| Securities and Business Investments Division | |
|
Securities Bulletin | |
| Vol. XII No. 2 | Summer 1998 |
Features:
- A Word from the Banking Commissioner
- Prepare for Year 2000 ("Y2K") Now
- SEC Exams Spotlight Independent Contractor Supervision
- Department Adopts Accredited Investor Exemption
- Quarterly Statistical Summary
Enforcement Highlights:
- Ralph Lambiase, Division Director
- Cynthia Antanaitis, Assistant Director and Bulletin Editor
- Eric Wilder, Assistant Director
- Marge Kagan, Subscription Coordinator
- Cynthia Antanaitis, Assistant Director and Bulletin Editor
Contributors:
A WORD FROM THE BANKING COMMISSIONER
As of July 1, 1998, the official business hours of the Connecticut Department of Banking were extended to 8:00 a.m. through 5:00 p.m., Monday through Friday.
In addition to the expanded office hours, the department is committed to making current, comprehensive information available on our Web site which industry and the public can access 24 hours a day, seven days a week.
Several web site areas may be of particular interest to the securities industry. An extensive FAQ section provides helpful information on securities licensing and registration requirements. As a further convenience, many Securities Division forms are available for easy file download.
For industry reference, the department is also posting up-to-date compilations of state laws and regulations, including the Connecticut Uniform Securities Act, revised whenever changes occur. In addition, a summary of legislation enacted during the recent 1998 General Assembly session has been published.
Among other web site features, issues of the Securities Bulletin are published on the Internet, archived back to March 1996. (If you would prefer to read the Bulletin on-line, please notify us and we'll remove you from our mailing list). Final administrative orders related to securities issues, an electronic complaint form, E-mail links to employees in the Securities Division and throughout the agency and an expansive choice of investor education material are also available on our web site.
Beyond its communications potential, the Internet is becoming a significant source of electronic commerce. As this evolution continues, the Securities Division expects to devote more resources to monitoring Internet solicitations for investments originating from Connecticut.
The growing impact of the Internet on the securities industry will be one of several important topics discussed during Securities Forum '98. The department's tenth annual conference is scheduled for Monday, October 19, 1998 at the Radisson Hotel and Conference Center in Cromwell, Connecticut. Visit our web site later this summer for complete program information.
John P. Burke
Banking Commissioner
Prepare For Year 2000 ("Y2K") Now
| TO: | All Broker-dealers, Investment Advisers and Others Subject to the Connecticut Uniform Securities Act
All Business Opportunity Sellers Subject to the Connecticut Business Opportunity Investment Act All Persons Subject to the Connecticut Tender Offer Act |
THE PROBLEM
When the clock strikes midnight on December 31, 1999, will your operations be disrupted, communications frozen and key data made unusable? Most computer systems and programs working today reflect the year in a 2-digit field. When the year 2000 comes, this date will be reflected as "00." Many systems, however, will read "00" as the year "1900." If your system makes calculations based on dates, the computer's reading of "00" as "1900" may cause serious errors and expose you to financial liability and litigation - to say nothing of its effect on your customer or client base.
The Y2K problem is not limited to one type of software or hardware. Mainframes, personal computers, networks and other items like elevators, power sources, infrastructures and phone systems all may be affected.
Although solutions may be expensive and time consuming, these factors pale in comparison to the potentially adverse consequences Y2K may have on your business and on the investing public.
WHAT TO DO: MAKE YOUR SYSTEMS Y2K COMPLIANT
| 1. | Dedicate sufficient funding for the project. | |
| 2. | Make sure all levels of management are aware of the problem, and that progress reports to management are regularly generated. | |
| 3. | Dedicate sufficient staffing to the project. | |
| 4. | Assess the risk
- Inventory all technology systems | |
| 5. | Hire an outside vendor or consultant if necessary to handle technical adjustments. | |
| 6. | List corrective steps to solve the problem. Examples:
- How many systems will be remediated? | |
| 7. | Take Action
- Remediate systems | |
| 8. | Test Your Systems For Y2K Compliance
- Internal systems | |
| 9. | Prepare a contingency plan to ensure that your systems continue to operate successfully after December 31, 1999. |
FOR MORE INFORMATION:
- SEC Release No. 34-39858
- SEC Release IC-23112
- SEC Release IA-1716
- SEC Release 34-39859
The Internet also offers a wide range of sites on Y2K compliance.
SEC EXAMS SPOTLIGHT INDEPENDENT CONTRACTOR SUPERVISION *
* Reprinted by Permission
and reformatted for Internet
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
April 8, 1998
Marc E. Lackritz
President
Securities Industry Association
1401 Eye Street, NW
Washington, D.C. 20005-2225
Re: Supervision of Independent Contractors
Dear Marc:
I am writing today to alert your members to an area of focus for Commission and Self-Regulatory Organization examiners -- supervision by broker-dealers employing independent contractors.
Broker-dealers must supervise registered representatives who are independent contractors. As the Court of Appeals for the Ninth Circuit held in Hollinger v. Titan Capital Corp., 914 F.2d 1564 (9th Cir. 1990)(en bane), there is no support in the federal statutory scheme for distinguishing between registered representatives who are employees or agents, and those who are independent contractors. Thus, when we examine broker-dealers employing independent contractors, regardless of the securities product they may sell, we expect to find adequate supervisory systems within the meaning of Section 15(b)(4)(E) of the Exchange Act.
Of course, we recognize that each broker-dealer may develop its own supervisory system. We do not believe that there is any one "model" supervisory system that must be followed by all firms. We do believe, however, consistent with the Exchange Act, that all broker-dealers should have a system in place which can reasonably be expected to prevent and detect, insofar as practicable, violations by supervised persons. As the Commission has recognized in two enforcement actions, Consolidated Investment Services, Inc., 61 SEC Docket 21 (Jan. 5, 1996) and Royal Alliance Associates, Inc., 63 SEC Docket 1843 (Jan. 15, 1997)(settled), even the small and remote offices often used by independent contractors must be supervised.
In sum, I would like to remind your members that independent contractors must be supervised, and that oversight of such supervision is a priority for the Commission's examination program. If you wish, you may share this letter with your members.
Sincerely,
Lori A. Richards
cc: Stuart Kaswell
Senior Vice President and General Counsel
ORDER EXEMPTING CERTAIN OFFERS AND SALES OF
SECURITIES SOLELY TO ACCREDITED INVESTORS
WHEREAS the Banking Commissioner (the "Commissioner") is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (the "Act") and Sections 36b-31-2 et seq. of the Regulations of Connecticut State Agencies promulgated under the Act;
WHEREAS Section 36b-21(b)(15) of the Act states that: "The following transactions are exempted from [the securities registration requirement and the sales literature filing requirement in] sections 36b-16 and 36b-22 [of the Act]: ... any other transaction that the commissioner may exempt, conditionally or unconditionally, on a finding that registration is not in the public interest or for the protection of investors;
WHEREAS Section 36b-31(a) of the Act provides, in part, that "[t]he commissioner may from time to time make, amend and rescind ... orders as are necessary to carry out the provisions of ... [the Act], including ... orders ... defining any terms, whether or not used in said sections, insofar as the definitions are not inconsistent with the provisions of ... [the Act]. For the purpose of ... orders, the commissioner may classify securities, persons and matters within his jurisdiction, and prescribe different requirements for different classes";
WHEREAS the Commissioner finds that the issuance of this Order is necessary or appropriate in the public interest or for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act;
THE COMMISSIONER THEREFORE ORDERS THAT:
| 1. | Pursuant to Section 36b-21(b)(15) of the Act offers and sales of securities by an issuer in a transaction that meets the requirements of this Order, including, without limitation, offers and sales made over the Angel Capital Electronic Network ("ACE-Net") shall be exempt from Sections 36b-16 and 36b-22 of the Act if the following conditions are met:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2. | Nothing in this Order shall be construed to limit the Commissioner's authority to enforce the antifraud provisions in Section 36b-4 of the Act with respect to any person; and | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3. | This Order shall remain in effect until modified, superseded or vacated by the Commissioner or other lawful authority. |
| So ordered at Hartford, Connecticut this 14th day of April, 1998. |
John P. Burke Banking Commissioner |
Enforcement Highlights
Administrative Sanctions
James Americus Pabilonia a/k/a James A. Pabilonia, Sr. a/k/a James Leslie Pabilonia, a/k/a James L. Pabilonia a/k/a James Americas Pabilonia d/b/a World Financial Securities, Inc. (CRD # 839841)
On April 6, 1998, the Banking Commissioner entered a Consent Order (Docket No. CD-97-4037-S) addressing the allegations in a September 5, 1997 Order to Cease and Desist and Notice of Right to Hearing against James Americus Pabilonia of Willimantic, Connecticut. The Order to Cease and Desist had alleged that in late 1996, James Pabilonia effected securities transactions on behalf of Primex Prime Electronic Execution, Inc., a Chicago-based broker-dealer, at a time when he was not registered as an agent of that firm under the Act. The Order to Cease and Desist also claimed that Pabilonia used Internet and print advertising to promote World Financial Securities, Inc., an assumed name under which he conducted business and for which no Form DBA-1 had been filed under the Connecticut Uniform Securities Act Regulations. In addition, the Commissioner had alleged that Pabilonia filed a materially false or misleading statement with the department concerning his agent and branch office registration status.
The Consent Order directed Pabilonia to cease and desist from violative conduct and barred him for ten years from transacting business as a broker-dealer, agent, investment adviser or investment adviser agent in or from Connecticut.
Kenneth Von Kohorn d/b/a Von Kohorn Research & Advisory (CRD #1163037)
On May 13, 1998, the Banking Commissioner entered a Consent Order (Docket No. CO-98-5103-S) with respect to Kenneth Von Kohorn, an investment adviser registered under the Connecticut Uniform Securities Act. Von Kohorn, a sole proprietor, maintains his principal office at 225 Main Street, Westport, Connecticut. The Commissioner based his action on allegations that, notwithstanding a November 15, 1993 Letter of Understanding with the department, Von Kohorn continued to pay unregistered investment adviser agents for client referrals in purported violation of Section 36b-6(c) of the Act.
The Consent Order directed Von Kohorn to 1) cease and desist from regulatory violations; 2) designate an independent consultant to ensure implementation of revised supervisory and compliance procedures; 3) submit a quarterly report to the Division for two years concerning any complaints, actions or proceedings involving Connecticut residents; 4) register as investment adviser agents all individuals who would solicit clients for Von Kohorn; 5) distribute a copy of the Consent Order to all current and prospective clients; and pay 6) $5,630 to the department, $5,000 of which would constitute an administrative fine and $630 of which would represent back investment adviser agent registration fees.
Fabio Robert Borgognone (CRD # 2320110)
On June 1, 1998, the Banking Commissioner entered a Consent Order (No. CO-98-5129-S) pursuant to the Connecticut Uniform Securities Act with respect to Fabio Robert Borgognone of Brooklyn, New York. The Commissioner's action followed a Securities and Business Investments Division investigation which revealed indications that, from at least October 1997 through November 1997, Borgognone transacted business as an agent of Madison Capital Markets Corp. while not yet registered, a practice which allegedly contravened Section 36b-6(a) of the Act.
The Consent Order required that Borgognone cease and desist from regulatory violations; pay a $400 fine to the agency; refrain from reapplying for agent registration under the Act for three years; and complete the Regulatory Element of the Securities Industry Continuing Education Program within 60 days following entry of the Consent Order.
Frank Gregory Marino (CRD # 1953756) - Broker-dealer Agent Registration Revoked by Consent
On June 15, 1998, the Banking Commissioner entered a Consent Order (No. CO-98-5148-S) resolving certain matters raised in an April 9, 1998 summary suspension order and Notice of Intent to Revoke Registration as an Agent issued with respect to Frank Gregory Marino. The Consent Order, which was entered pursuant to the Connecticut Uniform Securities Act, vacated the earlier suspension order. The Consent Order contained findings that Marino, an agent of Joseph Stevens & Co., Inc., withheld or concealed material information from, and refused to furnish material information to the Commissioner during the course of an investigation or examination.
The Consent Order revoked Marino's registration as a broker-dealer agent and barred him for seven years from acting as a broker-dealer, broker-dealer agent, investment adviser, investment adviser agent or agent of issuer in Connecticut. The Consent Order also provided that Marino could reapply for registration after five years had elapsed but that approval of any such application would be in the discretion of the Commissioner.
R.D. White & Co., Inc. (CRD # 7011)
On June 25, 1998, the Banking Commissioner entered a Consent Order against R.D. White & Co., Inc. resolving certain matters raised in a March 13, 1998 Notice of Intent to Revoke the firm's broker-dealer registration. R.D. White & Co., Inc. is headquartered at 26 Broadway, Suite 745, New York, New York. The Notice of Intent to Revoke (Docket number NR-98-5072-S) had alleged that the firm improperly transacted business in Connecticut as a broker-dealer absent registration; employed unregistered agents; filed a false or misleading statement with the Commissioner; engaged in dishonest or unethical practices in the securities business; and failed to make records available to the Commissioner.
The Consent Order directed the firm to 1) pay a $50,000 administrative fine to the agency; 2) offer rescission to three Connecticut clients; and 3) within 30 days, implement procedures to review and approve all written sales presentations, scripts or similar documentation prior to their use by employees and designate a management person to conduct spot checks to ensure compliance with the approval process. In addition, the Consent Order mandated that, for two years, the ratio of "cold callers" to registered representatives not exceed 50%. The firm would be required to compute the ratio monthly and retain written documentation concerning the computation. The Consent Order also required that the firm 1) hold monthly compliance meetings with unregistered persons involved in soliciting or executing transactions; 2) within 60 days, hire a consultant to review firm supervisory and compliance procedures and prepare a report thereon; 3) notify the agency concerning what revisions to its supervisory and compliance procedures resulted from the consultant's review; 4) exercise diligence in obtaining from prior clearing firms certain sales blotters requested by the department; and 5) for two years, report quarterly to the agency regarding any complaints, actions or proceedings involving Connecticut residents.
Independent Investor, Inc.
On April 29, 1998, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-98-5070-S) under the Connecticut Uniform Securities Act with Independent Investor, Inc. of 1224 Farmington Avenue, West Hartford, Connecticut. The Stipulation and Agreement alleged that from July 1997 to December 1997, the corporation transacted business as an investment adviser absent registration under the Act. In executing the Stipulation and Agreement, the Commissioner acknowledged the corporation's reliance on a registration application filing service and noted that the corporation had made a $1,500 contribution to the department's Investor Education Fund.
Pursuant to the Stipulation and Agreement, Independent Investor, Inc. agreed to 1) refrain from violative conduct; 2) review, revise and implement supervisory and compliance procedures designed to prevent and detect violations of the Act and its regulations; and 3) reimburse the agency $500 for the division's investigative costs
E. C. Capital, Ltd. (CRD # 37447) - Broker-dealer Registration Summarily Suspended; Notice of Intent to Revoke Registration Issued
On April 23, 1998, the Banking Commissioner entered an Order summarily suspending the broker-dealer registration of E.C. Capital, Ltd. under the Connecticut Uniform Securities Act (Docket number SS-98-5419-S). On the same day, the Commissioner issued a Notice of Intent to Revoke the firm's broker-dealer registration. The Commissioner's action was predicated on allegations that during an examination and investigation of E.C. Capital, Ltd., the firm deleted approximately 300 files from its computers after agency examiners requested that the integrity of computer information be maintained for later review. The Commissioner also alleged that the deleted information was not subsequently made available to the agency. The Commissioner further claimed that such conduct violated state record keeping requirements and was a dishonest or unethical business practice under state law inasmuch as it contravened NASD Conduct Rule 8221. The firm was afforded an opportunity for a hearing on the summary suspension order and the Notice of Intent to Revoke.
Malton Donovan Edwards (CRD # 1348691) - Consent Order Conditioning Registration as an Investment Adviser Issued
On June 19, 1998 the Banking Commissioner issued a Consent Order conditioning the investment adviser registration of Malton Donovan Edwards under the Connecticut Uniform Securities Act. The Consent Order was based on Edwards' not meeting the strict terms of regulatory experience requirements. Edwards maintains an invest- ment advisory office in Windsor, Connecticut.
Pursuant to the Consent Order, Edwards agreed to 1) refrain from having custody of client funds or securities for two years; 2) obtain all requisite written client consents when exercising discretionary authority or placing purchase or sale orders for securities; 3) for two years, limit his investment advice to corporate debt; municipal securities; securities issued by investment companies subject to regulation under the Investment Company Act of 1940; United States government securities; insurance products subject to regulation by the Connecticut Insurance Commissioner; and securities listed on the New York Stock Exchange, the American Stock Exchange and the National Market System of NASDAQ; 4) absent written permission from the Division Director, refrain from sharing in commissions or other remuneration earned by any broker-dealer executing securities transactions as a result of recommendations made by Edwards; 5) for two years, refrain from acting as a finder for compensation, splitting commissions or receiving referral fees in conjunction with the sale or purchase of securities or the rendering of investment advice; and 6) for two years, report to the department on a quarterly basis concerning
Independent Capital Management - Consent Order Conditioning Registration as an Investment Adviser Issued
On June 25, 1998 the Banking Commissioner issued a Consent Order under the Connecticut Uniform Securities Act conditioning the investment adviser registration of Independent Capital Management of 1224 Farmington Avenue, West Hartford, Connecticut. The Consent Order was predicated on deficiencies in securities-related experience and training.
Pursuant to the Consent Order, the firm agreed to 1) refrain from having custody of client funds or securities for two years; and 2) for two years, limit its investment advice to commercial paper; certificates of deposit; securities listed on the New York Stock Exchange, the American Stock Exchange and/or NASDAQ-NMS; warrants and/or options to purchase any of these securities; corporate debt; municipal securities; securities issued by federally regulated investment companies; United States government securities; insurance products subject to regulation by the Connecticut Insurance Commissioner; and futures on tangibles and intangibles where the clients qualified as "accredited investors" under federal Regulation D. In addition, the Consent Order directed the firm to refrain from charging performance fees not permitted by statute. The Consent Order also precluded the firm for two years from 1) sharing in commissions earned by any broker-dealer executing securities transactions as a result of recommendations made by Independent Capital Management; 2) engaging in any activity that would trigger broker-dealer or agent registration under Connecticut's securities laws; and 3) acting as a finder for compensation, splitting commissions or receiving referral fees in conjunction with the offer, sale or purchase of securities or the rendering of investment advice. The Consent Order also contemplated that, for two years, the firm report to a division on a quarterly basis any complaints, actions or proceedings initiated against it; and periodically consult with legal counsel to ensure its compliance with state advertising and recordkeeping rules.
Contemporaneously with the Commissioner's entry of the Consent Order, the firm became registered as an investment adviser in Connecticut.
QUARTERLY STATISTICAL SUMMARY
April 1, 1998 through June 30, 1998
| Registration & Notice Filings |
Securities | Business Opportunities |
YTD |
|---|---|---|---|
| Coordination Registrations (initial) | 63 | n/a | 121 |
| Coordination Registrations (renewal) | 11 | 19 | |
| Qualification Registrations (initial) | 4 | 11 | |
| Qualification Registrations (renewal) | 0 | 0 | |
| Investment Company Notices (initial) | 358 | 770 | |
| Investment Company Notices (renewal) | 224 | 657 | |
| Regulation D and Section 4(2) Filings | 448 | n/a | 877 |
| Other Exemption or Exclusion Notices | 30 | 10 | 79 (SE) 18 (BO) |
| Business Opportunity Registrations (initial) | n/a | 16 | 23 |
| Business Opportunity Registrations (renewal) | n/a | 22 | 26 |
| Licensing & Branch Office Registration |
Broker-Dealers |
Investment Advisers |
Issuers |
YTD |
|---|---|---|---|---|
| Firm Initial Registrations Processed | 88 | 17 | n/a | 198 (BD) 34 (IA) |
| Firm Notice Filings Processed | n/a | 33 | n/a | 71 (IA) |
| Firms Registered as of 6/30/98 | 2,366 | 507 | n/a | n/a |
| Firms Filing Notice as of 6/30/98 | n/a | 584 | n/a | n/a |
| Agent Initial Registrations Processed | 9,081 | 179 | 3 | 20,800 (BD) 421 (IA) 27 (IS) |
| Agents Registered as of 6/30/98 | 95,592 | 4,304 | 184 | n/a |
| Branch Offices Registered as of 6/30/98 | 1,304 | 498 | n/a | n/a |
| Branch Office Notice Filings as of 6/30/98 | n/a | 43 | n/a | n/a |
| Examinations Conducted | 13 | 18 | n/a | 32 (BD) 43 (IA) |
| Investigations | Securities | Business Opportunities |
YTD |
|---|---|---|---|
| Investigations Opened | 60 | 1 | 119 (SE) 2 (BO) |
| Investigations Closed | 64 | 1 | 103 (SE) 2 (BO) |
| Investigations in Progress as of 6/30/98 |
96 | 2 | n/a |
| Referrals from Attorney General | 3 | 1 | 6 (SE) 1 (BO) |
| Referrals from Other Agencies | 3 | 0 | 6 (SE) 0 (BO) |
| Subpoenas Issued | 18 | 0 | 35 (SE) 0 (BO) |
| Administrative Enforcement Actions |
Number | Parties | YTD (#/Parties) |
|---|---|---|---|
| Securities | |||
| Consent Orders | 5 | 5 | 9/9 |
| Stipulation and Agreements | 1 | 1 | 5/6 |
| Cease and Desist Orders | 0 | 0 | 0/0 |
| Denial, Suspension & Revocation Orders | 3 | 2 | 6/5 |
| Conditional Licensing Orders | 2 | 2 | 2/2 |
| Other Notices and Orders | 2 | 2 | 5/5 |
| Referrals (Civil) | 0 | 0 | 0/0 |
| Referrals (Criminal) | 2 | 2 | 3/3 |
| Business Opportunities | |||
| Consent Orders | 0 | 0 | 0/0 |
| Stipulation and Agreements | 0 | 0 | 0/0 |
| Cease and Desist Orders | 1 | 2 | 1/2 |
| Other Notices and Orders | 0 | 0 | 0/0 |
| Referrals (Civil) | 0 | 0 | 0/0 |
| Referrals (Criminal) | 0 | 0 | 0/0 |
| Monetary Sanctions | $ Assessed | YTD |
|---|---|---|
| Consent Orders and Stipulation and Agreements (Securities) |
$ 58,030 | $ 89,500 |
| Formal Administrative Fines (Securities) | 0 | 0 |
| ______ | _____ | |
| Totals | $ 58,030 | $ 89,500 |
| Reimbursement to the Investing Public |
Voluntary Restitution Offers; Other Monetary Relief |
YTD |
|---|---|---|
| Securities | $ 1,423,980 | $ 1,785,133 |
| Business Opportunities | 2,995 | 2,995 |
| ______ | _____ | |
| Totals | $ 1,426,975 | $ 1,788,128 |