner could be used to close the offering. The NASD

also determined that the firm, acting through Lipsitz, failedto conduct an in-person compliance meeting or interviewwith two representatives of the firm.

Neil Guthrie (Registered Representative, Gretna,Virginia) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $10,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Guthrie consented to the described sanctions and to theentry of findings that he failed to notify and obtainapproval from his member firm regarding his solicitationand acceptance of monies from three customers to investin investments unrelated to his member firm. The findingsalso stated that Guthrie prepared and provided receipts totwo customers that misrepresented the true investments ofthe customers’ monies. Furthermore, the NASDdetermined that Guthrie diverted customer funds to hispersonal home appliance and apparel wholesale businessand other unspecified investments contrary to his verbaland written representations to the customers.

O’Connor & Company (Chicago, Illinois) submitted aLetter of Acceptance, Waiver and Consent pursuant towhich he was fined $20,000. Without admitting or denyingthe allegations, the firm consented to the described sanc-tion and to the entry of findings that it entered a series oftransactions into the Small Order Execution System(SOES) that, when aggregated, exceeded the SOES maxi-mum order size requirements. The findings also stated thatthe firm failed to establish, maintain, and enforce supervi-sory procedures that would have enabled it to ensure com-pliance with NASD rules.

Albert J. Scibilia (Registered Representative,Hagerstown, Maryland) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which hewas fined $25,000 and barred from association with anyNASD member in any capacity. Without admitting ordenying the allegations, Scibilia consented to the describedsanctions and to the entry of findings that he effected unau-thorized transactions in customer accounts.

Nicholas F. Stranges (Registered Representative,Harrisburg, Pennsylvania) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which hewas fined $11,700, and suspended from association withany NASD member in any capacity for 30 business days.Without admitting or denying the allegations, Strangesconsented to the described sanctions and to the entry offindings that he submitted to his member firm annuityapplications for public customers on which he had record-ed incorrect birth dates to secure the payment of largercommissions than otherwise would have been paid on theannuity purchases.

July ActionsScott R. Gnesda (Registered Representative, Jeannette,Pennsylvania) submitted an Offer of Settlement pursuantto which he was fined $25,000 and barred from associationwith any NASD member in any capacity. Without admit-ting or denying the allegations, Gnesda consented to thedescribed sanctions and to the entry of findings that heaffixed to insurance forms and checks the initials, signa-tures, and endorsements of public customers and depositedthe checks in his personal bank account without theirauthorization.

Richard O. Pilardi (Registered Representative,Pittsburgh, Pennsylvania) submitted an Offer ofSettlement pursuant to which he was fined $25,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Pilardi consented to the described sanctions and to theentry of findings that he induced a public customer to affixher daughters’ signatures on insurance policy applicationsand thereafter submitted such applications to his memberfirm as authentic without the authorization of thecustomer’s daughters. The findings also stated that Pilardiaffixed a customer’s signature on forms requesting loanstotaling $489 and submitted such forms to his memberfirm. Furthermore, the NASD determined that Pilardi

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affixed the customer’s endorsement on checks and causedsuch checks to be applied to insurance premium payments,and submitted a request to change the customer’s addressof record to his home address without the customer’sauthorization.

August ActionAlbert E. Depew (Registered Representative, Butler,Pennsylvania) submitted a Letter of Acceptance, Waiverand Consent pursuant to which he was fined $5,000, sus-pended from association with any NASD member in anycapacity for six months, and required to requalify by examas an investment company and variable contract productsrepresentative. Without admitting or denying the allega-tions, Depew consented to the described sanctions and tothe entry of findings that he recommended to a public cus-tomer the exchange of an annuity and told the customerthat the surrender charge would be $800, told the customerthat the $2,500 surrender charge reflected on a statementwas incorrect when he knew or should have known thatthe $2,500 charge was the correct charge and had no rea-sonable basis for stating that it was incorrect.

The NASD also found that Depew submitted to his mem-ber firm a policy delivery receipt bearing his own signatureand the purported signature of a customer when he knewthe annuity had not been delivered to the customer and thatthe customer’s signature was not genuine.

James C. Garcia (Registered Representative, VirginiaBeach, Virginia) was fined $20,000 and barred from asso-ciation with any NASD member in any capacity. TheNational Business Conduct Committee (NBCC) affirmedthe sanctions following appeal of a Washington DistrictBusiness Conduct Committee (DBCC) decision. The sanc-tions were based on findings that Garcia failed to respondto NASD requests for information.

Richard J. Manning (Registered Representative,Pittsburgh, Pennsylvania) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which hewas fined $40,000 and barred from association with anyNASD member in any capacity. Without admitting ordenying the allegations, Manning consented to thedescribed sanctions and to the entry of findings he recom-mended and effected, in the account of a public customer,transactions that were excessive in size and frequency inview of the financial circumstances and the character ofthe account, and without having reasonable grounds tobelieve that the transactions were suitable for thecustomer. The findings also stated that Manning engagedin acts and practices that were designed to conceal tradinglosses in the account of a public customer and deceive thecustomer about the status of his account. Furthermore, theNASD determined that Manning gave a check or caused acheck to be given to a public customer and falsely repre-sented to the customer that the check represented profits orearnings from trading in the customer’s account. TheNASD also found that Manning provided an altered state-ment he owned that overstated the value of the annuity.

Jeffrey R. Streamer (Registered Representative, WestChester, Pennsylvania) was fined $20,000 and barredfrom association with any NASD member in any capacity.The sanctions were based on findings that Streamer failedto respond to NASD requests for information.

Josef B. Villanasco (Registered Representative,Annandale, Virginia) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Villanasco failed torespond to NASD requests for information.

District 10—the five boroughs of New York City and theadjacent counties in New York (the counties of Nassau,Orange, Putnam, Rockland, Suffolk, Westchester) andnorthern New Jersey (the state of New Jersey, exceptfor the counties of Atlantic, Burlington, Camden, CapeMay, Cumberland, Gloucester, Mercer, Ocean, andSalem)

April ActionsWilhelmina Emma Burris (Registered Representative,Corning, New York) submitted an Offer of Settlementpursuant to which she was fined $20,000 and barred fromassociation with any NASD member in any capacity.Without admitting or denying the allegations, Burris con-sented to the described sanctions and to the entry of find-ings that she failed to respond to NASD requests forinformation.

Elliot L. Levine (Registered Representative, Plainview,New York) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $25,000, barredfrom association with any NASD member in any capacity,and required to pay $9,096.79 in restitution to a memberfirm. Without admitting or denying the allegations, Levineconsented to the described sanctions and to the entry offindings that he caused $9,096.79 of policyholders’ fundsto be misused in that he caused the withdrawal of fundsfrom customer insurance accounts to pay insurance premi-ums on other client accounts.

Michael Malaga (Registered Representative, Edison,New Jersey) submitted an Offer of Settlement pursuant towhich he was barred from association with any NASDmember in any capacity. Without admitting or denying theallegations, Malaga consented to the described sanctionand to the entry of findings that he executed a series ofunauthorized transactions in customer accounts. The find-ings also stated that Malaga made unsuitable investmentrecommendations for, and executed excessive trades in theaccounts of public customers. Furthermore, the NASDdetermined that Malaga impeded his firm’s supervisoryefforts to detect his violative activity.

Serafin Martinez (Registered Representative, NorthArlington, New Jersey) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$40,000 and barred from association with any NASDmember in any capacity. Without admitting or denying theallegations, Martinez consented to the described sanctionsand to the entry of findings that he signed a public cus-tomer’s name on a $8,000 check made payable to the cus-tomer, deposited the check in his personal bank account,and converted the proceeds for his own use.

Dennis Perricone (Registered Principal, Holtsville, NewYork) was fined $20,000 and barred from association withany NASD member in any capacity. The sanctions werebased on findings that Perricone failed to respond toNASD requests for information about a customer com-plaint.

Norm Rabinovich (Registered Representative, NewYork, New York) submitted an Offer of Settlement pur-suant to which he was fined $25,000 and barred from asso-ciation with any NASD member in any capacity. Withoutadmitting or denying the allegations, Rabinovich consent-ed to the described sanctions and to the entry of findingsthat he arranged to have an imposter take the Series 7exam on his behalf. The findings also stated thatRabinovich failed to respond to NASD requests to appearfor an on-the-record interview. Furthermore, the NASDdetermined that Rabonivich filed a Form U-4 that failed todisclose his employment with another member firm.

Michael T. Rother (Registered Representative,Brooklyn, New York) submitted an Offer of Settlementpursuant to which he was fined $20,710.45 and barredfrom association with any NASD member in any capacity.Without admitting or denying the allegations, Rother con-sented to the described sanctions and to the entry of find-ings that he engaged in a scheme to defraud pursuant towhich he opened a fictitious brokerage account, arrangedto have correspondence, including account statements con-cerning the fictitious account, sent to his residentialaddress, and purchased and sold stock in his own accountand the fictitious account without paying for the transac-tions. Furthermore, the NASD found that Rother improper-ly received and negotiated checks relating to sales of astock in his own account and the fictitious account. The

findings also stated that Rother failed to respond to NASDrequests for information.

Robert A. Stabile (Registered Principal, Bayshore, NewYork) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $25,000, barredfrom association with any NASD member in any capacity,and required to pay $8,200 in restitution to a customer.Without admitting or denying the allegations, Stabile con-sented to the described sanctions and to the entry of find-ings that he engaged in private securities transactionswithout providing prior written notice to or obtainingapproval from his member firm. The findings also statedthat Stabile entered into private securities transactions witha public customer upon the premise of funding a privateadoption and instead, used the funds for personal purposes.Furthermore, the NASD found that Stabile engaged inoutside business activities without providing prior writtennotification to his member firm and failed to follow cus-tomer instructions to cancel an insurance policy.

United Daniels Securities Inc. (Orlando, Florida) andWillie Daniels (Registered Principal, Brooklyn, NewYork) submitted a Letter of Acceptance, Waiver andConsent pursuant to which they were fined $50,000, joint-ly and severally, and ordered to disgorge $66,586, jointlyand severally. In addition, the firm was expelled fromNASD membership and Daniels was barred from associa-tion with any NASD member in any capacity. Withoutadmitting or denying the allegations, the respondents con-sented to the described sanctions and to the entry of find-ings that the firm participated in municipal underwritingsat a time when it was not registered as a broker/dealer withthe NASD. The findings also stated that Daniels, actingthrough the firm, engaged in municipal underwritings eventhough he was not registered as a municipal securitiesprincipal.

May ActionsRobert James Baptist, Jr. (Registered Representative,Southport, Connecticut) submitted an Offer of Settlementpursuant to which he was fined $15,000 and suspendedfrom association with any NASD member in any capacityfor 20 business days. Without admitting or denying theallegations, Baptist consented to the described sanctionsand to the entry of findings that he executed unauthorizedtransactions in the accounts of public customers.

Glen Jeff Bennett (Associated Person, New York, NewYork) was fined $50,000 and barred from association withany NASD member in any capacity. The sanctions werebased on findings that Bennett arranged to have animposter take the Series 7 exam on his behalf. Bennett alsofailed to respond to NASD requests for information.

Brian Bond (Registered Representative, Woodbury,New York) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $5,000, suspendedfrom association with any NASD member in any capacityfor five business days, and required to disgorge $1,050 incommissions. Without admitting or denying the allega-tions, Bond consented to the described sanctions and to theentry of findings that he purchased warrants in a publiccustomer’s account without the customer’s prior knowl-edge or consent.

Michael F. Burke (Registered Representative, Rye, NewYork) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $10,000, suspend-ed from association with any NASD member in any capac-ity for 45 days, and required to requalify by exam as ageneral securities representative. Without admitting ordenying the allegations, Burke consented to the describedsanctions and to the entry of findings that he exerciseddiscretion in the account of public customers without firstobtaining written authorization from the customers. Thefindings also stated that Burke failed to properly markcustomer order tickets in that the tickets were marked“unsolicited” when they should have been marked “discre-tionary.”

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Oliver Lu (Registered Representative, New York, NewYork) was fined $20,000 and barred from association withany NASD member in any capacity. The sanctions werebased on findings that Lu failed to respond to NASDrequests for information.

Jules L. Marx (Registered Representative, SouthOrange, New Jersey) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$7,500, suspended from association with any NASD mem-ber in any capacity for five business days, and required topay $27,750 plus interest in restitution to public customers.Without admitting or denying the allegations, Marx con-sented to the described sanctions and to the entry of find-ings that he effected private securities transactions withpublic investors without providing prior written notice toand receiving written approval from his member firm. TheNASD also found that Marx used his member firm’s sta-tionery in connection with the private securities transac-tions without the firm’s prior knowledge or approval.

Russell D. Perlmutter (Registered Representative,Flushing, New York) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$5,000 and suspended from association with any NASDmember in any capacity for five business days. Withoutadmitting or denying the allegations, Perlmutter consentedto the described sanctions and to the entry of findings thathe used a fictitious name when a customer called his mem-ber firm to complain about a trade.

Leon E. Procopio (Registered Representative, GlenCove, New York) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Procopio failed torespond to NASD requests for information.

John J. Puglisi (Registered Representative, New York,New York) submitted an Offer of Settlement pursuant towhich he was fined $30,000, suspended from associationwith any NASD member in any capacity for 30 businessdays, required to requalify by exam as a general securitiesrepresentative, and required to pay $15,000 to a publiccustomer. Without admitting or denying the allegations,Puglisi consented to the described sanctions and to theentry of findings that he effected in the accounts of publiccustomers purchase and sale transactions without the cus-tomers’ knowledge, authorization, or consent.

June ActionsDavid Kippins (Registered Representative, Brooklyn,New York) was fined $270,594 and barred from associa-tion with any NASD member in any capacity. The sanc-tions were based on findings that Kippins recommendedtransactions to a public customer when he did not have areasonable basis to believe that the recommendations weresuitable for the customer in light of the customer’s statedinvestment objectives and financial needs. Furthermore,Kippins induced a public customer to sign a letter autho-rizing the redemption of shares of a government fund andconverted $38,500 of the proceeds to his own use and ben-efit without the prior knowledge or consent of thecustomer. Kippins also failed to respond timely to NASDrequests for information.

Ruslan Rapoport (Registered Representative, Brooklyn,New York) was fined $7,500, suspended from associationwith any NASD member in any capacity for three years,and required to requalify by exam. The sanctions werebased on findings that Rapoport failed to respond to NASDrequests to appear for an on-the-record interview.

Barry Charles Wilson (Registered Principal, Bloomfield,New Jersey) was fined $25,000 and barred from associa-tion with any NASD member as a financial and operationsprincipal. The sanctions were based on findings that amember firm, acting through Wilson, conducted a securi-ties business while failing to maintain minimum requirednet capital, filed an inaccurate FOCUS Part I report, failedto maintain the required minimum balance in the firm’scustomer reserve account, and failed to immediately notifythe NASD of its net capital deficiencies.

July ActionsWilliam Pierce Carroll (Registered Representative,Cutchoque, New York) was fined $195,000, barred fromassociation with any NASD member in any capacity, andordered to pay $35,000 in restitution to a public customer.The sanctions were based on findings that Carroll receiveda $35,000 check from a public customer for the purchaseof shares of a common stock and failed to deposit thefunds into the customer’s account or invest them on thecustomer’s behalf. Instead, Carroll endorsed the check andconverted the monies to his own use. Carroll also failed torespond to NASD requests for information.

Scott W. Kliewe (Registered Representative, UpperSaddle River, New Jersey) was fined $20,000 and barredfrom association with any NASD member in any capacity.The sanctions were based on findings that Kliewe failed torespond to NASD requests for information.

Robert John Lancellotti (Associated Person, ValleyCottage, New York) was fined $26,562.50. The sanctionwas based on findings that Lancellotti purchased units of ahot issue that traded at a premium in the immediate after-market in contravention of the Board of Governors Free-Riding and Withholding Interpretation. Lancellotti alsoopened a brokerage account at a member firm and execut-ed a securities transaction in the account without notifyingthe firm in writing that he was associated with anothermember firm.

Edward A. McKay, Jr. (Registered Principal, NewYork, New York) was fined $10,000 and suspended fromassociation with any NASD member in any capacity forone year. The sanctions were based on findings thatMcKay failed to respond timely to NASD requests forinformation.

John Michael Novichonek (Registered Representative,St. James, New York) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Novichonek failed torespond to NASD requests for information.

Angel Emilio Rivera (Registered Representative, StatenIsland, New York) was fined $75,344.98, barred fromassociation with any NASD member in any capacity, andrequired to pay $11,068.98 in restitution to a customer.The sanctions were based on findings that Rivera receivedan $11,060.90 check from a public customer for invest-ment in a mutual fund and, instead, without the priorknowledge, authority, or consent of the customer, deposit-ed the check into his personal bank account and convertedthe monies of his personal use. Rivera also failed torespond to NASD requests to appear for an on-the-recordinterview.

Stratton Oakmont, Inc. (Lake Success, New York) wasfined $20,000 and ordered to submit to the NASD, andthereafter utilize in its settlement agreements, a form ofOffer of Settlement containing non-disclosure and confi-dentiality clauses, if any, acceptable to the NASD. Thefirm also was required, upon request by the NASD in con-nection with the NASD’s investigative duties, to identifycustomers that should be released from settlement agree-ments that impose conditions on a customer’s ability toprovide information to the NASD. The SEC affirmed thesanctions following appeal of an April 1996 NBCC deci-sion. The sanctions were based on findings that the firmprepared, utilized, and executed agreements when settlingcustomer complaints that preclude, restrict, or conditioncustomers’ ability to cooperate with the NASD in connec-tion with its investigation of customer complaints. Thefirm also failed to release a public customer from therestrictive provisions of a settlement agreement that pre-cluded, restricted, and/or conditioned the customer fromcooperating in an NASD investigation.

Peter Wang (Registered Representative, Union City,New Jersey) submitted an Offer of Settlement pursuant towhich he was fined $2,500 and barred from associationwith any NASD member in any capacity. Without admit-ting or denying the allegations, Wang consented to the

described sanctions and to the entry of findings that, whiletaking the Series 7 exam, he was in possession of unautho-rized material related to the exam.

August ActionsBroadcort Capital Corporation (New York, New York)submitted a Letter of Acceptance, Waiver and Consentpursuant to which the firm was fined $11,500. Withoutadmitting or denying the allegations, the firm consented tothe described sanction and to the entry of findings that itpermitted officers to participate as members of the firm’sBoard of Directors without general securities principalregistrations and without the prerequisite requirements fora general securities principal. The findings also stated thatthe firm did not register a municipal securities principalalthough it was engaged in a municipal securities business.

BZW Securities Inc. (New York, New York) submitted aLetter of Acceptance, Waiver and Consent pursuant towhich it was fined $20,000. Without admitting or denyingthe allegations, the firm consented to the described sanc-tion and to the entry of findings that it failed to reporttrades on the Automated Confirmation Transaction Service(ACT) within 90 seconds and failed to append the lateindicator. Furthermore, the NASD found that the firmfailed to identify accurately the time of execution on ordertickets and failed to time stamp order tickets, or the timewas otherwise unavailable or did not agree with the timesubmitted to ACT. The findings also stated that the firmreported transactions when it was not required to do so,incorrectly identified itself as the market maker in itsreports, and transmitted Nasdaq National MarketTransactions to ACT late. The NASD also determined thatthe firm failed to establish, maintain, and enforce writtensupervisory procedures to prevent the above violations.

Anthony Carnevale (Registered Representative,Florham Park, New Jersey) submitted an Offer ofSettlement pursuant to which he was fined $2,500 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Carnevale consented to the described sanctions and to theentry of findings that, during the course of taking theSeries 7 exam, he was in possession of notes containingformulas and information that had been the subject ofquestions on the exam.

Kellen M. Carson (Registered Representative,Glenhead, New York) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$582,905, barred from association with any NASD mem-ber in any capacity, and ordered to pay $60,408 in restitu-tion to a member firm. Without admitting or denying theallegations, Carson consented to the described sanctionsand to the entry of findings that he caused $116,581 fromhis member firm’s pending account to be converted byplacing the monies into five accounts that he controlled.

Edward Catalanello (Registered Representative,Metuchen, New Jersey) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$50,000 and barred from association with any NASDmember in any capacity. Without admitting or denying theallegations, Catalanello consented to the described sanc-tions and to the entry of findings that he forged the nameof an insurance customer on disbursement request formsand caused disbursements to be made from the customer’slife insurance policies to pay for premiums on other poli-cies without the customer’s prior knowledge or consent.

Ashley T. Collen (Registered Representative, Brooklyn,New York) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $329,425 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Collen consented to the described sanctions and to theentry of findings that he engaged in the sale of privatesecurities transactions to public investors, without provid-ing prior written notice to, and receiving written approvalfrom his member firm.

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D.H. Blair & Co., Inc. (New York, New York) andAlfred S. Palagonia (Registered Representative,Quogue, New York) submitted a Letter of Acceptance,Waiver and Consent pursuant to which they were fined$25,000, jointly and severally, and ordered to disgorge$10,230.25, jointly and severally. Palagonia was requiredto requalify by exam as a general securities representative.Without admitting or denying the allegations, the respon-dents consented to the described sanctions and to the entryof findings that the firm, acting through Palagonia, soldshares of stock that traded at a premium in the immediateaftermarket to a restricted account.

The findings also stated that the firm, acting throughPalagonia, failed to obtain and/or maintain the registeredrepresentative’s signature introducing the restrictedaccount, and failed to ascertain the occupation of one ofthe spouses in a jointly held account, the name and addressof the spouse’s employer, and whether the spouse was anassociated person of another member firm. The NASD alsodetermined that the firm failed to adequately enforce itswritten supervisory procedures relating to the review andapproval of the restricted account in question.

David Martin Dickey (Registered Representative,Bridgewater, New Jersey) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which hewas fined $10,000 and barred from association with anyNASD member in any capacity. Without admitting ordenying the allegations, Dickey consented to the describedsanctions and to the entry of findings that he filed a FormU-4 with a member firm and failed to disclose an arrestand conviction which, if disclosed, would have caused himto be statutorily disqualified.

Paul Alexis Drayton (Registered Representative,Brooklyn, New York) was fined $196,250 and barredfrom association with any NASD member in any capacity.The sanctions were based on findings that Drayton con-verted customer funds totaling $25,250 by openingaccounts in a public customer’s name and using falseaddresses for the customer. In addition, Drayton falsifiedrecords by failing to disclose on a Form U-4 his criminalhistory. Drayton also failed to respond to NASD requeststo appear for an on-the-record interview.

Audrey Klein-Kapneck (Registered Representative,Livingston, New Jersey) submitted an Offer of Settlementpursuant to which she was fined $29,000, suspended fromassociation with any NASD member in any capacity for 10business days, and ordered to disgorge $58,874.76.Without admitting or denying the allegations, Klein-Kapneck consented to the described sanctions and to theentry of findings that she failed to provide written notifica-tion, to her member firm and the executing member firm,of her association with the member firm prior to openingan account with the executing firm. Furthermore, theNASD determined that, in contravention of the Board ofGovernors Free-Riding and Withholding Interpretation,Klein-Kapneck purchased and sold shares of hot issuesthat traded at a premium in the immediate aftermarket.

Scott Kliewe (Registered Representative, Marco Island,Florida) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $15,000 and sus-pended from association with any NASD member in anycapacity for nine months. Without admitting or denyingthe allegations, Kliewe consented to the described sanc-tions and to the entry of findings that he charged certainretail customers unfair prices in transactions where thegross commissions were approximately 30 percent of theprincipal amount of the transactions. The findings alsostated that Kliewe failed to respond timely to NASDrequests for information.

William J. Lucadamo (Registered Representative,Bayside, New York) was fined $62,500, suspended fromassociation with any NASD member in any capacity for 15business days, and required to requalify by exam in allcapacities requiring qualification except Series 3. TheNBCC imposed the sanctions following appeal of a NewYork DBCC decision. The sanctions were based on find-ings that Lucadamo misrepresented and omitted material

facts to public customers and recommended investments instock without having a reasonable basis to believe that hisrecommendations were suitable for the customers. In addi-tion, Lucadamo effected purchase transactions in customeraccounts without their prior authorization or consent.Furthermore, Lucadamo exercised discretion in acustomer’s account without written authorization.

McFadden, Farrell & Smith, L.P. (New York, NewYork) and Alan M. Green (Registered Principal, NewYork, New York) submitted a Letter of Acceptance,Waiver and Consent pursuant to which they were fined$100,000, jointly and severally. Green was also suspendedfrom association with any NASD member in any supervi-sory capacity for three months. Without admitting or deny-ing the allegations, the respondents consented to thedescribed sanctions and to the entry of findings that thefirm, acting through Green, failed to establish, maintain,and enforce adequate written supervisory procedures.

Furthermore, the NASD determined that the firm, actingthrough Green, failed to register employees, failed to regis-ter employees in a timely manner, and failed to register anemployee who was not engaged in an investment bankingor securities business. The findings also stated that thefirm, acting through Green, failed to maintain and preservecopies of the initial Form U-4 applications and failed tomaintain and preserve appropriate documentation onemployees with personal brokerage accounts at other bro-ker/dealers. The NASD found that the firm, acting throughGreen, failed to respond to an NASD request for informa-tion in a timely manner and negligently submitted docu-ments containing inaccurate information.

Merrill Lynch Government Securities of Puerto Rico,S.A. (Hato Rey, Puerto Rico) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which thefirm was fined $10,000. Without admitting or denying theallegations, the firm consented to the described sanctionand to the entry of findings that it conducted a securitiesbusiness while failing to maintain its minimum requirednet capital.

William R. Papandrea (Registered Representative,North Babylon, New York) was fined $10,000, barredfrom association with any NASD member in any capacity,and ordered to pay $600 in restitution to a customer. Thesanctions were based on findings that Papandrea signed acustomer’s name on a $600 refund check, deposited thecheck into his account, and converted the funds for hispersonal use without the customer’s knowledge or consent.

Herbert Morton Paul (Registered Representative, NorthWoodmere, New York) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$14,531.25. Without admitting or denying the allegations,Paul consented to the described sanctions and to the entryof findings that he purchased shares of stock that traded ata premium in the immediate aftermarket, in contraventionof the Board of Governors’ Free-Riding and WithholdingInterpretation. The findings also stated that Paul failed tonotify his current member firm that he had opened anaccount with a former member firm and failed to notify themember firm he purchased the securities through of hisassociation with his member firm. Furthermore, the NASDfound that Paul purchased stock without giving prior writ-ten notice to his member firm.

Chi Ming Szeto (Registered Representative, Brooklyn,New York) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $100,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Szeto consented to the described sanctions and to the entryof findings that he effected securities transactions in theaccounts of public customers without their prior knowledgeor authorization. The NASD also found that Szeto causedthe mailing addresses on the accounts of public customersto be changed to his own address or an address that he con-trolled without the customers’ prior knowledge or autho-rization. The findings also stated that Szeto caused checkstotaling $880 to be issued from the accounts of public cus-tomers and converted the proceeds to his own use.

David Terpoilli (Registered Representative, Norristown,Pennsylvania) was fined $20,000 and barred from associ-ation with any NASD member in any capacity. The sanc-tions were based on findings that Terpoilli failed torespond to NASD requests for information.

Tradition (Government Securities) Inc. (New York,New York) and Dennis William Savitsky (RegisteredPrincipal, North Bellmore, New York) submitted anOffer of Settlement pursuant to which they were fined$10,000, jointly and severally. Without admitting or deny-ing the allegations, the respondents consented to thedescribed sanction and to the entry of findings that thefirm, acting through Savitsky, permitted individuals toengage in the securities business and to function as gov-ernment securities representatives without being registeredwith the NASD.

Edward Veisman (Registered Representative, Brooklyn,New York) was fined $20,000 and barred from associationwith any NASD member in any capacity. The NBCCaffirmed the sanctions following appeal of a New YorkDBCC decision. The sanctions were based on findings thatVeisman failed to respond to NASD requests for informa-tion.

Veisman has appealed this action to the SEC and the sanc-tions, other than the bar, are not in effect pending consider-ation of the appeal.

District 11—Connecticut, Maine, Massachusetts, NewHampshire, Rhode Island, Vermont, and New York(except for the counties of Nassau, Orange, Putnam,Rockland, Suffolk, Westchester; the counties ofLivingston, Monroe, and Steuben; the remainder of thestate west of such counties; and the five boroughs ofNew York City)

April ActionsMichael S. Burbridge (Registered Representative, SouthEaston, Massachusetts) was fined $25,000 and barredfrom association with any NASD member in any capacity.The sanctions were based on findings that Burbridge with-held and misappropriated $2,113 in customer funds for hisown use and benefit without the knowledge or consent ofthe customers. Burbridge also failed to respond to NASDrequests for information.

John F. Chester, Jr. (Registered Representative, NorthKingston, Rhode Island) was fined $20,000 and barredfrom association with any NASD member in any capacity.The sanctions were based on findings that Chester failed torespond to NASD requests for information about his termi-nation from a member firm.

Chester J. Dudzik, Jr. (Registered Representative,Darien, Connecticut) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Dudzik failed torespond to NASD requests for information about customercomplaints.

Robert W. Main, Jr. (Registered Representative,Bedford, New Hampshire) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which hewas fined $10,000 and ordered to requalify by exam as ageneral securities representative. Without admitting ordenying the allegations, Main consented to the describedsanctions and to the entry of findings that he engaged in acourse of conduct while handling customer accounts thatwas contrary to the best interests and welfare of the cus-tomers. According to the findings, Main caused transac-tions involving the liquidation and reinvestment ofinvestment company shares with undue frequency andwithout reasonable justification.

May ActionsJames M. Burness (Registered Representative, Dublin,Ohio) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $4,500 and sus-

45


pended from association with any NASD member in anycapacity for five days. Without admitting or denying theallegations, Burness consented to the described sanctionsand to the entry of findings that knowing of a system prob-lem which he did not report to his firm, he repeatedlyplaced orders for customers over his firm’s proprietarytrading system over a three-day period at limit prices thathe knew, or had reason to believe, were extremely advan-tageous to the customers and extremely disadvantageous tothe firm.

David J. Hall (Registered Representative, Standish,Maine) submitted a Letter of Acceptance, Waiver andConsent pursuant to which he was fined $100,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Hall consented to the described sanctions and to the entryof findings that he engaged in private securities transac-tions without giving prior written notice to his memberfirm describing in detail the proposed transactions, his roletherein, and whether he received selling compensation inconnection with the transactions.

Phoenix Equity Planning Corporation (Enfield,Connecticut) submitted a Letter of Acceptance, Waiverand Consent pursuant to which the firm was fined$100,000. Without admitting or denying the allegations,the firm consented to the described sanctions and to theentry of findings that it failed to register at least three indi-viduals who were functioning in a principal capacity.

June ActionsThomas P. Battista (Registered Representative,Springfield, Vermont) submitted a Letter of Acceptance,Waiver and Consent pursuant to which he was fined$5,000 and barred from association with any NASD mem-ber in any capacity. Without admitting or denying the alle-gations, Battista consented to the described sanctions andto the entry of findings that, without the knowledge orconsent of the customers or his member firm, he failed toremit policyholder payments totaling $932 from four pub-lic customers intended for automobile insurance premiumsand converted the monies to his own use and benefit.

David Paelet (Registered Principal, Madison,Connecticut) submitted a Letter of Acceptance, Waiverand Consent pursuant to which he was fined $5,000 andsuspended from association with any NASD member inany capacity for 30 days. Without admitting or denying theallegations, Paelet consented to the described sanctionsand to the entry of findings that he participated in privatesecurities transactions and failed to give prior writtennotice to his member firm of such transactions.

July ActionsNone

August ActionsRichard R. Desrochers (Registered Representative, LasVegas, Nevada) submitted a Letter of Acceptance, Waiverand Consent pursuant to which he was fined $50,000 andbarred from association with any NASD member in anycapacity. Without admitting or denying the allegations,Desrochers consented to the described sanctions and to theentry of findings that he prepared and submitted to hismember firm fictitious check disbursement forms allegedlyon behalf of policyholders which caused his member firmto issue checks totaling $7,811.51, payable to policyhold-ers. The NASD found that Desrochers forged the policy-holders’ signatures, deposited the checks into his personalbank account, and misappropriated the proceeds to his ownuse and benefit.

Paul S. Dolan (Registered Representative, Revere,Massachusetts) submitted a Letter of Acceptance, Waiverand Consent pursuant to which he was fined $2,000,000and barred from association with any NASD member inany capacity. Without admitting or denying theallegations, Dolan consented to the described sanctionsand to the entry of findings that he solicited and received

from investors at least $2,300,000 and falsely representedto the investors that their funds would be invested either ina money market fund, which never existed, or tax-freegovernment bonds, that were never purchased. The find-ings also stated that Dolan misappropriated and converted$2,214,522 of the funds to his own use and benefit.

Craig S. Gioia (Registered Representative, Highland,New York) was fined $10,000. The sanction was based onfindings that Gioia made an improper guarantee of a cus-tomer account against loss.

Kevin J. McCarthy (Registered Principal, Bow, NewHampshire) was fined $5,000 and barred from associationwith any NASD member in any capacity. The sanctionswere based on findings that McCarthy forged a payrollcheck intended for a registered representative at his memberfirm and converted the funds for his own use and benefit.

Alan M. Santos-Buch (Registered Representative,South Norwalk, Connecticut) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which hewas fined $10,000 and suspended from association withany NASD member in any capacity for 30 days. Withoutadmitting or denying the allegations, Santos-Buch consent-ed to the described sanctions and to the entry of findingsthat he signed and delivered to a public customer a memo-randum that stated that the customer’s account would beguaranteed against losses. The findings also stated thatSantos-Buch stated to the same customer that they sharedan investment relationship which allocated financialresponsibility for certain changes in the value of theaccount to him under certain circumstances.

David J. Yorwerth (Registered Representative,Stamford, Connecticut) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which hewas fined $15,000 and suspended from association withany NASD member in any capacity for 30 days. Withoutadmitting or denying the allegations, Yorwerth consentedto the described sanctions and to the entry of findings thathe engaged in private securities transactions and failed togive prior written notice to his member firm describing, indetail, the proposed transactions, his role therein, and howhe would be compensated for the transactions.

Market Regulation Committee

April ActionsKO Securities, Inc. (Seattle, Washington) and TerranceY. Yoshikawa (Registered Principal, Seattle,Washington) were fined $10,000, jointly and severally. Inaddition, the firm was suspended from proprietary tradingand market making for five business days and Yoshikawamust attend a compliance conference with MarketRegulation staff. The National Business ConductCommittee (NBCC) affirmed the sanctions followingappeal of a Market Regulation Committee decision. Thesanctions were based on findings that the firm andYoshikawa concealed the true ownership of a commonstock on five occasions to prevent the firm from fallingbelow its minimum required net capital. Furthermore, inan attempt to reduce the risk of, or to prevent the firm fromexperiencing net capital difficulties, the firm andYoshikawa sold the stock from the firm’s inventoryaccount to two accounts at the firm owned by Yoshikawa,and shortly thereafter repurchased the stock into the firm’sinventory account at an agreed upon time and at essentiallythe same terms.

This action has been appealed to the Securities andExchange Commission (SEC) and the sanctions are not ineffect pending consideration of the appeal.

Albert A. Matani, Jr. (Registered Representative, BocaRaton, Florida) was fined $20,000 and barred from asso-ciation with any NASD member in any capacity. The sanc-tions were based on findings that Matani failed to respondto NASD requests for information and testimony.

May ActionsJoshua A. Ader (Registered Representative, LongBeach, New York) was fined $20,000 and barred fromassociation with any NASD member in any capacity. Thesanctions were based on findings that Ader failed torespond to NASD requests to provide documents, informa-tion, and testimony.

Duke & Co, Inc. (New York, New York), Lawrance A.Rosenberg (Registered Principal, Brooklyn, New York),and Salvatore Saporito (Registered Representative,Brooklyn, New York). The firm and Saporito submittedan Offer of Settlement pursuant to which the firm wasfined $25,000 and ordered to implement supervisory pro-cedures. Saporito was fined $25,000 and suspended fromassociation with any NASD member in any capacity forsix months. In a separate decision, Rosenberg was fined $5million and barred from association with any NASD mem-ber in any capacity. Without admitting or denying the alle-gations, the firm and Saporito consented to the describedsanctions and to the entry of findings that the firm, actingthrough Saporito and Rosenberg, manipulated trading in asecurity that created actual and apparent active trading inthe security and raised the price of the security for the pur-pose of inducing the purchase or sale of the security byothers. The findings also stated that the firm, actingthrough Saporito and Rosenberg, actively bid for,purchased, and solicited securities while the firm was act-ing as broker or dealer participating in a distribution ofsecurities. Furthermore, the NASD determined that thefirm and Rosenberg failed to establish and maintain aneffective supervisory system and failed to enforce supervi-sory procedures.

Valentin V. Sotir (Registered Representative,Ridgewood, New York) was fined $20,000 and barredfrom association with any NASD member in any capacity.The sanctions were based on findings that Sotir failed torespond to NASD requests to provide testimony in connec-tion with an ongoing investigation.

June ActionsACAP Financial, Inc. (Salt Lake City, Utah) submitteda Letter of Acceptance, Waiver and Consent pursuant towhich the firm was fined $10,800, required to remit $250in profits relating to transactions, and required to revise itswritten supervisory procedures relating to short sales.When the new supervisory procedures have been devel-oped, the firm must conduct training sessions on therevised procedures with all relevant personnel. Withoutadmitting or denying the allegations, the firm consented tothe described sanctions and to the entry of findings that itexecuted short-sale transactions of a Nasdaq NationalMarket security and failed to make affirmative determina-tions and report the trades to the Automated ConfirmationTransaction Service (ACT) with short-sale indicators.

Martin J. Cunnane, Jr. (Registered Representative,Yonkers, New York) was fined $40,000 and suspendedfrom association with any NASD member in any capacityfor three years. The NBCC affirmed the sanctions follow-ing appeal of a Market Regulation Committee decision.The sanctions were based on findings that Cunnane openedaccounts for three public customers and executed purchasetransactions in a common stock without the customers’authorization and consent.


John J. Fiero (Registered Principal, Jersey City, NewJersey) was fined $20,000 and suspended from associationwith any NASD member in any capacity for six months.The NBCC imposed the sanctions following appeal of aMarket Regulation Committee decision. The sanctionswere based on findings that Fiero failed to provide on-the-record testimony to the Market Regulation Committee.


46


Fahnestock & Company, Inc. (New York, New York)submitted a Letter of Acceptance, Waiver and Consentpursuant to which the firm was fined $10,000. Withoutadmitting or denying the allegations, the firm consented tothe described sanction and to the entry of findings that itdid not retain the original trade information that wasreported to ACT in its history file. The NASD also deter-mined that the firm reported the time for transactions toACT prior to the execution time on the order ticket. Thefindings also stated that the firm failed to establish, main-tain, and enforce written supervisory procedures reason-ably designed to detect and deter trade reportingviolations.

Gordon & Co. (Newton, Massachusetts) submitted aLetter of Acceptance, Waiver and Consent pursuant towhich the firm was fined $25,000. Without admitting ordenying the allegations, the firm consented to thedescribed sanction and to the entry of findings it failed tofile any conventional option position reports with theNASD as required by NASD Rule 2860(b)(5)(A) for itscustomers and/or proprietary accounts.

Hamilton Partners L.P. (Hamilton, Bermuda) submitteda Letter of Acceptance, Waiver and Consent pursuant towhich the firm was fined $10,000. Without admitting ordenying the allegations, the firm consented to thedescribed sanction and to the entry of findings that itexceeded the allowable options position limits. The find-ings also stated that the firm failed to maintain and enforcesupervisory procedures to prevent the violations describedabove.

Mark Andrew Heitner (Registered Representative,Forest Hills, New York) submitted an Offer of Settlementpursuant to which he was fined $5,000 and suspendedfrom association with any NASD member in any capacityfor five business days. Without admitting or denying theallegations, Heitner consented to the described sanctionsand to the entry of findings that he engaged in manipula-tive, deceptive, and fraudulent conduct by intentionallyand recklessly causing Nasdaq trades to be reported late.The findings also stated that Heitner backed away from anorder to buy stock.

Herzog Heine Geduld, Inc. (Jersey City, New Jersey)submitted a Letter of Acceptance, Waiver and Consentpursuant to which the firm was fined $15,000 and requiredto conduct a rule education class for its traders. Withoutadmitting or denying the allegations, the firm consented tothe described sanctions and to the entry of findings that itentered quotations in securities on The Nasdaq StockMarket that exceeded the parameters for maximum allow-able spreads pursuant to NASD Rule 4613(d).

Mayer & Schweitzer, Inc. (Jersey City, New Jersey)submitted a Letter of Acceptance, Waiver and Consentpursuant to which the firm was fined $18,500, required toattend a compliance conference with NASD Regulationstaff, and required to conduct a rule education class for itstraders. Without admitting or denying the allegations, thefirm consented to the described sanctions and to the entryof findings that it entered quotations in securities on TheNasdaq Stock Market that exceeded the parameters formaximum allowable spreads pursuant to NASD Rule4613(d).

Morgan Stanley & Co., Inc. (New York, New York)submitted an Offer of Settlement pursuant to which thefirm was fined $10,000. Without admitting or denying theallegations, the firm consented to the described sanctionand to the entry of findings that it failed to report conven-tional options positions for any of its accounts as requiredby the NASD.

SC Securities Corporation (Dallas, Texas) submitted anOffer of Settlement pursuant to which the firm was fined$100,000. Without admitting or denying the allegations,the firm consented to the described sanction and to theentry of findings that it failed to establish and maintain aneffective supervisory system, to enforce supervisory proce-dures, and to reasonably supervise its registered represen-tatives.

Trimark Securities, L.P. (White Plains, New York) sub-mitted a Letter of Acceptance, Waiver and Consent pur-suant to which the firm was fined $20,000 and required tosubmit to the NASD all procedures and steps that it willimplement to ensure compliance with the NASD’s tradereporting regulations. Without admitting or denying theallegations, the firm consented to the described sanctionsand to the entry of findings that it failed to report trades toACT when in fact, these trades were done with other mem-ber firms and ACT participants. Furthermore, the findingsstated that the firm reported an incorrect buy/sell indicatorin transactions and reported trades that were not requiredto be reported.

Troster Singer Corporation (Jersey City, New Jersey)submitted a Letter of Acceptance, Waiver and Consentpursuant to which the firm was fined $22,500 and requiredto conduct a rule education class for its traders. Withoutadmitting or denying the allegations, the firm consented tothe described sanction and to the entry of findings that itentered quotations in securities on The Nasdaq StockMarket that exceeded the parameters for maximum allow-able spreads pursuant to NASD Rule 4613(d).

Troster Singer Corporation (Jersey City, New Jersey)submitted a Letter of Acceptance, Waiver and Consentpursuant to which the firm was fined $16,000 and requiredto conduct a rule education class for its traders. Withoutadmitting or denying the allegations, the firm consented tothe described sanctions and to the entry of findings that itentered or maintained quotations in The Nasdaq StockMarket that caused a locked and/or crossed market condi-tion to occur in eight securities.

July ActionsThomas Joseph Browne, Jr. (Registered Representative,Forest Hills, New York), Bartholomew Cornell Haring(Registered Representative, Staten Island, New York),and Gregory John Mouen (Registered Representative,New York, New York). Browne was fined $25,000 andbarred from association with any NASD member in anycapacity. Haring was fined $4,100 and barred from associ-ation with any NASD member in any capacity. Mouen wasfined $7,100 and barred from association with any NASDmember in any capacity. The sanctions were based onfindings that Brown, Haring, and Mouen engaged inmanipulative, deceptive, or other fraudulent activities inconnection with the purchase or sale of securities.

Brooklyn Capital & Securities Trading, Inc. (Brooklyn,New York) and David Rybstein (Registered Principal,Brooklyn, New York) were fined $58,000, jointly andseverally. The firm was suspended from NASD member-ship for one year and required to reapply for membership.Rybstein was suspended from association with any NASDmember in any capacity for one year and must requalify byexam. The Securities and Exchange Commission (SEC)affirmed the sanctions following appeal of a January 1996National Business Conduct Committee (NBCC) decision.The sanctions were based on findings that the firm andRybstein employed manipulative and deceptive devices intrading of securities in violation of Section 10(b) of theSecurities Exchange Act of 1934 and Rule 10b-5 andNASD rules.

Sidney C. Eng (Registered Principal, Mill Valley,California) was fined $75,000 and barred from associationwith any NASD member in any capacity. The NBCCaffirmed the sanctions following appeal of a MarketRegulation Committee decision. The sanctions were basedon findings that Eng knowingly purchased shares of stockwhile in possession of material, non-public information.

This action has been appealed to the SEC, and the sanc-tions, other than the bar, are not in effect pending consider-ation of the appeal.

Lowell C. Schatzer (Registered Principal, New York,New York), Robert F. Catoggio (RegisteredRepresentative, Staten Island, New York), and RonanS. Garber (Registered Representative, Highland Beach,Florida) submitted Offers of Settlement pursuant to which

Schatzer and was fined $120,000, barred from associationwith any NASD member in any capacity, and required topay $4,161,362 in restitution, jointly and severally, with amember firm. Catoggio was fined $50,000 and barred fromassociation with any NASD member in any capacity.Garber was fined $120,000 and barred from associationwith any NASD member in any capacity. Without admit-ting or denying the allegations, the respondents consentedthe described sanctions and to the entry of findings that, bymeans of manipulative, deceptive, and other fraudulentdevices and contrivances, Schatzer, Catoggio, and Garbereffected a series of transactions in common stock that cre-ated actual and apparent active trading in the stock orraised the stock’s price. The findings also stated thatGarber effected transactions in, and induced others toeffect transactions in a stock that were not fair and reason-able and were not reasonably related to the prevailing mar-ket price of the stock. Garber also engaged in and inducedothers to engage in deceptive and fraudulent devices andcontrivances in connection with the transactions.Furthermore, the NASD determined that Schatzer failed toestablish and maintain an effective supervisory system,failed to enforce supervisory procedures, and failed torespond to NASD requests to appear for testimony. TheNASD also found that Garber failed to timely respond toNASD requests to appear for testimony.

August ActionsAlfred Berg, Inc. (New York, New York) submitted aLetter of Acceptance, Waiver and Consent pursuant towhich the firm was fined $20,000. Without admitting ordenying the allegations, the firm consented to thedescribed sanction and to the entry of findings that itreported transactions late without the proper modifier,reported transactions incorrectly with a modifier, failed toreport transactions, and reported transactions when notrequired to be reported. The findings also stated that thefirm reported a transaction with the incorrect price, report-ed transactions with the improper volume, reported trans-actions with execution times that were different than thosereflected on the order tickets, and failed to enter a timestamp on an order ticket reflecting the execution time for atransaction. Furthermore, the NASD found that the firmfailed to establish, maintain, and enforce written supervi-sory procedures reasonably designed to detect and detertrade reporting violations.

Gilford Securities, Inc. (New York, New York) submit-ted a Letter of Acceptance, Waiver and Consent pursuantto which the firm was fined $10,000. Without admitting ordenying the allegations, the firm consented to thedescribed sanction and to the entry of findings that itreported or failed to report Nasdaq National MarketSecurities and Over-The-Counter Equity Securities to theACT, contrary to the provisions of Marketplace Rules4632 and 6620.

Lew Lieberbaum & Co., Inc. (Garden City, New York)submitted a Letter of Acceptance, Waiver and Consentpursuant to which the firm was fined $80,000 and requiredto attend a compliance conference. Without admitting ordenying the allegations, the firm consented to thedescribed sanctions and to the entry of findings that itreported transactions to ACT late and executed transac-tions prior to the market opening and prior to the marketclose. The NASD also determined that transactionsbetween the firm and other market makers were reported toACT with no contra side information and a bunched reportwas reported without using a modifier. The findings alsostated that the firm failed to time stamp order tickets, can-celed trades were not maintained, and reported transactionsas bunched without indicating it on the order tickets.Furthermore, the NASD found that the firm failed to estab-lish, maintain, or enforce written supervisory procedureswith respect to trade reporting.

Merrill Lynch, Pierce, Fenner & Smith Incorporated(New York, New York) submitted a Letter of Acceptance,Waiver and Consent pursuant to which the firm was fined$10,000. Without admitting or denying the allegations, thefirm consented to the described sanction and to the entry of

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findings that it failed to file any conventional option posi-tion reports with the NASD.

Westport Resources Investment Services, Inc.(Westport, Connecticut) submitted a Letter ofAcceptance, Waiver and Consent pursuant to which thefirm was fined $15,000. Without admitting or denying theallegations, the firm consented to the described sanctionand to the entry of findings that it reported NasdaqSecurities to the Automated Confirmation TransactionService contrary to the provision of Marketplace Rules4632 and 4642 in that it failed to report Nasdaq transac-tions within 90 seconds after execution and did not desig-nate the transactions as late with a modifier. The NASD

also found the firm aggregated individual executions intoNasdaq-listed security transactions reports but failed todesignate the reports with the appropriate modifier, andorder tickets did not indicate that the executions werebunched for trade reporting purposes.

Whale Securities Co., L.P. (New York, New York) sub-mitted a Letter of Acceptance, Waiver and Consent pur-suant to which the firm was fined $20,000. Withoutadmitting or denying the allegations, the firm consented tothe described sanction and to the entry of findings that itviolated the NASD Marketplace Rules in that transactionswere reported to ACT without a modifier, were improperlyaggregated, and were reported with incorrect volumes. The

NASD also found that trades were reported late withoutusing the modifier, a trade done on a cash/next day settle-ment basis was reported the regular way, and transactionswere not reported to ACT. The findings also stated that thefirm violated SEC Rule 17a-3 and Marketplace Rules inthat transactions did not indicate original time of entry orexecution, order tickets were missing, and order ticketswere not time stamped with execution times. Furthermore,the NASD determined that the firm failed to establish,maintain, and enforce written supervisory procedures con-cerning trade reporting.

Regarding Any Items In This PublicationIf you have further questions orcomments, please contact either the indi-vidual listed at the conclusion of an itemor Rosa A. Maymi, Editor, NASDRegulatory & Compliance Alert (RCA),1735 K Street, NW, Washington, DC20006-1500, (202) 728-8981.

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Regulatory & Compliance Alert - Fall 1997

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