|Securities and Business Investments Division|
|Vol. X No. 4||December 1996|
- A Word from the Banking Commissioner
- Commissioner Issues Order on Business Opportunity Registration Status of Certain Internet Offerings
- Acceptability of Series 7A, 7B, 17 and 47 Examinations
- Quarterly Statistical Summary
- Ralph A. Lambiase, Division Director
- Cynthia Antanaitis, Assistant Director and Bulletin Editor
- Eric J. Wilder, Assistant Director
Jeffrey P. Halperin, Senior Administrative Attorney
- Louise Hanson, Subscription Coordinator
- Cynthia Antanaitis, Assistant Director and Bulletin Editor
Securities Forum '96, held on November 25 at the Four Points Hotel in Waterbury, proved to be a great success. Approximately 365 people registered for the eighth annual event and the evaluation comments received have been uniformly positive. Planning will begin shortly for Securities Forum '97, and we are very interested in further improving the conference. Thoughts considered for Securities Forum '97 include scheduling additional presentations, perhaps three concurrent panels, to cover a further breadth of topics or offering smaller, more in-depth workshops to focus in greater detail on important issues. As always, we welcome your suggestions on how we can organize Securities Forum '97 to best meet your needs.
According to recent press reports, some securities firms have allegedly served as fronts for criminal activity. If true, we find such news stories disturbing. A firm applying for broker-dealer registration may, for example, list a slate of officers, directors and control persons who are free of any disciplinary history, but in fact be indirectly and secretly controlled by "consultants" or others with questionable backgrounds. On its face, a regulator would have no reason to deny such an application. This type of activity may result in financial losses to investors, cause investors to lose confidence in the integrity of the marketplace and ultimately hamper the ability of businesses to raise capital. As industry pursues a uniform licensing standard, such alleged problems warrant that licensing standards be both meaningful and enforceable in a timely and effective manner.
A further threat to the integrity of the marketplace arises from the calculated demise of firms facing significant arbitration awards or regulatory penalties. Such firms close up shop to escape liability, leaving individual investors with unrecoverable losses. Meanwhile, the agents of these firms mass transfer to a new firm to continue in business. While a greater regulatory focus on permanently barring or otherwise sanctioning culpable individuals may help, such an approach would necessarily be after-the-fact and perhaps would not benefit harmed investors. In order to preserve investors' confidence, the federal government and industry should consider establishing a restitution fund to meet arbitration awards and regulatory sanctions against such firms which abruptly shut their doors, leaving investors out in the cold.
America's securities markets have enjoyed the confidence of millions of families and individuals who have entrusted their financial futures to investments. At a time when the nation's securities regulatory structure is undergoing significant relaxation following enactment of Congressional legislation, issues such as those raised above are troubling. It is important to remember the integral role investors play in the marketplace and the risk posed by not keeping investors' needs first and foremost.
--John P. Burke
ORDER EXEMPTING CERTAIN OFFERS OF BUSINESS OPPORTUNITIES
MADE ON THE INTERNET FROM BUSINESS OPPORTUNITY REGISTRATION
WHEREAS the Banking Commissioner (the "Commissioner") is charged with the administration of Chapter 672c of the Connecticut General Statutes, the Connecticut Business Opportunity Investment Act (the "Act").
WHEREAS Section 36b-62(a) of the Act provides, in part, that: "Prior to the . . . offer for sale of a business opportunity the seller shall register said business opportunity with the commissioner . . . ."
WHEREAS Section 36b-65(a) adds that "[u]nless exempted by subsection (e) of this section , any person who advertises, sells, contracts, offers for sale or promotes any business opportunity in this state or from this state must register with the commissioner and file an application . . ."
WHEREAS Section 36b-65(e)(3) states, in part, that: "The following business opportunities are exempt from subsections (a) and (b) of section 36b-62 . . . [section] 36b-64; subsections (a), (b), (c), (d) and (f) of this section . . . and . . . [subdivision] (1) . . . of section 36b-67 [of the Act] . . . (3) any other business opportunity that the commissioner by . . . order may exempt, conditionally or unconditionally, if he finds that enforcement of all the provisions of sections 36b-60 to 36b-79, inclusive, with respect to such business opportunity is not necessary to protect the public interest, and for the protection of purchaser-investors due to the limited character of the business opportunity . . . .";
WHEREAS the Commissioner acknowledges that an attempt or offer to dispose of, or the solicitation of an offer to buy, a business opportunity or an interest in a business opportunity for value, that is made on or through the Internet, the World Wide Web or similar proprietary or common carrier electronic system (such systems hereinafter being referred to collectively as the "Internet"), would constitute an "offer" for purposes of Section 36b-61(5)(B) of the Act, and would otherwise trigger registration and related requirements under the Act;
WHEREAS the Commissioner also acknowledges that use of the Internet may be a legitimate means of encouraging business growth and that a communication made on the Internet may be directed not only to particular recipients but also to anyone with access to the Internet;
WHEREAS the Commissioner finds that the issuance of this Order is necessary or appropriate in the public interest or for the protection of purchaser-investors and consistent with the purposes fairly intended by the policy and provisions of the Act;
WHEREAS the Commissioner further finds that the registration of certain Internet offers is not necessary or appropriate in the public interest or for the protection of purchaser-investors;
THE COMMISSIONER THEREFORE ORDERS THAT:
1) Pursuant to Section 36b-65(e)(3) of the Act, offers of business opportunities made by or on behalf of sellers on or through the Internet shall be exempt from the registration and consent to service of process requirements in Sections 36b-62(a) and (b); the bonding requirement in Section 36b-64, the registration and related requirements in subsections (a), (b), (c), (d) and (f) of Section 36b-65, and the prohibition against unregistered offers in Section 36b-67(1) of the Act if the following conditions are observed:
(A) The Internet offer indicates, directly or indirectly, that the business opportunity is not being offered to residents of Connecticut;
(B) The Internet offer is not specifically directed to any person in Connecticut by, or on behalf of, the seller of the business opportunity; and
(C) No sales of the seller's business opportunities are made in Connecticut as a result of the Internet offering until such time as the business opportunity has been registered under Sections 36b-62 and 36b-65 of the Act and a disclosure document is delivered to Connecticut purchaser- investors within the time frame prescribed by Section 36b-63 of the Act
2) Nothing in this Order shall preclude a seller, or person acting on behalf of a seller, which offers business opportunities on the Internet or effects sales to Connecticut purchaser- investors following such an offering from relying upon any other applicable exemption pursuant to Section 36b-65(e) of the Act, or any exclusion pursuant to Section 36b-61(6)(D) of the Act.
3) Nothing in this Order shall relieve any person relying on the exemption from registration herein from compliance with other applicable provisions of the Act or any regulation or order under the Act, including, without limitation, the antifraud provisions in Section 36b-67(6) of the Act.
4) This Order shall remain in effect until amended or rescinded by the Commissioner.
So ordered at Hartford, Connecticut this 20th day of November 1996.
John P. Burke
Text of Interpretive Letter
This will acknowledge receipt of your October 11, 1996 letter concerning the above matter as well as correspondence dated October 15, 1996 from Anthony Colonna, Senior Testing Specialist with the New York Stock Exchange, Inc. (the "NYSE"). The information contained in the NYSE's correspondence and in the accompanying enclosures describing the Series 7A, Series 7B, Series 17 and Series 47 examinations is incorporated by reference herein. The NYSE's correspondence raises the issue of whether Connecticut would accept the above examinations in lieu of the Series 7 and Series 63 examination for agents seeking registration under the Act. That such agents would have to be registered to transact business in this state appears likely based on the information presented.
Series 7A Examination
The materials indicate that the Series 7A examination is a subset of the General Securities Registered Representative Examination (Series 7), and was designed to test persons conducting a limited public business in NYSE-listed securities from the NYSE Floor. Such activity is generally limited to accepting orders directly from professional investors for execution on the trading floor. NYSE Floor members electing to serve retail customers or to move off-Floor to serve either retail or professional customers would still have to pass the Series 7 examination. "Professional customers" would include financial institutions, insurance companies, investment trusts, governmental entities, charitable or non-profit educational institutions, pension or profit sharing plans or any person having net tangible assets of at least sixteen million dollars. The Securities and Exchange Commission approved the examination on July 29, 1993, noting that the examination would ensure requisite knowledge levels for floor members performing these limited functions.
Designed as a companion to the Series 7A examination, Series 7B tests floor clerks (order takers) of members and member organizations engaged in public business with professional customers. As is the case with Series 7A, persons wishing to serve retail customers or move off-Floor to serve either retail or professional customers would still have to pass the Series 7 examination. The Securities and Exchange Commission approved the examination on July 8, 1994, observing that the examination would ensure requisite knowledge levels for floor clerks performing these limited functions.
Series 17 and Series 47
The supporting documents explain that Series 17 (United Kingdom Limited Registered Representative Examination) was designed for United Kingdom approved registered representatives wishing to sell securities in the United States through U.S. broker-dealers. Similarly, Series 47 (Japan Module of the General Securities Registered Representative Examination) was intended to cover Japanese registered representatives seeking to sell securities in the United States. Only individuals who are registered in Japan as Class-1 Sales Representatives and are in good standing with the Japan Securities Dealers Association would be eligible to take the exam. The Securities and Exchange Commission has approved both the Series 17 and Series 47 examinations to test knowledge of U.S. securities laws, markets, investment products, and sales practices. Neither examination, however, would qualify an individual to sell municipal securities; representatives wishing to sell municipal securities would be required to take the Series 7 or the Series 52 examination.
Connecticut Examination Requirements
Section 36b-31-15e(d) of the Regulations requires that:
- Each applicant for registration as an agent shall supply evidence to the commissioner that such applicant has taken and successfully passed (1) an examination given by the United States Securities and Exchange Commission or by a securities self-regulatory organization registered under the Securities Exchange Act of 1934, and (2) effective October 1, 1994, the Uniform State Agents Securities Law Examination [Series 63].
Please be advised that Connecticut would accept the Series 7A, Series 7B, Series 17 or Series 47 examination in fulfillment of Section 36b-31-15e(d)(1) of the Regulations for agents eligible to take such examinations who seek registration under the Act. In addition, although the examinations would fulfill the requirement in Section 36b-31-15e(d)(1) of the Regulations, the agent would nonetheless be required, absent a waiver, to meet the Series 63 examination requirement in Section 36b-31-15e(d)(2) of the Regulations. In the case of floor members and floor clerks who pass the Series 7A or 7B examination and who perform the specialized functions described in your correspondence, we believe that a general waiver of the Series 63 examination requirement would be warranted. At the present time, however, representatives passing the Series 17 or Series 47 examinations should pursue individualized waivers with our office. Such waivers will be considered in light of the representative's disciplinary history, industry experience and education.
John P. Burke
October 17, 1996
Bell Connections, Inc. (CRD # 41520)
On November 21, 1996, the Banking Commissioner issued an Order to Cease and Desist and Notice of Right to Hearing (Docket number CD-96-2890-S) under the Connecticut Uniform Securities Act against Bell Connections, Inc., a corporation located at 21031 Ventura Boulevard, Suite 1000, Woodland Hills, California. The Order to Cease and Desist alleged that, from at least October, 1995, the corporation offered application service agreements to Connecticut residents. The application service agreements would permit investors to obtain licenses from the Federal Communications Commission to operate private carrier paging licenses with substantial assistance from Bell Connections, Inc. Such agreements allegedly constituted securities which were neither registered under the Connecticut Uniform Securities Act nor exempt from statutory registration requirements. Since Bell Communications, Inc. did not request a hearing on the allegations in the Order to Cease and Desist, the order became permanent on December 16, 1996.
Chester J. Dudzik, Jr. (CRD # 1325508)
On December 12, 1996, the Banking Commissioner issued an Order to Cease and Desist, Notice of Right to Hearing and Notice of Intent to Fine (Docket number CD/NF-96-3004-S) under the Connecticut Uniform Securities Act against Chester J. Dudzik, Jr. of Darien, Connecticut. The Order to Cease and Desist and Notice of Intent to Fine alleged that, during July 1995, Dudzik, then employed as an agent of Auerbach, Pollak & Richardson, Inc., a broker-dealer, effected transactions in the common stock of The Rattlesnake Holding Company, Inc.; those shares were listed for trading on the Small Cap Market of NASDAQ. At the time, however, Dudzik was subject to a restriction imposed by a May 23, 1994 Consent Order of the Commissioner (No. CO-94-2606-S) prohibiting him for three years from soliciting or recommending securities transactions except for 1) equity or debt securities listed on the New York Stock Exchange, the American Stock Exchange or NASDAQ-NMS; and 2) fixed income securities, mutual fund shares, or professionally managed accounts. Respondent Dudzik was afforded an opportunity for a hearing on the Order to Cease and Desist. A January 22, 1997 hearing date was initially scheduled on the Notice of Intent to Fine.
Stratton Oakmont, Inc. (CRD # 18692)
On November 1, 1996, the Banking Commissioner entered a Consent Order (No. CO-96- 2615-S) with respect to Stratton Oakmont, Inc. ("Stratton") of 1979 Marcus Avenue, Lake Success, New York. The Consent Order followed a June 13, 1996 Notice of Intent to Suspend or Revoke the firm's broker-dealer registration under the Connecticut Uniform Securities Act.
The terms of the Consent Order preserved investor rights to participate in an Expedited Claims Mediation/Arbitration Process through the auspices of the NASD. In addition, the Consent Order restricted the firm's activity for thirty days to effecting unsolicited securities trades; any commissions derived by the firm from this limited activity would be contributed to the agency's Investor Education Fund. The Consent Order also prohibited Stratton, for two years, from effecting securities transactions for Connecticut residents who were not "accredited" within the meaning of federal Regulation D. Previous investors who did not qualify for "accredited" status would receive a rescission offer from the firm to receive back the amounts paid for their securities minus profits. The Consent Order also required that certain structural changes be made to the firm's operations. For example, the firm would be required to 1) retain a General Counsel to ensure legal compliance with regulatory requirements; 2) increase the number of outside directors so that they constituted a majority of the entire board; 3) provide notice of major corporate changes to the department; 4) revise its supervisory procedures; 5) mandate continuing education for all principals and managers servicing Connecticut accounts; 6) register as agents all telephone "cold callers" targeting Connecticut residents; and 7) randomly tape "cold calls" made to Connecticut residents to ensure regulatory compliance. The Consent Order also required that the firm's directors execute an Acknowledgment of Fiduciary responsibility.
Finally, the Consent Order fined the firm $50,000 and required that it reimburse the agency $12,500 for investigative and examination costs.
Douglas N. Berkey (CRD # 1253762)
On November 19, 1996, the Banking Commissioner entered a Consent Order (No. 96-2845-S) with respect to Douglas N. Berkey, formerly an agent of Sentra Securities Corporation (CRD number 10249). The Consent Order followed a Securities and Business Investments Division investigation which resulted in allegations that Berkey engaged in private securities transactions while associated with Sentra Securities Corporation and made unsuitable recommendations to customers.
The Consent Order directed Berkey to pay a $1,500 fine and to reimburse the agency an additional $1,000 for its investigative costs. The Consent Order also required that Berkey complete the Regulatory Element of the National Association of Securities Dealers, Inc. Continuing Education Program within 90 days, and file quarterly reports for two years reflecting any securities-related complaints, actions or proceedings involving Berkey. The Consent Order also acknowledged that Berkey had voluntarily undertaken to repay affected Connecticut residents, and prescribed a summary suspension of Berkey's registration in the event of a failure to honor this commitment.
A.G. Edwards & Sons, Inc. (CRD # 4)
On November 22, 1996, the Banking Commissioner entered a Consent Order (No. 96-2954-CO) with respect to A.G. Edwards & Sons, Inc., a broker-dealer registered under the Connecticut Uniform Securities Act. The Consent Order was based on claims that the firm failed to exercise adequate supervisory controls over certain branch offices, particularly with respect to the hand-delivery of client checks and the review of double-endorsed checks.
The Consent Order directed the firm to issue a Compliance Alert to its Connecticut branches; the Compliance Alert would focus on the hand-delivery of checks by agents and the firm's review of double-endorsed checks. In addition, for one year, the firm's Internal Audit Department would be required to conduct quarterly reviews of Connecticut branch office compliance with the Compliance Alert's policies and procedures. The Consent Order also contemplated that the firm would hold a compliance seminar for all Connecticut branch office managers within 120 days. In addition, satisfaction of the Regulatory Element of the National Association of Securities Dealers' Continuing Education Program would be required for branch office managers in the firm's Wilton and Danbury, Connecticut offices as well as all Connecticut branch office managers who would otherwise be required to complete the program. Finally, the Consent Order imposed a $10,000 fine against the firm and required that it pay an additional $5,000 as reimbursement for agency investigative costs. The Consent Order also acknowledged that, in furtherance of the firm's desire to resolve the matter informally with the department, A.G. Edwards & Sons, Inc. had made a $5,000 contribution to the agency's Investor Education Fund
Smith Barney Mutual Funds Management Inc. (CRD # 39005)
On November 15, 1996, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-96-07-3003S) with Smith Barney Mutual Funds Management Inc. of New York, New York. The Stipulation and Agreement followed a Securities and Business Investments Division investigation under the Connecticut Uniform Securities Act. That investigation uncovered indications that in 1995, unregistered, non-exempt securities of Smith Barney Funds, Inc./Utility Portfolio, Smith Barney Funds, Inc./Income & Growth Portfolio, Smith Barney Funds, Inc./U.S. Government Securities Portfolio and Smith Barney Money Funds, Inc./Cash Portfolio (collectively, the "Funds") were sold to Connecticut residents in purported violation of Section 36b-16 of the Act. Smith Barney Mutual Funds Management Inc. acted as manager of the Funds.
Without admitting or denying the agency's allegations, Smith Barney Mutual Funds Management Inc. agreed to 1) comply with the Act and its regulations; 2) review, revise and implement supervisory procedures designed to ensure regulatory compliance; and 3) pay $25,000 to the department, $20,000 of which constituted an administrative fine, and $5,000 of which represented reimbursement for investigative costs.
Quantech Research Group, Inc. (CRD # 39114) and Mark Tyler Minervini (CRD # 8980780) - Appeals Court Upholds Commissioner's Licensing Ruling
On October 25, 1996, the Superior Court for the Judicial District of Ansonia/Milford at Milford issued a Memorandum of Decision (Docket number CV96 053324S) affirming the Commissioner's January 18, 1996 ruling denying the registration of Quantech Research Group, Inc. as an investment adviser and the registration of Mark Tyler Minervini, the corporation's president, as an investment adviser agent. Quantech Research Group, Inc. maintains, or has maintained, a place of business at 341 Main Street, West Haven, Connecticut and 475 West Todd Street, Hamden, Connecticut The court also upheld the agency's entry of an Order to Cease and Desist against both parties. Examining the record as a whole, the court noted that there was substantial evidence to support the position that the respondents lacked the requisite knowledge and experience to qualify for investment adviser registration.
A.R. Baron & Co., Inc. (CRD # 29285) - Broker-dealer Registration Revoked
On November 15, 1996, the Banking Commissioner entered an order revoking the broker-dealer registration of A.R. Baron & Co., Inc. (Docket No. NR-96-3008-S) of Citicorp Center, 153 East 53rd Street, New York, New York. The order was based on findings that 1) the firm was subject to several National Association of Securities Dealers, Inc. sanctions, to wit, a July 17, 1995 censure and $400,00 fine for excessive markups, a May 13, 1996 censure and $11,000 fine for failing to fully respond to NASD requests for information, and a July 27, 1996 censure and $20,000 fine for failing to observe net capital requirements, among other things; 2) the firm 's broker-dealer registration was revoked by the State of Alabama on December 19, 1995 for failing to disclose disciplinary events against several of the firm's officers; and 3) A.R. Baron & Co., Inc. was subject to an August 5, 1996 cease and desist ordered issued by the Securities and Exchange Commission. A.R. Baron & Co., Inc. did not contest the entry of the revocation order.
George Clark Bryant, II (CRD # 33977) - Notice of Intent to Deny Registration as a Broker-dealer Agent Issued
On November 22, 1996, the Banking Commissioner issued a Notice of Intent to Deny (No. ND-96-3042-S) the pending registration of George Clark Bryant as an agent of Merit Capital Associates, Inc. (CRD number 30576), a broker-dealer registered under the Connecticut Uniform Securities Act. The Commissioner's action was based on allegations that, while employed as an agent of Merrill Lynch, respondent Bryant repeatedly caused Merrill Lynch to issue checks drawn on various clients' accounts without obtaining permission from the clients. In addition, the Notice of Intent claimed that, while employed as an agent of Merrill Lynch, Bryant borrowed $291,300 from a client without the client's prior consent and without notice to his employing broker-dealer, and that Bryant misrepresented to Merrill Lynch the nature and extent of his borrowings from clients. Bryant was afforded an opportunity for a hearing on the allegations in the Notice of Intent to Deny.
Werlitz Securities, Inc. (CRD # 10135) - Notice of Intent to Revoke Registration as a Broker-dealer Issued
Inga Marie Werlitz (CRD # 463499) - Notice of Intent to Revoke Registration as an Agent Issued
On December 19, 1996, the Banking Commissioner issued a Notice of Intent to Revoke (No. NR-96-3054-S) the broker-dealer registration of Werlitz Securities, Inc., now or formerly of 200 Garden City Plaza, Garden City, New York. The Commissioner's action was predicated on allegations that the firm failed to comply with financial reporting requirements under the Connecticut Uniform Securities Act. In addition, the Notice of Intent to Revoke claimed that the firm was suspended by the National Association of Securities Dealers on April 8, 1996, and that, on April 11, 1996, the NASD fined the firm's president, Inga Marie Werlitz, and barred her from association in any capacity with any NASD member firm.
Also on December 19, 1996, the Banking Commissioner issued a Notice of Intent to Revoke (No. NR-96-3054-S) the registration of Inga Marie Werlitz as an agent of Werlitz Securities, Inc. The department's action was based on the $100,000 fine and the bar from association imposed by the NASD against Ms. Werlitz on April 11, 1996.
Both the firm and Inga Marie Werlitz were provided with an opportunity for a hearing on the allegations in their respective Notices.
Helix Securities, Inc. (CRD # 25862) - Notice of Intent to Revoke Registration as a Broker-dealer Issued
On December 19, 1996, the Banking Commissioner issued a Notice of Intent to Revoke (No. NR-96-3053-S) the broker-dealer registration of Helix Securities, Inc., now or formerly of 57 West 200 South, Suite 503, Salt Lake City, Utah. The Commissioner's action was based on allegations that the firm failed to comply with financial reporting requirements under the Connecticut Uniform Securities Act. In addition, the Notice of Intent to Revoke claimed that, on May 15, 1996, the NASD had censured and fined the firm $75,000 for alleged stock manipulation; and that on May 29, 1996, the securities administrator of Iowa had revoked the firm's registration in that state for failing for file audited financial statements. The firm was provided with an opportunity to contest the allegations in the Notice of Intent to Revoke.
October 1, 1996 through December 31, 1996
|Total Coordination (Initial & Renewal)||2,129||n/a||7,094|
|-- (Investment Co. Renewals: 1655)|
|-- (All Other Coordinations: 474)|
|Regulation D Filings||473||n/a||1,893|
|Other Exemption or Exclusion Notices||31||3||142 (SE)|
|Business Opportunity (Initial)||n/a||5||29|
|Business Opportunity (Renewal)||n/a||4||32|
|Licensing & Branch Office Registration||
|Firm Initial Registrations Processed||83||36||n/a||411 (BD)|
|Firms Registered as of 12/31/96||2,076||1,156||n/a||n/a|
|Agent Initial Registrations Processed||6,935||592||15||31,564 (BD)|
as of 12/31/96
|Branch Offices Registered
as of 12/31/96
|Examinations Conducted||28||6||n/a||149 (BD)|
|Investigations Opened||49||1||184 (SE)|
|Investigations Closed||54||0||186 (SE)|
|Investigations in Progress as of 12/31/96||82||2||n/a|
|Referrals from Attorney General||1||0||5 (SE)|
|Referrals from Other Agencies||4||1||19 (SE)|
|Subpoenas Issued||4||0||9 (SE)|
|Stipulation and Agreements||1||1||12/12|
|Cease and Desist Orders||2||2||5/8|
|Denial, Suspension & Revocation Orders||1||1||6/6|
|Conditional Licensing Orders||0||0||0/0|
|Other Notices and Orders||5||5||8/8|
|Stipulation and Agreements||0||0||1/1|
|Cease and Desist Orders||0||0||5/8|
|Other Notices and Orders||0||0||0/0|
|Consent Orders and Stipulation and
|$ 110,000||$ 433,814|
the Investing Public
Voluntary Restitution Offers;
|Securities||$ 605,678||$ 9,934,161|
|Totals||$ 605,678||$ 9,934,161|