|Securities and Business Investments Division|
|Vol. XVIII No. 4||Winter 2004|
- A Word from the Banking Commissioner
- Updated Custody Requirements for State-Registered Advisers
- Investment Advisory Codes of Ethics
- Compliance Programs for State-Registered Investment Advisers
- Quarterly Statistical Summaries
Enforcement and Other Highlights
Ralph Lambiase, Division Director
Cynthia Antanaitis, Assistant Director and Bulletin Editor
Eric Wilder, Assistant Director
Helen Crane, Subscription Coordinator
This issue of the Securities Bulletin focuses on three very timely matters of interest to investment advisers registered with the State of Connecticut. Recently, the Securities and Exchange Commission implemented new rules governing the custody of client funds and securities; the development of investment advisory codes of ethics; and the need for federally registered investment advisers to designate a compliance officer. Several state-registered firms have asked the department whether the state would take a regulatory approach similar to that espoused by the SEC.
In response, on February 4, 2005, the department issued an Order Updating Custody Requirements for State-Registered Investment Advisers. The Order modernizes Connecticut's regulatory scheme by recognizing that most advisers utilize the services of a designated custodian such as a bank or other financial institution. The Order draws heavily on its federal counterpart and on model provisions adopted by the North American Securities Administrators Association, Inc.
In a recent policy statement, the department also addressed the need for state-registered investment advisers to adopt a formal code of ethics. The department concluded that, although the Connecticut Uniform Securities Act and its Regulations do not require that state-registered investment advisers prepare a separate ethical code, ethical concerns should be integrated into the adviser's supervisory and compliance procedures as well as its business operations. In addition, the policy statement recommended several areas for investment advisory firms to address in avoiding improper conflicts of interest.
An additional policy statement focused on whether Connecticut would promulgate an analogue to Rule 206(4)-7 which mandates that SEC-registered investment advisers designate a compliance officer to oversee their compliance systems. Given the existing requirement under Connecticut law that state-registered investment advisers have an adequate supervisory system in place, the department is not promulgating an additional regulation to mirror new SEC Rule 206(4)-7 at this time. State-registered investment advisers are reminded, however, that the implementation of comprehensive supervisory procedures goes a long way toward minimizing business risks and preventing dishonest or unethical practices, including material conflicts of interest and the misappropriation of client assets.
As always, we welcome your comments.
John P. Burke
WHEREAS, the Banking Commissioner ("Commissioner") is charged with administering Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act ("Act"), and Sections 36b-31-2 to 36b-31-33, inclusive, of the Regulations of Connecticut State Agencies ("Regulations") promulgated under the Act;
WHEREAS, Section 36b-31(a) of the Act provides, in pertinent part, that "[t]he commissioner may from time to time make . . . such . . . orders as are necessary to carry out 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, Section 36b-31(b) of the Act provides, in pertinent part, that "[n]o . . . order may be made . . . unless the commissioner finds that the action 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]";
WHEREAS, the Commissioner finds that the issuance of this Order is necessary and appropriate in the public interest and for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act;
WHEREAS, Section 36b-31(c) of the Act adds that "[t]o encourage uniform interpretation and administration of . . . [the Act] and effective securities regulation and enforcement, the commissioner may cooperate with the securities agencies or administrators of other states . . . [and with] the Securities and Exchange Commission . . .";
WHEREAS, Section 36b-5(c) of the Act provides that "[i]t is unlawful for any investment adviser that is registered or required to be registered under . . . [the Act] to take or have custody of any securities or funds of any client if: (1) The commissioner by regulation prohibits custody; or (2) in the absence of a regulation, the investment adviser fails to notify the commissioner that he has or may have custody";
WHEREAS, the Commissioner, acting pursuant to the authority granted by Section 36b-5(c) of the Act, promulgated Section 36b-31-5b of the Regulations, which makes it a fraudulent, deceptive or misleading act, practice or course of business for any investment adviser having custody or possession of funds or securities in which any client has any beneficial interest to take any action, directly or indirectly, with respect to those funds or securities unless certain requirements are met;
WHEREAS, Section 36b-31-5b of the Regulations was patterned after Securities and Exchange Commission ("SEC") Rule 206(4)-2, 17 C.F.R. § 275.206(4)-2, promulgated under the Investment Advisers Act of 1940;
WHEREAS, effective November 5, 2003, the SEC revised Rule 206(4)-2 to conform the rule to modern custodial practices. The revised rule required federally-regulated investment advisers to comply with its terms by April 1, 2004;
WHEREAS, on April 18, 2004, the North American Securities Administrators Association, Inc. ("NASAA") adopted amendments to the NASAA model rules governing investment adviser custody which amendments paralleled the SEC's revisions to
WHEREAS, Section 36b-31-31c of the Regulations provides that "[t]he commissioner may exempt a person, security or transaction from a specified provision of sections 36b-31-2 to 36b-31-33, inclusive, of the regulations upon a finding that such exemption is in the public interest";
AND WHEREAS, the Commissioner finds that the exemption provided by this Order is in the public interest.
NOW THEREFORE, THE COMMISSIONER ORDERS AS FOLLOWS:
|1.||Definitions. For purposes of this Order:|
|2.||Exemption for Compliance With Updated Custody Requirements. An investment adviser registered or required to be registered under the Act that fulfills the conditions for having custody set forth in this Order shall be exempt from the custody requirements in Section 36b-31-5b(a) of the Regulations;|
|3.||Conditions to be Met.|
|5.||This Order shall remain in effect until modified, superseded or vacated by the Commissioner or other lawful authority.|
By January 7, 2005, all investment advisers registered with the Securities and Exchange Commission ("SEC") must comply with new Rule 204A-1 under the Investment Advisers Act of 1940 (the "Advisers Act") and keep related books and records under amended Rule 204-2 (Final Rule: Investment Adviser Code of Ethics; Release No. IA-2256, File No. S7-04-04, 7/2/04). The Division has received several inquiries concerning the extent to which the new rule and related recordkeeping requirements apply to investment advisers registered under the Connecticut Uniform Securities Act ("CUSA").
Although CUSA and its Regulations do not require that state-registered investment advisers prepare a separate code of ethics, ethical concerns should be integrated into a state-registered investment adviser's supervisory and compliance procedures as well as its business operations as more fully discussed in this policy statement.
Discussion: SEC Rule 204A-1 and its Impact on State-Registered Investment Advisers
SEC Rule 204A-1 contains a basic code of ethics requirement and more specific internal reporting and operational requirements that SEC-registered investment advisers must observe to prevent conflicts of interest. Correspondingly, amendments to SEC Rule 204-2(a) require SEC-registered investment advisers to retain as required records a copy of their code of ethics; records concerning code of ethics violations and their disposition; records concerning personal securities transactions by certain advisory personnel; and evidence in the form of an acknowledgement that supervised persons received a copy of the code of ethics.
The Basic Code of Ethics Requirement
Rule 204A-1 requires SEC-registered investment adviser to establish, maintain and enforce a written code of ethics containing, at a minimum, a standard of business conduct that the adviser requires of its "supervised persons" as defined in Section 202(a)(25) of the Advisers Act, and retain the code of ethics as a required record under amended Rule 204-2(a). The standard must reflect the investment adviser's fiduciary obligations and those of its supervised persons. In the implementing release, the SEC noted that: "The rule does not require the adviser to adopt a particular standard" and that "[a]dvisers are free to set higher standards for their employees, such as those established by professional or trade groups" such as the Financial Planning Association, the Association for Investment Management and Research, the Certified Financial Planner Board of Standards, the Investment Counsel Association of America and the American Institute of Certified Public Accountants (Release, at n. 6) In addition, the implementing release pointed out that the code of ethics "should be more than a compliance manual" and should "set out ideals for ethical conduct premised on fundamental principles of openness, integrity, honesty and trust." The rule also requires that supervised persons comply with applicable federal securities laws such as the Securities Act of 1933, the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Investment Company Act of 1940, the Advisers Act, Title V of the Gramm-Leach-Bliley Act, and the Bank Secrecy Act.
Neither CUSA nor its Regulations contain an express requirement that Connecticut-registered investment adviser prepare a separate, written code of ethics and the department is not mandating that one be prepared at this time. However, laced throughout CUSA and its Regulations are several proscriptions against unethical conduct. Section 36b-5(f) of CUSA prohibits persons receiving compensation or other remuneration for advisory or solicitation services from engaging in "any dishonest or unethical practice in connection with the rendering of such advice or in connection with such solicitation." Under Section 36b-15(a)(2)(H) of CUSA, an investment advisory registration may be revoked, suspended or restricted if the registrant has "engaged in dishonest or unethical practices in the securities or commodities business." Section 36b-31-15c of the Regulations provides examples of misconduct deemed to be dishonest or unethical for purposes of Section 36b-15(a)(2)(H) of CUSA. Section 36b-27(a) of CUSA permits the Commissioner to, among other things, issue a cease and desist order and require restitution and disgorgement upon a finding that the respondent "engaged in a dishonest or unethical practice in the securities or commodities business." To avoid running afoul of these prohibitions, the Division would encourage state-registered investment advisers to incorporate ethical considerations into their existing compliance/supervisory materials and, most important, communicate those considerations to investment adviser agents on a regular basis.
Internal Reporting of Personal Securities Transactions
SEC Rule 204A-1 requires that "access persons" report their personal securities transactions to the SEC-registered investment adviser and that the investment adviser review those transactions. An "access person" is a "supervised person" 1) having access to nonpublic information about the portfolio holdings of any "reportable fund" (i.e. a fund for which the investment adviser served as investment adviser or a fund whose adviser or principal underwriter controls the investment adviser, is controlled by the investment adviser or is under common control with the investment adviser); 2) involved in making client securities recommendations; or 3) having access to nonpublic client securities recommendations. Directors, officers and partners of the investment adviser are presumptively "access persons."
There are two types of reports that access persons must prepare under SEC Rule 204A-1: 1) a "Holdings Report" and 2) a "Transaction Report." Neither report is required for securities held in accounts over which the access person had no direct or indirect influence or control.
The Holdings Report covers the access person's current securities holdings. The report must be submitted to the chief compliance officer or other designated person 1) no later than 10 days after the person becomes an access person; and 2) at least once each twelve month period thereafter on a date selected by the SEC-registered investment adviser. The Holdings Report contains information on the title and type of securities; as applicable, the exchange ticker symbol or CUSIP number; the number of shares; the principal amount of each reportable security in which the access person has any direct or indirect beneficial ownership; the name of any broker, dealer or bank with whom the access person maintains an account in which any securities are held for the access person's direct or indirect benefit; and the date the access person submits the report.
The Transaction Report covers "reportable securities" in which the access person had (or, as a result of the transaction acquired) any direct or indirect beneficial ownership. The term "reportable securities" does not include direct obligations of the U.S. government; bankers' acceptances; bank CDs; commercial paper; high quality short-term debt instruments, including repurchase agreements; shares issued by money market funds; shares issued by open-end funds other than "reportable funds" (i.e. those with whom the investment adviser had an affiliation as described elsewhere in the rule); and shares issued by unit investment trusts that are invested exclusively in one or more open-end funds, none of which are "reportable funds." In addition, Transaction Reports do not have to be filed for: 1) transactions effected pursuant to an automatic investment plan such as a dividend reinvestment plan; or 2) if the report would duplicate information in broker trade confirmations or account statements that the investment adviser holds in its records, provided that the investment adviser receives the confirmations or statements no later than 30 days after the end of the applicable calendar quarter. Transaction reports must be submitted to the chief compliance officer or other designated person quarterly and within 30 days after each calendar quarter ends. The report covers transactions occurring during the quarter and includes: the date of the transaction; the title of the reportable security; as applicable, the exchange ticker symbol or CUSIP number; the interest rate; the maturity date; the number of shares; the principal amount of each reportable security involved; the nature of the transaction (purchase; sale; any other type of acquisition or disposition); the price of the security at which the transaction was effected; the name of the broker, dealer or bank with or through whom the transaction was effected; and the date the access person submits the report.
Insofar as personal securities transactions are concerned, CUSA and its Regulations do not impose formal internal reporting or review requirements as does SEC Rule 204A-1. This is not to say, however, that firms should not develop a mechanism for addressing personal securities transactions. In the Division's online description of its Investment Adviser Examination Program, records of personal securities transactions are specifically listed as being subject to review during a Division examination. Moreover, in outlining typical examination deficiencies, the Division noted that an investment adviser's compliance/supervision manual "should encompass all aspects of the business such as . . . the disclosure of any conflicts of interest, the review of personal securities transactions, and any other items that are necessary to have procedures that ensure compliance with the various securities laws."
While the SEC did not prescribe specific requirements for an adviser's code of ethics insofar as personal transactions and other matters are concerned, the implementing release mentioned the following which may assist state-registered advisers in addressing ethical concerns:
|1.||Requiring prior written approval from the firm before a personal securities transaction can be placed|
|2.||Maintaining a list of securities issuers that the adviser is recommending for client transactions and prohibiting personal trading in securities of those issuers|
|3.||Maintaining a "restricted list" of issuers about whom the adviser has inside information, and prohibiting any trading (personal or for clients) in securities of those issuers|
|4.||Prohibiting advisory personnel from placing personal securities transactions during "blackout periods" corresponding to when client securities trades are being placed or recommendations are being made|
|5.||Reminding advisory personnel that investment opportunities must first be offered to clients before the adviser or its personnel may act on them.|
|6.||Prohibiting or restricting market timing or "short-swing" trading|
|7.||Requiring trading by advisory personnel only through certain broker-dealers, or limiting the number of brokerage accounts permitted|
|8.||Providing the investment adviser with duplicate trade confirmations and account statements|
|9.||Assign new securities analyses to employees whose personal holdings do not present apparent conflicts of interest.|
|10.||Limiting the acceptance of gifts by advisory personnel|
Pre-approval of Participation in an IPO or Limited Offering
SEC Rule 204A-1 requires that access persons obtain the investment adviser's approval before they directly or indirectly acquire beneficial ownership in any securities in either an initial public offering ("IPO") or a limited offering.
Neither CUSA nor its Regulations expressly require that preapproval be obtained for IPOs and limited offerings. However, state-registered investment advisers should be mindful that an investment adviser agent's participation in an IPO or limited offering may be disadvantageous to the client and present a conflict of interest.
SEC Rule 204A-1 requires that all supervised persons report any violation of the investment adviser's code of ethics promptly to the firm's chief compliance officer. If another person is designated to receive the report in lieu of the compliance officer, the compliance officer must also receive a report of the violation so that he or she is not circumvented in the reporting process. Whistleblower records are not required records under revised SEC Rule 204-2(a).
CUSA and its Regulations do not contain a "whistleblower" provision.
Internal Dissemination of Code
SEC Rule 204A-1 requires that each SEC-registered investment adviser provide each supervised person with a copy of the adviser's code of ethics and any amendments to the code. Supervised persons must, in turn, provide the investment adviser with a written acknowledgement that they have received a copy of the code of ethics, including amendments.
Although CUSA and its Regulations do not require that state-registered investment advisers prepare a separate code of ethics, ethical concerns should be incorporated into the firm's supervisory and compliance procedures. Section 36b-31-6f of the Regulations obligates each investment adviser to amend its written supervisory procedures as appropriate within a reasonable time after relevant changes occur and communicate the amendments throughout its organization.
Form ADV Amendments
As part of its adoption of new Rule 204A-1, the SEC announced an amendment to Part II, Item 9 of Form ADV. The change would require investment advisers to describe on Schedule F their code of ethics and indicate that they would provide a copy to any client or prospective client upon request. In describing the change, the implementing release noted: "We expect few clients will request a copy of the code, and that the cost to provide it will be minimal."
The Division notes that the codes of ethics to which some state-registered investment advisers adhere by virtue of their status as certified public accountants or members of certain financial planning professional organizations should be readily available to prospective clients and clients should a request be made. In incorporating ethical principles into their supervisory/compliance manuals, other investment advisers may wish to consider preparing, on a voluntary basis, a client document that summarizes the adviser's ethical restrictions and business values.
Compliance Programs of State-Registered Investment Advisers in the Wake of New Federal Requirements
New SEC Rule 206(4)-7
By October 5, 2004, all investment advisers registered with the Securities and Exchange Commission ("SEC") must comply with new Rule 206(4)-7 under the Investment Advisers Act of 1940 (the "Advisers Act") (Final Rule: Compliance Programs of Investment Companies and Investment Advisers; Release No. IA-2204, File No. S7-03-03, 12/17/03). The new rule was promulgated under Section 206(4) of the Advisers Act, which prohibits any act, practice or course of business that is fraudulent, deceptive or manipulative. Rule 206(4)-7 requires SEC-registered investment advisers to: 1) adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules by the investment adviser and its supervised persons; 2) at least annually, review the adequacies of those policies and procedures and the effectiveness of their implementation; and 3) designate an individual, who must be a supervised person, to be responsible for administering the policies and procedures.
Correspondingly, SEC Rule 204-2, concerning the maintenance of books and records by federally registered investment advisers, was amended to require firms to maintain 1) copies of all policies and procedures formulated under Rule 206(4)-7 that are in effect or were in effect over the previous five years; and 2) any records documenting the investment adviser's annual review of those policies and procedures as required by Rule 204(6)-7(b).
The Division has received several inquiries concerning how the SEC's new compliance procedure requirement would affect investment advisers registered with the department under the Connecticut Uniform Securities Act ("CUSA").
Given Connecticut's existing regulatory structure, the department is not promulgating an additional regulation to mirror new SEC Rule 206(4)-7 at this time. State-registered investment advisers are reminded, however, that the implementation of comprehensive supervisory procedures goes a long way toward minimizing business risks and preventing dishonest or unethical practices, including material conflicts of interest and the misappropriation of client assets.
Section 36b-31-6f(b) of the Regulations under CUSA provides that: "Each registered . . . investment adviser shall establish, enforce and maintain a system for supervising the activities of its . . . investment adviser agents and Connecticut office operations that is reasonably designed to achieve compliance with applicable securities laws and regulations."
Section 36b-31-6f of the Regulations requires that, at a minimum, the supervisory system provide for the following:
|1.||The establishment, implementation and maintenance of written supervisory procedures containing:|
|2.||Designation of a manager with authority to carry out supervisory responsibilities for each type of business in which the investment adviser engages and for which investment adviser registration is required|
|3.||Designation of an on-site, full-time manager for each Connecticut branch office and principal place of business to be responsible for the day-to-day operation and supervision of the office|
|4.||Assignment of each investment adviser agent to a supervising manager|
|5.||Reasonable efforts to determine that all supervisory personnel have the experience or training to carry out their assigned responsibilities|
|6.||Participation, at least annually, by each investment adviser agent, either individually or collectively, in an interview or meeting conducted by persons the investment adviser designates. During this interview or meeting, compliance matters relevant to the adviser agent's activities must be discussed. The meeting or interview may occur in conjunction with a discussion of other matters and may be conducted at a central or regional location or at the investment adviser agent's place of business.|
|7.||Designation of one or more managers to review the supervisory system, procedures and inspections implemented by the investment adviser and take or recommend to senior management appropriate action reasonably designed to achieve compliance with CUSA and its Regulations. Unlike Rule 206(4)-7, there is no express requirement in the Connecticut regulations that this review occur at a specified time (i.e. at least annually).|
In addition, Section 36b-31-6f obligates each investment adviser to amend its written supervisory procedures as appropriate within a reasonable time after changes occur in 1) applicable securities laws and regulations; and 2) the investment adviser's supervisory system. The adviser must also communicate the amendments through its organization.
The failure of an investment adviser to supervise its investment adviser agents is a basis for revoking, suspending or restricting an investment advisory registration under Section 36b-15(a)(2)(K) of CUSA. State-registered investment advisers should also bear in mind that the implementation of comprehensive supervisory procedures helps to minimize business risks. For small advisers in particular, business continuity planning covering contingencies such as an adviser's incapacity or death is important. In addition, procedures should provide safeguards against dishonest or unethical practices, including material conflicts of interest and the misappropriation of client assets.
In conducting examinations of investment advisory books and records, the Division will review the investment adviser's compliance manual, among other records. For additional guidance on the examination process, including required books and records, see Investment Adviser Examination Program.
James Arthur Wilson, Sr. (CRD # 801265) - Notice of Intent to Revoke Registration as Agent Issued Based on Alleged Prior Criminal Conviction
On December 7, 2004, the Banking Commissioner issued a Notice of Intent to Revoke Registration as Agent with respect to James Arthur Wilson, Sr. of Newburgh, New York (Docket No. NR-2004-7068-S). The respondent is registered under the Connecticut Uniform Securities Act as a broker-dealer agent of Ormes Capital Markets, Inc. The action alleged that, on February 10, 2004, in New York Superior Court, County Court of Orange County, the respondent was convicted by plea of grand larceny in the fourth degree, a class E felony under New York law, for stealing $5,265 in unemployment benefits from the New York State Department of Labor, and was sentenced to pay $5,265 in restitution. The action also recited that, on or about February 2, 2004, and prior to sentencing, the respondent paid restitution in full. The respondent was afforded an opportunity to request a hearing on the Notice of Intent to Revoke Registration as Agent.
Anthony John Catinella - Order to Cease and Desist and Notice of Intent to Fine Issued
On December 2, 2004, the Banking Commissioner entered an Order to Cease and Desist, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. CF-2004-7115-S) against Anthony John Catinella of 3097 NW 72nd Avenue, Margate, Florida. The action alleged that, during August 2003, the respondent 1) violated Section 36b-16 of the Connecticut Uniform Securities Act by offering unregistered non-exempt securities of Care Concepts, Inc. to at least one Connecticut person; and 2) transacted business as an unregistered broker-dealer agent of Richmark Capital Corporation (CRD number 43162) in contravention of Section 36b-6(a) of the Act. Since the respondent did not request a hearing on the Order to Cease and Desist within the time prescribed, the Order to Cease and Desist became permanent on January 11, 2005. A hearing on the Notice of Intent to Fine is pending.
Richmark Capital Corporation (CRD # 43162) - Notice of Intent to Revoke Registration as Broker-dealer and Notice of Intent to Fine Issued
On December 2, 2004, the Banking Commissioner entered a Notice of Intent to Revoke Registration as Broker-dealer, Notice of Intent to Fine and Notice of Right to Hearing (Docket No. RF-2004-7106-S) with respect to Richmark Capital Corporation, a registered broker-dealer having its principal office at 5525 North MacArthur Boulevard, Suite 615, Irving, Texas. The action alleged that the respondent 1) wilfully violated Section 36b-6(b) of the Connecticut Uniform Securities Act by employing at least two unregistered broker-dealer agents; 2) engaged in dishonest or unethical practices in the securities business by executing transactions on behalf of customers without authority to do so, and exercising discretionary power in effecting customer transactions without first obtaining written discretionary authority from the customers; 3) wilfully violated Section 36b-16 of the Act by offering unregistered non-exempt securities of Care Concepts, Inc. to at least one Connecticut person; 4) violated Section 36b-31-14a(a) of the Regulations under the Act by failing to keep accurate books and records concerning the representatives assigned to Connecticut accounts; and 5) wilfully violated Section 36b-31-6f(b) of the Regulations under the Act by failing to establish, enforce and maintain an adequate supervisory system.
The respondent was afforded an opportunity to request a hearing on the Notice of Intent to Revoke Registration as Broker-dealer. A hearing on the Notice of Intent to Fine is pending.
Dean Russel Baker (CRD # 4493790) - Agent Registration Revoked
On November 23, 2004, the Banking Commissioner entered an Order revoking the broker-dealer agent registration of Dean Russel Baker (Docket No. RF-2004-6974-S) of Oakland Park, Florida. Dean Russel Baker had been associated with LH Ross & Company, Inc. (CRD number 37920), a securities brokerage firm located at 2255 Glades Road, Suite 425W, Boca Raton, Florida. The respondent had been the subject of a July 19, 2004 Notice of Intent to Revoke Registration as Agent and Notice of Intent to Fine (Docket No. RF-2004-6974-S) alleging that from at least June 2002 through November 2003, the respondent 1) engaged in unauthorized trading; 2) failed to obtain written discretionary trading authority from customers where required by law to do so; and 3) failed to provide Connecticut customers with the margin disclosure statement described in NASD Rule 2341(a). The July 19, 2004 Notice of Intent to Revoke Registration as Agent and Notice of Intent to Fine had also alleged that such conduct constituted a dishonest or unethical practice in the offer, sale or purchase of a security within the meaning of Section 36b-4(b) of the Connecticut Uniform Securities Act, and a basis for the initiation of administrative proceedings under Sections 36b-15(a)(2)(B) and 36b-15(a)(2)(H) of the Act.
In revoking the respondent's agent registration, the Commissioner found that the respondent had wilfully violated Section 36b-4(b) of the Connecticut Uniform Securities Act and had engaged in a dishonest or unethical practice in the securities business. The respondent did not appear or contest the revocation of his agent registration.
BMX Entertainment Corporation f/k/a BMX Entertainment, Inc. - Notice of Intent to Issue Stop Order Issued
On November 17, 2004, the Banking Commissioner issued a Notice of Intent to Issue Stop Order (Docket No. SO-2004-7088-S) denying effectiveness to the pending securities registration of BMX Entertainment Corporation. The respondent, located at 67 Smith Street, P.O. Box 10857, Stamford, Connecticut, purportedly is in the music recording and distribution business. The Notice of Intent to Issue Stop Order alleged that, notwithstanding more than one deficiency letter issued by agency staff, the registration statement remained materially incomplete in that, among other things, the issuer's disclosure document did not satisfy the requirements in the SCOR Issuer's Manual. The respondent was afforded an opportunity to request a hearing on the Notice of Intent to Issue Stop Order.
Dean Russel Baker (CRD # 4493790) Fined $3,500 for Engaging in Dishonest or Unethical Practices
On December 1, 2004, the Banking Commissioner entered a Consent Order (Docket No. RF-2004-6974-S) resolving the allegations in a July 19, 2004 Notice of Intent to Fine against Dean Russel Baker of Oakland Park, Florida. On November 23, 2004, the Banking Commissioner had revoked the respondent's broker-dealer agent registration based upon findings that the respondent wilfully violated Section 36b-4(b) of the Connecticut Uniform Securities Act and had engaged in a dishonest or unethical practice in the securities business.
In entering the Consent Order, the Commissioner acknowledged that the respondent had submitted documentation demonstrating economic hardship such that the respondent was financially incapable of paying the maximum fine contemplated by the Notice of Intent to Fine. The Consent Order directed the respondent to pay a $3,500 fine to the agency in resolution of the matter and withdrew the July 19, 2004 Notice of Intent to Fine.
Steven Douglas Klein (CRD # 1940511) Barred from Conducting Securities Activity in Connecticut for Ten Years
On November 8, 2004, the Banking Commissioner entered a Consent Order (Docket No. CF-2004-6950-S) with respect to Steven Douglas Klein of 1549 August Road, North Babylon, New York. Respondent Klein had been the subject of a March 29, 2004 Order to Cease and Desist and Notice of Intent to Fine (Docket No. CF-2004-6950-S) alleging that 1) from at least October 1989 to September 23, 2003, the respondent was the president and 75% owner of Ameriprop, Inc., a broker-dealer; 2) in that capacity, the respondent was the authorized signatory on the Form BDW (Uniform Request for Broker-dealer Withdrawal) filed by Ameriprop, Inc. and on the Form U-5 (Uniform Termination Notice for Securities Industry Registration) filed by Ameriprop, Inc. and relating to respondent Klein's association with that firm; 3) in October 2003, the respondent filed a Form U-4 (Uniform Application for Securities Industry Registration or Transfer) to apply for registration as a broker-dealer agent of Seidel & Shaw, LLC; and 4) the respondent violated Section 36b-23 of the Connecticut Uniform Securities Act and Section 36b-31-14e(a) of the Regulations thereunder by failing to address in the filings a June 23, 2003 Notice of Opportunity for Hearing issued by the Georgia Commissioner of Securities against respondent Klein and Ameriprop, Inc. The Order to Cease and Desist, being uncontested, had become permanent on April 21, 2004.
The Consent Order resolved the allegations in the Notice of Intent to Fine. In entering the Consent Order, the Commissioner acknowledged that the respondent had demonstrated economic hardship such that the respondent was financially incapable of paying the maximum fine. The Consent Order barred the respondent for ten consecutive years from transacting business as a broker-dealer, investment adviser, agent or investment adviser agent in or from Connecticut, and from acting as a finder for compensation, splitting commissions, or receiving referral fees in connection with any recommendation, sale or purchase of securities. The Consent Order also required that the respondent reimburse the department $500 for investigative costs.
Wilder Douglas Carnes (CRD # 2891466) - Broker-dealer Agent Registration Suspended for Ten Business Days Following Sales of Hedge Fund Interests
On October 7, 2004, the Banking Commissioner entered a Consent Order (Docket No. CRF-2004-6420-S) with respect to Wilder Douglas Carnes of 150 A Hanover Road, Newtown, Connecticut. The respondent co-managed Criterion Investment Capital LLC, an entity that acted as the general partner of the Criterion Investment Fund I L.P., a Connecticut-based hedge fund. The respondent had been the subject of a February 5, 2004 Order to Cease and Desist, Notice of Intent to Revoke Registrations as Agent and Investment Adviser Agent and Notice of Intent to Fine alleging that, in connection with offers and sales of hedge fund interests effected from at least January 2001 to January 2002, the respondent violated the antifraud provisions in Section 36b-4 of the Connecticut Uniform Securities Act by 1) not disclosing that, contrary to representations made to prospective investors, hedge fund interests were being sold for less than $500,000 to non-accredited investors; 2) not disclosing that, although the offering circular represented that the hedge fund's objective was to achieve long term appreciation, the average investment was only 19 days in duration; 3) not disclosing that, contrary to representations made in the offering circular, hedge fund trading focused on options; and 4) failing to disclose the respondent's 1999 bankruptcy. In addition, the action had claimed that the respondent 1) violated Section 36b-31-14e(a) of the Regulations under the Act by failing to update his Form U-4 to disclose the department's pending investigation; and 2) contravened Section 36b-6(c) of the Act by transacting business as an unregistered investment adviser agent in conjunction with his hedge fund activities.
The Consent Order resolved the allegations in the February 5, 2004 Order to Cease and Desist, Notice of Intent to Revoke Registrations as Agent and Investment Adviser Agent and Notice of Intent to Fine. In entering into the Consent Order, the Commissioner acknowledged that the respondent had demonstrated economic hardship such that the respondent was financially incapable of paying a fine, and that the respondent had not been employed in the securities industry since June 30, 2004. Although the respondent applied for registration as a broker-dealer agent of Source Capital, Inc. on July 20, 2004, that registration had not been made effective as of the date the Consent Order was entered. In entering the Consent Order, the Commissioner also found that the respondent 1) violated Section 36b-31-14e(a) of the Regulations under the Connecticut Uniform Securities Act by failing to promptly file a correcting amendment to his Form U-4; and 2) violated Section 36b-6(c) of the Act by transacting business as an investment adviser agent while unregistered.
Pursuant to the Consent Order, the respondent's agent registration, which became effective on October 8, 2004, was suspended for ten business days. The Consent Order also obligated the respondent to cooperate with the Division in its investigation of Criterion Investment Fund I L.P. and Criterion Investment Capital LLC.
Martin Scott Sands (CRD # 1186904) - Consent Order Conditioning Registration as an Investment Adviser Agent and Restricting Securities-Related Activities Entered
On November 29, 2004, the Banking Commissioner entered a Consent Order (No. CO-04-7093-S) conditioning the investment adviser agent registration of Martin Scott Sands and restricting Martin Sands' securities-related activities. Sands had applied for Connecticut registration as an investment adviser agent of Sands Brothers Asset Management LLC, an SEC-registered investment adviser. Sands is also registered as a broker-dealer agent of Sands Brothers & Co., Ltd. and Sands Brothers International Ltd. under the Connecticut Uniform Securities Act. All three entities are affiliated. The Consent Order was based on allegations that Sands had been subject to a December 18, 2003 bar and an October 2000 suspension by the New York Stock Exchange.
The Consent Order required that during Sands' association with Sands Brothers Asset Management LLC, Sands Brothers & Co., Ltd. and/or Sands Brothers International Ltd., 1) Sands would refrain, for 72 hours following any securities recommendation he made to a customer or client or following any purchase or sale effected on behalf of a customer or client by Sands, from buying or selling any security being recommended, purchased or sold to the client by or through Sands' efforts; 2) Sands would not, directly or through intermediary accounts, buy or sell any security for 72 hours after Sands received oral or written notice that any of the firms would be modifying any recommendation concerning the advisability of investing in, purchasing or selling such security; 3) Sands would be subject to the direct supervision of a principal or other employee of higher grade; and 4) the chief compliance of officer of each firm would approve any trading in Sands' personal accounts and those of his immediate family. Sands Brothers Asset Management LLC, Sands Brothers & Co., Ltd. and Sands Brothers International Ltd. concurred with these restrictions on Sands' activities by signing the Consent Order. The Consent Order also required that, for two years, quarterly reports concerning any securities-related complaints, actions or proceedings involving Sands be filed with the department. The Consent Order also placed Sands on administrative probation for two years.
Martin Scott Sands became registered as an investment adviser agent of Sands Brothers Asset Management LLC in Connecticut on November 29, 2004.
Donald Barton (CRD # 1304356) Fined $5,000 for Engaging in Private Securities Transactions; Acting as Unregistered Agent of Issuer
On November 22, 2004, the Banking Commissioner entered a Consent Order (Docket No. CO-04-7048-S) with respect to Donald Barton, a registered broker-dealer agent of Harvest Capital, LLC (CRD # 35723). The Consent Order alleged that from approximately June 2002 to September 2003, Donald Barton engaged in private securities transactions in violation of Section 36b-31-6e of the Regulations under the Connecticut Uniform Securities Act and transacted business as an unregistered agent of issuer of Intrust Advisors Multi-Manager Fund, L.P. in violation of Section 36b-6(a) of the Act. The Consent Order directed Donald Barton to cease and desist from regulatory violations; fined him $5,000; and required that he reimburse the department up to $1,000 for expenses incurred in connection with one or more examinations of his office to be conducted within 24 months following the entry of the Consent Order.
Lydian Asset Management, L.P. (CRD # 108024) Assessed $1,800 for Delinquent Investment Advisory Notice Filing; Lydian Global Opportunities Partners L.P. Fined $1,500 for Late Rule 506 Notice Filing
On October 18, 2004, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-04-7037-S) with Lydian Asset Management, L.P., an SEC-regulated investment adviser located at 495 Post Road East, Westport, Connecticut and its affiliate, Lydian Global Opportunities Partners L.P. of the same address. The Stipulation and Agreement alleged that, from July 2001 until June 7, 2004, when a notice was filed, Lydian Asset Management, L.P. failed to make the investment advisory notice filing required by Section 36b-6(e) of the Connecticut Uniform Securities Act. The Stipulation and Agreement also alleged that Lydian Global Opportunities Partners L.P., an issuer of securities, had been approximately fifteen months late in making a Rule 506 notice filing under the Act in conjunction with sales of partnership interests.
In resolution of the matter, Lydian Asset Management, L.P. agreed to pay $1,800 to the department. Of that amount, $1,500 constituted an administrative fine, and $300 constituted reimbursement for past due notice filing fees. In addition, Lydian Global Opportunities Partners L.P. agreed to pay a $1,500 fine.
Broker/Dealer, Inc. (CRD # 16589) Fined $1,500 for Unregistered Activity
On November 30, 2004, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-04-7112) with Broker/Dealer, Inc. of 2675 North Mayfair Road, Suite 410, Milwaukee, Wisconsin. The Stipulation and Agreement claimed that from approximately March 2004 until May 2004, the firm transacted business as a broker-dealer absent registration by selling securities in a private placement to three Connecticut accredited investors. The Stipulation and Agreement also claimed that the firm employed an unregistered agent. Both the firm and the agent, neither of whom have any reported disciplinary history, have since become registered under the Connecticut Uniform Securities Act. Pursuant to the Stipulation and Agreement, the firm agreed to revise and implement supervisory and compliance procedures designed to prevent regulatory violations and to pay a $1,500 fine to the department.
|Licensing At A Glance||1st
|Securities and |
Business Opportunity Filings
|Investment Company Notice Filings||732||227||254||6,490||7,703|
|Exemptions and Exemptive Notices||694||676||641||678||2,689|
|Ongoing as of September 30, 2004||109||131||81||101|
|Cases referred from Attorney General||6||1||1||5||13|
|Cases referred from Other Agencies||1||6||0||1||8|
|Business Opportunity Investigations|
|Ongoing as of September 30, 2004||10||12||4||16|
|Securities Enforcement: |
Remedies and Sanctions
|Notices of Intent to Deny (Licensing)||2||0||0||0||2|
|Notices of Intent to Suspend (Licensing)||0||0||0||0||0|
|Notices of Intent to Revoke (Licensing)||3||2||1||2||8|
|Denial Orders (Licensing)||2||1||0||0||3|
|Suspension Orders (Licensing)||0||0||0||1||1|
|Revocation Orders (Licensing)||0||2||1||1||4|
|Notices of Intent to Fine||7||2||1||2||12|
|Orders Imposing Fine||5||0||3||0||8|
|Cease and Desist Orders||8||2||3||2||15|
|Notices of Intent to Issue Stop Order||0||0||0||1||1|
|Formal Orders of Restitution||0||0||0||0||0|
|Proceedings and Settlements|
|Stipulation and Agreements||5||3||8||2||18|
|Monetary Sanctions Imposed||$ 282,100||$13,000||$229,650||$13,800||$ 538,550|
|Restitution or Other Monetary Relief||$ 81,880||$4,014,406||$41,082||$75,210||$4,212,578|
|(includes Rescission Offer Amounts; rounded to nearest dollar)|
|Criminal (Chief State's Attorney)||0||0||0||0||0|
|Criminal Matters, Including Referrals (Other)||0||0||0||3||3|
|Civil (Attorney General)||0||2||0||0||2|
|Other Agency Referrals||0||0||2||1||3|
|* Corrected to add new category 7/2005.|