Securities and Business Investments Division
Securities Bulletin
Vol. XIII No. 4	Winter 1999

Features:

• A Word from the Banking Commissioner
• Commissioner Comments on SEC Proposal to Exclude Certain Broker-dealers from Investment Advisory Treatment
• Fourth Quarter Statistical Summaries

Enforcement Highlights:

• Administrative Actions
• Settlements

Contributors:

Ralph Lambiase, Division Director

Cynthia Antanaitis, Assistant Director and Bulletin Editor

Eric Wilder, Assistant Director

Marge Kagan, Subscription Coordinator

A WORD FROM THE BANKING COMMISSIONER

In the previous Bulletin issue, I noted that the Department of Banking had issued a joint press release with the Connecticut Department of Insurance in October 1999 warning insurance agents about fraudulent schemes involving the marketing of "high yield, low risk" promissory notes and commercial paper.

Insurance Commissioner George Reider and I said in the news release that two Florida-based companies had apparently duped local agents into marketing these investments by falsely telling them that the products were not securities and that the investments were fully backed by foreign surety companies.

Since then, the Department has issued orders to cease and desist against two companies that marketed such promissory notes - Sebastian International Entertainment, Inc. and World Vision Entertainment, Inc. - and orders to cease and desist against two issuers of guarantees on the promissory notes - Global Insurance Company, Ltd., a Costa Rican company whose address is referenced by its proximity to a local Kentucky Fried Chicken outlet, and New England International Surety, Inc., based overseas in Belgium and Switzerland. The orders may be read in their entirety by accessing our web site.

Unfortunately, it appears that similar promissory notes and commercial paper are still being actively marketed to investors in Connecticut and across the country. To date, the Securities Division has received complaints from Connecticut residents involving over $5 million in such investments. This continuing problem underscores the need for adequate supervision of salespeople who work independently outside of an office location and an equally important need for companies to properly educate their agents, some of whom have been victimized in these cases along with their clients.

A copy of a comment letter the department recently submitted to the Securities and Exchange Commission regarding a proposed rule deeming certain broker-dealers not be investment advisers is included in this Bulletin issue. While we share the Commission's desire to provide some regulatory relief, we also believe taking an exemptive (versus an exclusionary) approach would preserve more authority to protect investors.

I'm very pleased to note that the new millennium has dawned without any significant Y2K problems encountered by financial services firms, who rely so greatly today on computer technology. Industry is to be genuinely commended for its hard work in successfully preparing for the Y2K rollover.

TEXT OF BANKING COMMISSIONER'S COMMENT LETTER ON

SEC RELEASE NUMBER 34-42099: CERTAIN BROKER-DEALERS NOT TO BE INVESTMENT ADVISERS

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Dear Secretary Katz:

As Banking Commissioner of the State of Connecticut, I oversee an agency charged with regulatory responsibility over various financial industry sectors, including broker-dealers and investment advisers. Our agency is acutely sensitive to changes affecting competitive conditions in the financial services marketplace and can readily understand the Commission’s desire to afford some latitude to broker-dealers offering a non-commission based pricing structure to their customers. In our view, any measure that would reduce incidents of abusive sales practices stemming from a commission-driven pricing structure is meritorious. However, we have concerns with the implementation of the proposal and its workability as drafted.

I.

By Framing the Proposal as an Exception from the Federal "Investment Adviser" Definition the Proposal Would Have an Untoward Effect on State Laws and Remove Federal Antifraud Protection

Section 203A(b)(1)(B) of the Investment Advisers Act of 1940 (the "Advisers Act") removed state licensing authority over investment advisers and their supervised persons where the investment adviser was excepted from the federal definition of "investment adviser" under Section 202(a)(11) of the Advisers Act. Although state registration authority was preserved over "investment adviser representatives" having a place of business within a given state, SEC Rule 203A-3 defined the term "investment adviser representative" to be limited to individuals associated with a federally registered investment adviser.

Similarly, in promulgating Rule 203A-3, the Commission pointed out that investment adviser representatives were a subset of "supervised persons." 15 U.S.C. 80b-2(25) defines "supervised person" to consist of 1) partners, officers or directors of an investment adviser; 2) employees of an investment adviser; and 3) persons providing investment advice on behalf of the investment adviser who are subject to the adviser’s supervision and control. Since "supervised persons" must be associated with an investment adviser, entities excepted from the federal definition of "investment adviser" cannot have "supervised persons." Since federally excepted advisers have neither "supervised persons" nor "investment adviser representatives", the proposal would create a class of individuals, currently registered under state law as investment adviser representatives, whose status is cast in doubt.

To avoid this interpretive problem, we would recommend that the Commission utilize its authority under Section 206A of the Advisers Act to exempt affected broker-dealers from federal registration and the incidents of registration (e.g. advisory recordkeeping requirements). Taking an exemptive (versus an exclusionary) approach would also permit the Commission to retain antifraud jurisdiction under Section 206 of the Advisers Act. Since Section 206 only extends to "investment advisers", excepted entities would not fall within its prohibitions. In sum, we would err on the side of investor protection and enhanced federal enforcement authority while acknowledging the Commission’s desire to provide registration relief. Taking an exemptive approach also makes more sense in terms of the text of proposed Rule 202(a)(11)-1. A requirement of the proposed rule is that the broker-dealer receive "special compensation" - a factor that would otherwise destroy the exclusion. If, notwithstanding special compensation, the Commission proposes to excuse registration, the better legal vehicle would be an exemption from registration, not a wholesale exclusion from the statute.

Since many state statutes have a broker-dealer exclusion that tracks that in Section 202(a)(11) of the Advisers Act, it is particularly important that the Commission approach the issues with care.

Although a requirement of proposed Rule 202(a)(11)-1 is that advisory services be "solely incidental" to the brokerage services provided to customer accounts, the release does not list those factors the Commission would consider in determining whether the services are "solely incidental." Because of their special nature, we believe that discretionary accounts and most wrap fee arrangements are inherently advisory and not solely incidental to traditional brokerage functions. In addition, we believe that how a product or service is advertised can sway prospective clients more than a standard disclosure and solidify a broker-dealer’s advisory marketing niche. Therefore, the rule should make it plain that, if a broker-dealer uses the brokerage disclaimer in its advertising, the advertising should not contradict the disclaimer.

We also believe that requiring each broker-dealer to measure its investment adviser status on an account by account basis could present compliance difficulties. Again, if relief is sought from independent requirements such as brochure delivery, we would recommend an exemptive rather than an exclusionary approach.

Thank you for this opportunity to comment. Should you or the Commission staff have any questions concerning this letter, please contact Ralph Lambiase, Director of the department’s Securities and Business Investments Division at (860) 240-8231.

Administrative Actions

First Providence Financial Group, LLC (CRD # 39469) - Broker-dealer Registration Summarily Suspended; Notice of Intent to Revoke Registration and to Fine Issued

On December 14, 1999, the Banking Commissioner entered an Order Summarily Suspending the Broker-dealer Registration of First Providence Financial Group, LLC of 90 Broad Street, 10th Floor, New York, New York. On the same day, the Commissioner issued a Notice of Intent to Revoke the firm's broker-dealer registration and a Notice of Intent to Fine (Docket No. SS-5482-S). The Commissioner alleged that during the course of an agency examination and investigation, the firm, through its Chief Executive Officer Kenneth Klein, concealed material information from department staff by deleting approximately 20 files from its computer system after receiving a request to maintain the integrity of the information. The Commissioner also claimed that the firm had engaged in dishonest or unethical practices by employing "cold callers" who were not registered with the National Association of Securities Dealers. In addition, the Commissioner maintained that the firm had employed unregistered agents in violation of Section 36b-6(b) of the Connecticut Uniform Securities Act.

A hearing on the Notice of Intent to Fine was scheduled for February 3, 2000. The firm was also afforded an opportunity to request a hearing on the summary suspension order and the Notice of Intent to Revoke registration.

Visionary Entertainment Group, Inc. (CRD # 44647); Elyse Berzon and Jodie Allen Ordered to Cease and Desist

On October 20, 1999, the Banking Commissioner entered an Order to Cease and Desist and Notice of Right to Hearing (Docket No. CD-99-5327-S) against Visionary Entertainment Group, Inc. of 530 South Federal Highway, Deerfield Beach, Florida; Jodie Allen, its president and chief executive officer; and Elyse Berzon, an agent of the company. The Order to Cease and Desist alleged that Visionary Entertainment Group, Inc., through Berzon, offered and sold unregistered securities in the form of ownership interests in movies to be produced by the company. One such film was "Little Secret Agent Girl." Berzon was purportedly not registered as an agent of the issuer at the time. The Cease and Desist Order also claimed that Visionary Entertainment Group, Inc. and Allen violated the antifraud provisions of the Connecticut Uniform Securities Act by making false representations concerning the prospects of "Little Secret Agent Girl" and guaranteeing that investor funds would be returned if the company failed to provide a film within a reasonable time and within budget by February, 1998. Since none of the respondents requested a hearing within the prescribed time period, the Order to Cease and Desist became permanent as to each on November 26, 1999.

Preston Langley Asset Management, Inc. f/k/a Lexington Capital Corporation (CRD # 35733) - Notice of Intent to Suspend Broker-dealer Registration, to Fine and to Condition Securities Activities Issued

On October 8, 1999, the Banking Commissioner issued a Notice of Intent to Suspend Registration as Broker-dealer; Notice of Intent to Impose Conditions on Securities Activities of Broker-dealer; and Notice of Intent to Fine with respect to Preston Langley Asset Management, Inc. (Docket No. NSCF-99-5162-S). The firm, formerly known as Lexington Capital Corporation, is located at 48 West 38th Street, 7th Floor, New York, New York.

In issuing the Notices, the Commissioner claimed that from at least July 1997, the firm had employed at least two unregistered agents in violation of Section 36b-6(b) of the Connecticut Uniform Securities Act; failed to apprise the department of a net capital deficiency occurring between October 1997 and April 1998; and failed to reasonably supervise its agents in a manner designed to prevent noncompliance with applicable securities laws and regulations. The respondent was afforded an opportunity for a hearing on the Commissioner's allegations.

Settlements

Smith, Brown & Groover, Inc. (CRD # 1329) Assessed $4,900 for Unregistered Broker-dealer Activity

On December 27, 1999, the Banking Commissioner entered a Consent Order (File No. CO-99-5457-S) with respect to Smith, Brown & Groover, Inc., a securities broker-dealer having its principal office at 4001 Vineville Avenue, Macon, Georgia. In conjunction with its application for broker-dealer registration in Connecticut, the firm voluntarily disclosed that, at various times between 1996 and 1999, it had serviced one or more Connecticut accounts at a time when neither the firm nor its agents were appropriately registered under the Connecticut Uniform Securities Act.

The Consent Order obligated the firm to pay $4,900 to the department, $4,000 of which constituted an administrative fine; $400 of which represented reimbursement for past due registration fees; and $500 of which constituted reimbursement for agency investigative costs. The Consent Order also required that, within 30 days, the firm furnish proof that it had provided affected Connecticut customers with a commission refund or credit, at the customer's election, covering the period of unregistered activity. Finally, the Consent Order directed the firm to provide quarterly reports for two years concerning any complaints, actions or proceedings involving Connecticut residents. The firm became registered as a broker-dealer in Connecticut on December 27, 1999.

Mason Securities, Inc. (CRD # 12967) Fined $1,500 for Unregistered Branch Office Activity

On December 21, 1999, the Banking Commissioner entered a Consent Order (File No. CO-99-5481-S) with respect to Mason Securities, Inc., a registered broker-dealer having its principal office at 11800 Sunrise Valley Drive, #550, Reston, Virginia. The Commissioner's action was predicated on claims that, from approximately September 1994 through September 1999, the firm transacted business from an unregistered branch office in violation of Section 36b-6(d) of the Connecticut Uniform Securities Act. The branch office was staffed by Andrew R. Flagg (CRD number 1140635) who had been the subject of a September 16, 1999 Consent Order by the Commissioner.

The Consent Order fined Mason Securities, Inc. $1,500 and required that it take steps to enhance its supervision of Flagg's securities activities, including conducting an annual branch office audit of any Connecticut branch office staffed by Flagg. In addition, the Consent Order required that the firm provide quarterly reports to the department for two years concerning any securities-related complaints, actions or proceedings initiated by Connecticut residents and relating to any of the firm's Connecticut branch offices or agents.

Miller, Johnson & Kuehn, Incorporated (CRD # 8678) Fined $50,000; Ordered to Cease and Desist from Regulatory Violations

On December 13, 1999, the Banking Commissioner entered a Consent Order (File No. CO-99-5167-S) with respect to Miller, Johnson & Kuehn, Incorporated, a registered broker-dealer having its principal office at 5500 Wayzata Boulevard, Suite 800, Minneapolis, Minnesota. The Commissioner's action was based on allegations that 1) from at least July, 1996 through June, 1998, the firm had employed unregistered agents; 2) from at least September 1997 through March 1998, the firm had failed to institute adequate procedures for identifying its customers before effecting transactions in their accounts; and 3) the firm had not established, enforced and maintained an adequate system for supervising its agents.

The Consent Order fined Miller, Johnson & Kuehn $50,000 and directed it to cease and desist from regulatory violations. Half of the penalty amount (or $25,000) was payable upon entry of the Consent Order. The Consent Order permitted the firm to obtain a credit for the remaining $25,000 penalty amount if it provided an itemized accounting demonstrating that, over the ensuing twelve months, $25,000 had been expended on internal improvements to its compliance, operational and supervisory structure. The Consent Order authorized the Commissioner to immediately impose a $25,000 fine on the firm if the firm failed to abide by the terms of the Consent Order. The Consent Order also required that, for two years, the firm provide the agency with quarterly reports concerning complaints, actions or proceedings involving Connecticut residents.

Strategic Assets, Inc. (CRD # 37590) Fined $10,000 for Supervisory Lapses; Unregistered Branch Office Activity

On October 28, 1999, the Banking Commissioner entered a Consent Order (File No. CO-99-5166-S) with respect to Strategic Assets, Inc., a registered broker-dealer having its principal office at 445 Broad Hollow Road, Suite 425, Melville, New York. The Commissioner's action was based on claims that the firm failed to exercise adequate supervisory controls over one James Pabilonia by failing to sufficiently monitor the mailing of a client's check to Pabilonia for delivery to the client and by failing to conduct any on-site examinations of Pabilonia's office during the ten months Pabilonia was associated with the firm. Pabilonia, who was arrested on December 22, 1998, was charged with securities fraud and other counts including larceny, money laundering and racketeering and was the subject of a ten year bar imposed by the Commissioner on April 6, 1998. The Consent Order also alleged that Strategic Assets, Inc. transacted securities business from an unregistered branch office manned by Pabilonia at 670 Main Street, 4th Floor, Willimantic, Connecticut.

The Consent Order fined the firm $10,000 and directed it to offer investor restitution for losses attributable to Pabilonia's alleged misconduct. In addition, the Consent Order directed the firm to cease and desist from regulatory violations; implement revised supervisory and compliance procedures; and provide quarterly reports to the department for two years concerning any securities-related complaints, actions or proceedings involving Connecticut residents.

Nationwide Advisory Services, Inc. (CRD # 11173) Fined $20,000 and Assessed $5,000 in Costs for Unregistered Branch Office Activity

On October 26, 1999, the Banking Commissioner entered a Consent Order (File No. CO-99-5399-S) with respect to Nationwide Advisory Services, Inc., a registered broker-dealer based at One Nationwide Plaza, Columbus, Ohio. The Commissioner alleged that at various times commencing in 1996, the firm had 1) transacted business from several unregistered Connecticut branch offices; 2) failed to notify the department prior to the cessation of business activity at three branch offices, one of which was its Connecticut supervisory branch; 3) failed to promptly notify the Commissioner of managerial changes at eleven Connecticut branch offices; 4) failed to comply with a prior representation that its Connecticut branch offices would be open for inspection by the department; 5) failed to ensure that seven of its supervisory personnel passed a qualifying examination as principal; and 6) failed to establish, maintain and implement an adequate supervisory structure.

The Consent Order fined the firm $20,000 and required that it reimburse the department an additional $5,000 for investigative costs. In addition, the Consent Order required that the firm 1) incorporate into its supervisory and compliance manual a written plan demonstrating that a sufficient, technologically up to date mechanism was in place to track the examination histories of its Connecticut agents and to "flag" those who had not passed a product-specific examination or a principal's examination; 2) decentralize its Connecticut operations by establishing an in-state supervisory office; 3) designate an in-state back-up sales officer; and 4) staff each Connecticut branch office with an on-site principal and not seek a waiver from that requirement for two years.

FSC Securities Corporation (CRD # 7461) Sanctioned for Unregistered Branch Office Activity

On October 18, 1999, the Banking Commissioner entered a Consent Order (File No. CO-99-5339-S) with respect to FSC Securities Corporation, a broker-dealer having its principal office at 2300 Windy Ridge Parkway, Suite 1100, Atlanta, Georgia. The Consent Order alleged that, from at least May 1998 through August 1998, the firm transacted business from 70 Balfour Drive, West Hartford, Connecticut without registering that location as a branch office under the Connecticut Uniform Securities Act.

The Consent Order imposed a $6,500 monetary sanction on the firm, directing FSC Securities Corporation to disgorge $4,000 in commissions earned during the period of unregistered branch office activity; pay an administrative fine of $1,500 and contribute $1,000 to the agency's Investor Education Fund. In addition, the Consent Order mandated that the firm implement revised supervisory and compliance procedures; and issue a compliance notice to its in-state agents both explaining the firm's supervisory obligations and educating them on trade name filing requirements under state law.

FFP Securities, Inc. (CRD # 16337) Assessed $35,000; Ordered to Satisfy Noteholders and Restrict its Securities Business for Two Years

On October 1, 1999, the Banking Commissioner entered a Consent Order (Docket No. CO-99-4083-S) under the Connecticut Uniform Securities Act with respect to FFP Securities, Inc., a broker-dealer having its principal office at 15455 Conway Road, Chesterfield, Missouri. The Consent Order followed a Securities and Business Investments Division investigation which alleged that the firm had 1) failed to establish, enforce and maintain an adequate supervisory system to safeguard against unsuitable limited partnership, real estate investment trust and variable annuity recommendations made by its agents; and 2) sold unregistered nonexempt notes to Connecticut residents at various times from September 1995 forward. The Commissioner's action complemented a similar Consent Order between the firm and its home state of Missouri.

The Connecticut Consent Order required that the firm engage a manager for special oversight of its Connecticut office operations and hire an outside consultant to prepare written recommendations on the firm's internal supervisory and compliance procedures. In addition, the Consent Order established a Subordinated Note Reserve Fund and a Note Interest Reserve Account administered by an independent trustee to ensure payment of principal and interest on notes sold to investors. Under the Consent Order, the firm would be prohibited from selling any additional subordinated notes until the obligations of existing noteholders were satisfied. Aside from handling liquidating transactions, the firm was also precluded for two years from effecting securities transactions in Connecticut unless those transactions involved investment company securities, governmental securities, exchange-listed options, and securities listed on the New York Stock Exchange, the American Stock Exchange or the National Market System of NASDAQ.

The Consent Order also directed the firm to pay $35,000 to the department, $25,000 of which would constitute reimbursement for agency investigative costs and $10,000 of which would represent a contribution to the department's Investor Education Fund. The firm was also ordered to provide quarterly written reports to the agency for two years describing any securities complaints, actions or proceedings involving Connecticut residents.

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STATISTICAL SUMMARY

The Securities and Business Investments Division is also charged with
administering the Connecticut Business Opportunity Act.

Securities Division