|Securities and Business Investments Division|
|Vol. XI No. 1||March 1997|
- A Word from the Banking Commissioner
- Filing Timetable Clarified for Rule 506 Offerings
- Order Issued Prescribing Use of Form NF for Investment Company Notice Filings
- 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
On April 14, 1997, the Connecticut Department of Banking joined with the U. S. Securities and Exchange Commission and United States Senators Christopher J. Dodd and Joseph I. Lieberman to co-host an Investors' Town Meeting in Hamden, CT. Over 800 investors registered for the morning-long event to ask regulators and the Senators questions and to attend a series of free seminars. Arthur Levitt, Chairman of the SEC, is to be commended for initiating a program of town meetings across America. We are pleased that the SEC has joined with state securities regulators in recognizing a need to actively educate individual investors.
I would like to especially thank Town Meeting co-hosts Senators Dodd and Lieberman for continuing to serve as strong advocates for investor protection and for listening to the Department of Banking's concerns over legislative issues.
In my remarks at the Town Meeting, I discussed several issues of national and local interest. Representatives Michael Oxley (R., Ohio) and Edward Markey (D., Mass.) have sponsored legislation in Congress which would implement decimalization in U.S. markets. I expressed support for their proposal to price stocks in decimals, a change which may save investors billions of dollars a year according to various estimates.
As discussed in a previous Bulletin issue, I also suggested that the federal government and industry may wish to explore the creation of a fund similar to the pension guaranty investment fund to help protect investors who are victimized by the calculated demise of firms facing significant arbitration awards or regulatory penalties. Such firms today simply close shop to escape liability, leaving individual investors with unrecoverable losses.
Of particular concern, I noted that this Department must have unrestricted access to securities brokerage firms' books and records in our own state to effectively and fully investigate complaints and protect Connecticut investors. We have urged the SEC to adopt its proposed books and records requirements for broker-dealers as a balanced approach to the needs of regulators and to the benefit of industry.
The National Securities Markets Improvement Act of 1996 calls for the SEC to conduct a study of state licensing requirements for associated persons of registered broker-dealers and of methods for attaining uniform licensing requirements. In this regard, I expressed my strong support for continued local control of licensing. The Central Registration Depository ("CRD") system has proven to be an extremely efficient system for licensing agents and states' physical proximity to licensees allows for effective examination and early detection of problems.
John P. Burke
Response to Letter of Inquiry
This will acknowledge receipt of your February 21, 1997 facsimile transmission concerning the above matter. In your letter, you inquire about the impact of the federal National Securities Markets Improvement Act of 1996 ("NSMIA") on the timing of regulation D filings made with this department.
Section 102 of NSMIA amended Section 18 of the Securities Act of 1933 (the "'33 Act") to curtail state oversight of certain offerings of "covered securities." Amended Section 18(b)(4) of the '33 Act provides that "[a] security is a covered security with respect to a transaction that is exempt from registration under this title pursuant to ... (D) Commission rules or regulations issued under Section 4(2), except that this subparagraph does not prohibit a state from imposing notice filing requirements that are substantially similar to those required by rule or regulation under Section 4(2) that are in effect on September 1, 1996." It should be noted that amended Section 18(b)(4) thus encompasses only Rule 506 offerings rather than Rules 504 and 505 (which were promulgated under Section 3(b) of the '33 Act).
Although our department is considering legislation that would be responsive to NSMIA, to date, there have been no enacted amendments to the Connecticut statute or any modifications to the regulations thereunder. Section 36b-31-21b-9b of the Connecticut Regulations governs transactions made pursuant to Rules 504, 505 and 506 of Regulation D. As presently constituted, Section 36b-31-21b-9b(h) of the Regulations requires that, for such offerings, a notice on Form D be filed "[p]rior to the first sale of securities in this state." (emphasis added) By contrast, Rule 503(a) of Regulation D provides that the notice on Form D be filed with the SEC "no later than 15 days after the first sale of securities," regardless of the state of origin. Unlike Connecticut, the federal approach thus allows a maximum post-sale filing "grace period" of 15 days. Pursuant to Section 36b-31-31c of the Connecticut Regulations, we find it to be in the public interest to permit an issuer relying on Rule 506 of Regulation D to make its Connecticut filing no later than 15 days following the first Connecticut sale. While we actively encourage earlier filings, we also wish to make compliance with state filing requirements easier. The existing filing timetable remains in effect for filings made pursuant to Rules 504 and 505 of Regulation D.
Aside from the exempt status of the offering issuer's counsel should bear in mind that independent registration requirements exist for agents of issuer, broker-dealers and broker-dealer agents who may be making Connecticut sales. The earlier a dialogue commences with the state on any licensing concerns, the greater the benefit to the issuer client.
John P. Burke
March 4, 1997
ORDER PRESCRIBING USE OF FORM NF
FOR INVESTMENT COMPANY NOTICE FILINGS
WHEREAS the Commissioner of Banking (the "Commissioner") is charged with the administration of Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (the "Connecticut Act") and Sections 36b-31-2 et seq. of the Regulations of Connecticut State Agencies promulgated under the Connecticut Act;
WHEREAS Section 36b-31 (a) of the Connecticut Act provides, in part, that: "The commissioner may from time to time make, amend and rescind such ... forms and orders as are necessary to carry out the provisions of sections 36b-2 to 36b-33, inclusive, including ... forms and orders governing ... reports ... For the purpose of ... forms and orders, the commissioner may classify securities, persons and matters within his jurisdiction, and prescribe different requirements for different classes" (Emphasis supplied);
WHEREAS the Commissioner finds that the issuance of this order and the prescribing of forms described herein is necessary or appropriate in the public interest and consistent with the purposes fairly intended by the policy and provisions of the Connecticut Act;
WHEREAS Public Law 104-290, The National Securities Markets Improvement Act of 1996 ("NSMIA"), which was signed by President Clinton on October 11, 1996 and became effective upon enactment, preempted the state registration of securities issued by investment companies that were either registered under the federal Investment Company Act of 1940 or that had filed a registration statement under that statute;
WHEREAS Sections 36b-16 through 36b-20, inclusive, of the Connecticut Act contain requirements encompassing the registration of investment company securities and are preempted by NSMIA to that extent;
WHEREAS, notwithstanding the preemptive provisions of NSMIA, Congress made it clear in amended Section 18 of the Securities Act of 1933 that: "Nothing in this section prohibits the securities commissioner (or any agency or office performing like functions) of any State from requiring the filing of any document filed with the [Securities and Exchange] Commission pursuant to ... [the Securities Act of 1933], together with annual or periodic reports of the value of securities sold or offered to be sold to persons located in the State (if such sales data is not included in documents filed with the Commission), solely for notice purposes, and the assessment of any fee, together with a consent to service of process and any required fee";
WHEREAS NSMIA amended Section 18 of the Securities Act of 1933 to provide, in subsection (c) (2) (B) , that "[u]ntil otherwise provided by law, rule, regulation, or order, or other administrative action of any State ... adopted after the date of enactment of ... [NSMIA], filing or registration fees with respect to securities or securities transactions shall continue to be collected in amounts determined pursuant to State law as in effect on the day before such date ... The fees required ... shall be paid, and all necessary supporting data on sales or offers for sales ... shall be reported on the same schedule as would have been applicable had the issuer not relied on [the preemptive provisions of NSMIA]"; (Emphasis added);
WHEREAS, (1) subsections (b) and (k) of Section 36b-19 of the Connecticut Act currently require a nonrefundable $500 fee for the initial and renewal registration of redeemable securities issued by open-end management companies or unit investment trusts and the initial registration of securities issued by face-amount certificate companies; and (2) under Section 36b-19(b) of the Connecticut Act, other issuers, such as those offering closed-end management company securities, must pay a nonrefundable fee of one-tenth of one per cent of the maximum aggregate offering price of securities to be offered in Connecticut, the base fee being $300 and the maximum fee being $1,500;
WHEREAS, prior to enactment of NSMIA, (1) a securities registration for face-amount certificate companies and unit investment trusts was valid for one year from the date of effectiveness with the Securities and Exchange Commission, without limitation as to number of shares or aggregate amount, and renewal was accomplished by filing the renewal fee with the department not earlier than thirty days nor later than five days prior to the expiration date of the registration; and (2) the registration cycle for redeemable securities issued by open-end management companies ran from the date of Securities and Exchange Commission effectiveness, and concluded two months following the end of the applicant's current fiscal year, with a minimum of three months, such registration being renewed by filing the renewal fee with the department within that two month "window"; and 3) a registration for closed-end management company securities was effective for one year from the date of Securities and Exchange Commission effectiveness;
WHEREAS, in response to NSMIA, the states and affected industry organizations have developed Form NF (Uniform Investment Company Notice Filing) to facilitate the notice filing contemplated by NSMIA;
WHEREAS Section 36b-31(b) of the Connecticut Act states, in part, that: "In prescribing ... forms and orders the commissioner may cooperate with the securities administrators of the other states and the Securities and Exchange Commission with a view to effectuating the policy of . .. [the Connecticut Act ] to achieve maximum uniformity in the form and content of ... reports wherever practicable";
NOW THEREFORE THE COMMISSIONER ORDERS AS FOLLOWS:
|(1)||Subject to the department's authority to request other documents filed with the Securities and Exchange Commission under the Securities Act of 1933, Form NF (Uniform Investment Company Notice Filing) shall be the prescribed form for initial notice filings, renewal notice filings, notice amendments, notice withdrawals/terminations and sales reports filed with the department by or on behalf of investment companies subject to NSMIA. A separate notice on Form NF shall be filed for each series or portfolio of investment company securities;|
|(2)||Each Form NF covering investment company securities shall include (A) a Consent to Service of Process (Form U-2), provided that (1) if the issuer has filed a Consent to Service of Process in connection with a prior registration, it need not file another if it references the previous Consent to Service of Process in its Form NF filing; and (2) post-NSMIA issuers of investment company securities may incorporate by reference a Consent to Service of Process submitted in conjunction with a prior notice filing; and (B) the Central Registration Depository number, or other identifying information, covering the broker-dealer(s) and/or the agents of issuer involved in the offering;|
|(3)||For face-amount certificate company, closed-end management company and unit investment trust filings, the notice on Form NF shall remain valid for one year from the date of Securities and Exchange Commission effectiveness, and the current renewal timetable for such securities shall be preserved, provided that the renewal fee is accompanied by an executed Form NF;|
|(4)||For redeemable securities issued by open-end management companies, (A) where an initial Form NF notice filing is made on or after the date of this Order but prior to July 1, 1997, it shall remain valid until the earlier of two months following the end of the applicant's current fiscal year or December 31, 1997; and (B) where a previously filed registration is slated to expire on or after the date of this Order but prior to July 1, 1997, a renewal notice on Form NF shall be filed within ninety days following the end of the applicant's last fiscal year, such notice to remain valid until December 31, 1997;|
|(5)||Those registration fees in effect on the date of enactment of NSMIA shall remain in effect for investment company notice filings on Form NF; and|
|(6)||This Order shall remain in effect until modified, superseded or vacated by the Commissioner or other lawful authority.|
|So Ordered at Hartford, Connecticut
this 18th day of April, 1997.
|John P. Burke|
Pre-paid Cellular, Inc.
On February 25, 1997, the Banking Commissioner issued an Order to Cease and Desist and Notice of Right to Hearing (Docket number CD-97-2950-S) under the Connecticut Uniform Securities Act against Pre-paid Cellular, Inc., a corporation located at 1001 South Monaco Street Parkway, Suite 270, Denver, Colorado. The Order to Cease and Desist alleged that, in or about December 1995, the corporation sold limited liability partnership interests in Boston-2 PrePaid Cellular Associates, L.L.P. to one or more Connecticut residents. Boston-2 PrePaid Cellular Associates, L.L.P. was purportedly formed to provide prepaid cellular telephone service to customers at retail or wholesale in the territory of metropolitan Boston, Massachusetts. The limited liability partnership interests allegedly constituted securities which were neither registered under the Connecticut Uniform Securities Act nor exempt from statutory registration requirements. Pre-paid Cellular, Inc. was afforded an opportunity to request a hearing on the allegations in the Order to Cease and Desist.
Francis G. Adams, Jr. (CRD # 1001)
On January 27, 1997, the Banking Commissioner entered a Consent Order (No. 96-3042-CO) under the Connecticut Uniform Securities Act with respect to Francis G. Adams, Jr., a registered agent of Merrill Lynch, Pierce, Fenner & Smith ("Merrill Lynch"). The Consent Order followed a Securities and Business Investments Division investigation which uncovered indications that, from May 1989 to February 1995, while employed as Senior Resident Vice President at the firm's New Haven, Connecticut branch office, Adams failed to supervise a Merrill Lynch agent in the performance of his duties.
The Consent Order censured Adams and directed him to pay a $25,000 fine to the state.
David Andrew Stevenson (CRD # 1335836)
On February 14, 1997, the Banking Commissioner entered a Consent Order (No. 97-2948-CO) under the Connecticut Uniform Securities Act with respect to David Andrew Stevenson of Farmington, Connecticut. The Consent Order alleged that, from approximately January 1990 through July 1996, while acting as an agent of Waddell & Reed, Inc. (CRD number 000866), Stevenson purportedly violated Section 36b-4 of the Act by 1) misappropriating customer funds that were intended to be invested in mutual funds and annuities; and 2) selling without authorization mutual fund shares owned by Connecticut residents in an attempt to misappropriate the sales proceeds for his personal use. The total alleged misappropriation exceeded two million dollars. Stevenson neither admitted nor denied the allegations in the Consent Order.
The Consent Order directed Stevenson to cease and desist from violative conduct. In addition, Stevenson was permanently barred from 1) representing a broker-dealer or issuer in effecting or attempting to effect securities transactions; 2) transacting business as a broker-dealer, investment adviser or investment adviser agent; and 3) acting as a finder for compensation, splitting commissions with an agent registered under the Act or receiving referral fees in connection with the offer, sale or purchase of securities.
Stevenson was also criminally charged with state securities fraud and first degree larceny. The criminal proceedings,.which are being handled by the Office of the Chief State's Attorney, are currently pending, and no trial date has been set.
Philip D. Growick (CRD # 1071815)
On March 5, 1997, the Banking Commissioner entered a Consent Order (No. 97-3049-CO) under the Connecticut Uniform Securities Act with respect to Philip D. Growick. The Consent Order alleged that Growick engaged in private securities transactions without providing written notice to his employing broker-dealer, and that such conduct constituted grounds for the revocation, suspension or conditioning of his agent registration in Connecticut.
Without admitting or denying the foregoing allegations, Growick agreed to the entry of a Consent Order 1) fining him $25,000; and 2) barring him from association with any broker-dealer, issuer or investment adviser for seven years.
SFI Investments, Inc. (CRD # 21663)
On March 27, 1997, the Banking Commissioner entered a Consent Order (No. CO-96-3058-S) under the Connecticut Uniform Securities Act with respect to SFI Investments, Inc., a securities broker-dealer having its principal office at Wall Street Plaza, 88 Pine Street, 16th Floor, New York, New York. The Consent Order alleged that, at various times between 1994 and 1996, the firm transacted business as a broker-dealer absent registration under the Connecticut Uniform Securities Act and employed unregistered agents.
The Consent Order directed the firm to cease and desist from regulatory violations; implement revised supervisory procedures designed to improve regulatory compliance; and submit quarterly reports to the department for two years describing any securities-related complaints, actions or proceedings involving Connecticut residents. In addition, the Consent Order required that the firm pay $7,532 to the agency, $4,332 of which represented the disgorgement of commissions earned during the period of alleged unregistered activity, $200 of which reflected past due registration fees and $3,000 of which constituted an administrative fine.
National Securities Corporation (CRD # 7569)
On February 4, 1997, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-97-3088-S) with National Securities Corporation, a securities broker- dealer located at 1001 Fourth Avenue, Suite 2200, Seattle, Washington. The Stipulation and Agreement followed a Securities and Business Investments Division investigation under the Connecticut Uniform Securities Act. That investigation uncovered indications that from at least May 1995, the firm allegedly transacted business from an unregistered branch office in contravention of Section 36b-6(d) of the Act.
Pursuant to the Stipulation and Agreement, the firm agreed to implement revised procedures designed to ensure regulatory compliance; to periodically report to the Division concerning any securities-related complaints, actions or proceedings involving Connecticut residents; and to pay $1,000 to the agency, $500 of which constituted an administrative penalty and $500 of which represented reimbursement for Division investigative costs.
Helix Securities, Inc. (CRD # 25862) - Broker-dealer Registration Revoked
On January 16, 1997, the Banking Commissioner entered an order revoking the broker-dealer registration of Helix Securities, Inc. (Docket No. NR-96-3053-S), now or formerly of 57 West 200 South, Suite 503, Salt Lake City, Utah. The Commissioner's action was based on findings that the firm failed to comply with financial reporting requirements under the Connecticut Uniform Securities Act. In addition, the Commissioner found that additional bases for revoking the firm's registration existed in 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 Commissioner's action was uncontested by the firm.
Werlitz Securities, Inc. (CRD # 10135) - Broker-dealer Registration Revoked
Inga Marie Werlitz (CRD # 463499) - Agent Registration Revoked
On February 13, 1997, the Banking Commissioner entered Findings of Fact, Conclusions of Law and an Order (No. NR-96-3054-S) revoking 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 based on findings that the firm failed to comply with financial reporting requirements under the Connecticut Uniform Securities Act. In addition, the Commissioner found 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. The firm did not appear or contest the Commissioner's action.
Also on February 13, 1997, the Banking Commissioner entered Findings of Fact, Conclusions of Law and an Order (No. NR-96-3054-S) revoking the registration of Inga Marie Werlitz as an agent of Werlitz Securities, Inc. The Commissioner based his action on the $100,000 fine and the bar from association imposed by the NASD against Ms. Werlitz on April 11, 1996. Ms. Werlitz did not appear or contest the Commissioner's action.
George Clark Bryant, II (CRD # 33977) - Broker-dealer Agent Registration Denied
On February 28, 1997, the Banking Commissioner issued Findings of Fact, Conclusions of Law and an Order (No. ND-96-3042-S) denying 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 found 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 Commissioner found that, while employed as an agent of Merrill Lynch, Bryant borrowed $291,300 from a client without the client's prior consent and without notice to his employing broker-dealer, and that Bryant misrepresented to Merrill Lynch the nature and extent of his borrowings from clients. Such activity amounted to dishonest or unethical practices in the securities business and therefore a basis for denying Bryant's registration. Bryant withdrew his initial request for a hearing on the matter.
January 1, 1997 through March 31, 1997
|Total Coordination (Initial & Renewal)||2,132||n/a||2,132|
|-- (Investment Co. Renewals: 1753)|
|-- (All Other Coordinations: 379)|
|Regulation D Filings||415||n/a||415|
|Other Exemption or Exclusion Notices||41||15||41 (SE)|
|Business Opportunity (Initial)||n/a||6||6|
|Business Opportunity (Renewal)||n/a||3||3|
|Licensing & Branch Office
|Firm Initial Registrations Processed||99||36||n/a||99 (BD)|
|Firms Registered as of 3/31/97||2,146||1,167||n/a||n/a|
|Agent Initial Registrations Processed||10,561||740||32||10,561 (BD)|
|Agents Registered as of 3/31/97||82,052||10,957||167||n/a|
|Branch Offices Registered
as of 3/31/97
|Examinations Conducted||26||20||n/a||26 (BD)|
|Investigations Opened||52||1||52 (SE)|
|Investigations Closed||46||0||46 (SE)|
|Investigations in Progress
as of 3/31/97
|Referrals from Attorney General||1||0||1 (SE)|
|Referrals from Other Agencies||5||1||5 (SE)|
|Subpoenas Issued||7||0||7 (SE)|
|Stipulation and Agreements||1||1||1/1|
|Cease and Desist Orders||1||1||1/1|
|Denial, Suspension & Revocation Orders||4||4||4/4|
|Conditional Licensing Orders||0||0||0/0|
|Other Notices and Orders||0||0||0/0|
|Stipulation and Agreements||0||0||0/0|
|Cease and Desist Orders||0||0||0/0|
|Other Notices and Orders||0||0||0/0|
|Consent Orders and
Stipulation and Agreements (Securities)
|$ 58,532||$ 58,532|
the Investing Public
Voluntary Restitution Offers;
|Securities||$ 499,180||$ 499,180|
|Totals||$ 499,180||$ 499,180|