Full text of "Rogue brokers : hearing before the Subcommittee on Telecommunications and Finance of the Committee on Energy and Commerce, House of Representatives, One Hundred Third Congress, second session, September 14, 1994"

ROGUE BROKERS

4, EN 2/3: 103-160

iue DrokerSi Serial Ho. 103-160,

HEARING

BEFORE THE

SUBCOmnTTEE ON
TELECOMMUNICATIONS AND FINANCE

OF THE

COMMITTEE ON

ENERGY AND COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

SECOND SESSION

SEPTEMBER 14, 1994

Serial No. 103-160

Printed for the use of the Committee on Energy and Commerce

/^>.

■P/^

U.S. GOVERNMENT PRINTING OFFICE
86-176CC WASHINGTON : 1995

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-046786-1

ROGUE BROKERS

4. EN 2/3: 103-160

iue BrokerSi Serial Ho. 103-160/...

HEARING

BEFORE THE

SUBCOmnTTEE ON
TELECOMMUNICATIONS AND FINANCE

OF THE

COMMITTEE ON

ENERGY AND COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

SECOND SESSION

SEPTEMBER 14, 1994

Serial No. 103-160

Printed for the use of the Committee on Energy and Commerce

r.^ 5

U.S. GOVERNMENT PRINTING OFFICE
8&-476CC WASHINGTON : 1995

For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-046786-1

COMMITTEE ON ENERGY AND COMMERCE

JOHN D. DINGELL, Michigan, Chairman

HENRY A. WAXMAN, CaUfornia

PHILIP R. SHARP, Indiana

EDWARD J. MARKEY, Massachusetts

AL SWIFT, Washington

CARDISS COLLINS, IlUnois

MIKE SYNAR, Oklahoma

W.J. "BILLY" TAUZIN, Louisiana

RON WYDEN, Oregon

RALPH M. HALL, Texas

BILL RICHARDSON, New Mexico

JIM SLATTERY, Kansas

JOHN BRYANT, Texas

RICK BOUCHER, Virginia

JIM COOPER, Tennessee

J. ROY ROWLAND, Georgia

THOMAS J. MANTON, New York

EDOLPHUS TOWNS, New York

GERRY E. STUDDS, Massachusetts

RICHARD H. LEHMAN, Cahfomia

FRANK PALLONE, Jr., New Jersey

CRAIG A. WASHINGTON, Texas

LYNN SCHENK, California

SHERROD BROWN. Ohio

MIKE KREIDLER, Washington

MARJORIE MARGOLIES-MEZVINSKY,

Pennsylvania
BLANCHE M. LAMBERT, Arkansas

Alan J. Roth, Staff Director and Chief Counsel

Dennis B. Fitzgibbons, Deputy Staff Director

Margaret A Durbin, Minority Chief Counsel and Staff Director

CARLOS J. MOORHEAD, California

THOMAS J. BLILEY, Jr., Virginia

JACK FIELDS, Texas

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

DAN SCHAEFER, Colorado

JOE BARTON, Texas

ALEX MCMILLAN, North Carolina

J. DENNIS HASTERT, IlUnois

FRED UPTON, Michigan

CLIFF STEARNS, Florida

BILL PAXON, New York

PAUL E. GILLMOR, Ohio

SCOTT KLUG, Wisconsin

GARY A. FRANKS, Connecticut

JAMES C. GREENWOOD, Pennsylvania

MICHAEL D. CRAPO. Idaho

Subcommittee on Telecommunications and Finance

EDWARD J. MARKEY, Massachusetts, Chairman

JACK FIELDS, Texas
THOMAS J. BLILEY, Jr., Virginia
MICHAEL G. OXLEY, Ohio
DAN SCHAEFER, Colorado
JOE BARTON, Texas
ALEX MCMILLAN, North Carolina
J. DENNIS HASTERT, IlUnois
PAUL E. GILLMOR, Ohio
CARLOS J. MOORHEAD, California
(Ex Officio)

W.J. "BILLY" TAUZIN, Louisiana
RICK BOUCHER, Virginia
THOMAS J. MANTON, New York
RICHARD H. LEHMAN, CaUfornia
LYNN SCHENK, CaUfornia
MARJORIE MARGOLIES-MEZVINSKY,

Pennsylvania
MIKE SYNAR, Oklahoma
RON WYDEN, Oregon
RALPH M. HALL, Texas
BILL RICHARDSON, New Mexico
JIM SLATTERY, Kansas
JOHN BRYANT, Texas
JIM COOPER, Tennessee
JOHN D. DINGELL, Michigan
(Ex Officio)

David H. Moulton, Staff Director

Jeffrey Duncan, Senior Policy Analyst

Gayatri N. Bhalla, Legislative Assistant-Finance

Stephen Blumenthal, Minority Counsel

Peter D. Rich, Minority Counsel

(H)

CONTENTS

Page

Testimony of:

Bothwell, James L., Director, Financial Institutions and Market Issues,

General Grovemment Division, General Accounting Office 24

Kwalwasser, Edward A., Executive Vice President, New York Stock Ex-
change 63

Lackritz, Marc E., F^resident, Securities Industry Association 55

Levitt, Hon. Arthur, Jr., Chairman, Securities and Exchange Commis-
sion 6

Murray, Mary E., Investor 52

Perkins, John R., Commissioner of Securities, OflBce of the Missouri

Secretary of State 119

Pinto, John E., Executive Vice President, National Association of Securi-
ties Dealers 88

Steenstra, Earl J., Investor 43

Material submitted for the record by:

Levitt, Hon. Arthur, Jr., Chairman, Securities and Exchange Commis-
sion, response to questions from Hon. Edward J. Markey 154

Markey, Hon. Edward J., Chairman, Subcommittee on Telecommuni-
cations and Finance:
Letter dated September 28, 1994 to Hon. Charles A. Bowsher, Comp-
troller General of the United States 159

Letter dated November 1, 1994 to Hon. Lloyd Bentsen, Secretary,

Department of the Treasury 215

Letter dated September 28, 1994 to Hon. Arthur Levitt, Chairman,

Securities and Exchange Commission 219

Letter dated October 13, 1994 to Hon. Arthur Levitt, Chairman,
Securities and Exchange Commission 224

(III)

ROGUE BROKERS

WEDNESDAY, SEPTEMBER 14, 1994.

House of Representatives,
Committee on Energy and Commerce,
Subcommittee on Telecommunications and Finance,

Washington, DC.

The subcommittee met, pursuant to notice at 9:35 a.m., in room
2123, Raybum House Office Building, Hon. Edward J. Markey
(chairman) presiding.

Mr. Markey. Good morning and welcome to the Subcommittee
on Telecommunications and Finance.

Today the subcommittee is holding an oversight hearing to exam-
ine the problems of unscrupulous "rogue brokers" in the securities
industry. This hearing will focus on how the securities industry
and the regulators identify and discipline stockbrokers who engage
in abusive sales practices.

We will be asking what steps are taken to better protect inves-
tors against abusive sales practices and what is being done to en-
sure the removal from the industry of truly bad apples who commit
serious violations of the rules or repeatedly abuse their customers.
The vast majority of stockbrokers are honest and ethical profes-
sionals who work hard, live by the rules and do their best to serve
the investment needs of their customers. Unfortunately, it takes
only a relatively small number of individuals or firms willing to
abuse the public trust for private gain to undercut investor con-
fidence in the fairness and the integrity of our securities markets.

Clearly, stockbrokers who view the public not as customers to be
served but as sheep to be shorn have no place in the industry. Our
system of broker-dealers sales practice regulation is based on the
concept of securities industry self-regulation, supplemented by SEC
and State regulatory oversight.

For such self-regulation to work, however, three things are nec-
essary. First, securities firms must establish, maintain, and enforce
strong internal controls and exercise effective supervision over the
activities of their employees. Second, the securities industry's self-
regulatory organizations — principally the New York Stock Ex-
change and the National Association of Securities Dealers — must
vigorously examine member firms for compliance with their rules
and with the Federal securities laws and discipline those who en-
gage in abusive sales practices. And finally, the SEC and State se-
curities regulators must exercise aggressive oversight over the sys-
tem and be prepared to initiate their own enforcement actions
when there is evidence of violations.

(1)

Over the last few years, disturbing questions have been raised
about the operation of the existing system of the securities industry
self- regulation. The SEC reports that "concerns regarding the hir-
ing, retention, and supervisory practices of large broker-dealers in-
creased as a result of Commission examination findings in 1991
and 1992."

Public attention began to focus on shortcomings in the system
following press reports suggesting that many unscrupulous rogue
brokers have been able to remain in the industry even after amass-
ing significant records of disciplinary actions, customer complaints
and arbitrations against them.

In response to these concerns, in July of 1992 the SEC initiated
a wide-ranging inquiry into the hiring, retention and supervisory
practices of the nine largest broker-dealers, which collectively have
approximately 49 percent of all public customer accounts in the
United States. Separately, the General Accounting Office, at the
subcommittee's request, undertook an inquiry into the problems
raised by unscrupulous stockbrokers. The subcommittee will be ex-
amining the findings and the recommendations in the SEC and
GAO reports that disciplinary surveillance systems be improved to
allow better monitoring of rogue brokers and impose sterner dis-
ciplinary sanctions on those found culpable for sales practice
abuses.

I look forward to the testimony of the witnesses on both of the
distinguished panels who are going to grace our subcommittee here
today.

And with that, I want to turn and recognize the ranking minority
member, the gentleman from Texas, Mr. Fields for an opening
statement.

Mr. Fields. Thank you, Mr. Chairman.

Today we review the recommendations of two reports produced
by the Securities and Exchange Commission and the GAO. These
reports conclude that even a few unscrupulous brokers can cause
serious financial harm to investors and have the potential to dam-
age public confidence in the securities industry.

No one can argue with those particular conclusions. SEC exami-
nations confirm there are some sales people among the half million
in the securities industry who should be the subject of closer mon-
itoring. That is not news.

Firms who employ people who have generated customer com-
plaints or who have a disciplinary history understand that Con-
gress insists that these sales people be monitored closely. The secu-
rities industry, the capital-raising mechanism for the American
economy, has never challenged this obligation.

Indeed, the firms of the securities industry are working with the
SEC the New York Stock Exchange and the National Association
of Securities Dealers to ensure that firm compliance and registra-
tion systems identify potential problems and monitor the activities
of the sales force.

Similarly, self-regulatory initiatives like updating the industry's
central registration depository, known by its initials CRD, rep-
resent an expenditure by the industry of millions of dollars to im-
prove the collection and recording of disciplinary actions instituted
against its own sales force. In this manner an industry effort al-

lows the State and Federal regulators to better meet their respon-
sibilities.

These are not the actions of an industry that would condone
"rogue brokers" after carefully considering the results of the SEC
examinations and the additional analysis of those results by the
GAO, I fmd myself questioning the extent to which a "rogue
broker" problem exists at all, that is not to say that there are indi-
viduals who themselves are not problems.

I see nothing in these reports that indicates an epidemic of rogue
brokers plundering their clients accounts and moving on with im-
punity to the next broker-dealer. I see nothing that indicates an in-
dustrywide problem of securities firms hiring problem brokers after
turning a blind eye to their disciplinary histories.

The securities industry employs 470,000 registered representa-
tives. Of these, the GAO report concludes that approximately 9,800
had at least one disciplinary action against them. In fact, that
number includes any adjudicated matter before a court and may
not involve the securities laws.

Convictions for driving while intoxicated or an adjudication of
personal bankruptcy or a lien on a personal account are examples
of, in the words of the SEC, "those types of actions that arguably
do not affect an individual's ability to act in a fiduciary capacity
as a broker," I am in agreement with the SEC conclusion concern-
ing the GAO report that "in light of these factors, I believe that
care should be exercised in drawing conclusions based on GAO's
universe or their sample."

If the 816 brokers GAO identified as having three or more dis-
ciplinary actions are the unscrupulous ones, that is two-tenths of
a percent of the total number of brokers, which means that over
99 percent would be by definition, "scrupulous."

We all agree that even one rogue broker is too many, but ^ye
must be re^istic. Frauds and sales practice violations are often dif-
ficult, if not impossible, to stop before they happen. The system of
broker regulation that has developed over the years is to identify
those who violate the rules and throw the book at those people.

By making an example of these people, others who might con-
sider breaking the rules are discouraged from doing so. That sys-
tem is apparently working in the securities industry to the extent
that in even the worst case analysis provided by GAO, 98 percent
of all brokers are not a cause of concern.

This is not an attempt to minimize the importance of the securi-
ties industry maintaining systems to monitor the sale activities of
its employees and to maintain systems to examine the disciplinary
histories of potential employees. Nor is it a statement of insensitiv-
ity to those who lose money as a result of the unethical or illegal
action of some stockbrokers.

It is appropriate to question, however, what glaring inadequacy
has been identified in either the SEC or GAO reports that would
justify making customer complaint information generally available
to the public?

prospects of an individual trying to sell securities on a fiduciary
basis.

Regulators at the Federal, State, and self-regulatory levels must
do more than meet their statutory obligation of ensuring investor
protection. Their regulatory mandate must be carried out within
the constitutional restriction of protecting the rights of those ac-
cused of wrongdoing to due process of law.

Consequently, when the SEC and GAO recommendations for ex-
pansion of the CRD database are examined, it is also our duty to
ensure that only appropriate information is contained in the sys-
tem and that it is treated with the confidentiality it deserves.

Before the information in the CRD is expanded, there should be
a correction of long-standing problems concerning the existing sys-
tem. The most serious problems relate to the potentially unlimited
disclosure of data in the CRD, including data on unsubstantiated
allegations. Steps must be taken to ensure against the publication
of information that will injure those unjustly accused or those who
have not had an opportunity to defend themselves.

The SEC and the GAO reports serve to increase industry incen-
tives to develop and refine systems identifying problem brokers and
monitoring their activities. To that extent I support the Agency ef-
forts on behalf of investors.

Since the industry and its regulators are in agreement that prob-
lem brokers require special supervision, I am confident that to the
extent that any problem exists, we are a long way towards its reso-
lution.

I look forward to the testimony today and I am sure that it will
be enlightening.

Thank you, Mr. Chairman.

Mr. Markey. The gentleman's time has expired.

The gentleman from North Carolina Mr. McMillan.

Mr. McMillan. I thank the Chair.

I will have to leave quickly to go to another hearing on above-
ground petroleum storage tanks which seems to be more on the
mind of my constituents than rogue brokers. So I will have to miss
some of the testimony this morning.

I recognize that there have been incidents that stand out as
cause for alarm and are the subject of oversight in this committee.
But if it were a pattern among securities brokers in the business
today, I suspect the industry which relies so much on public trust
would be the first to raise the red flag.

Indeed, the broker-dealer community is based on a system of self-
regulation subject to Federal and State oversight. Brokerage firms
for the most part maintain internal compliance systems for their
own people. These same brokers are policed by the industry's self-
regulatory organizations. The NASD, the stock exchanges, and the
SEC has direct oversight over the activities of these broker-dealers,
as do State securities regulators with whom they must all register.

In the wake of press allegations of widespread abuse by such
rogue brokers, the SEC undertook an investigation, as has been
pointed out, of the nine largest broker dealers representing almost
half of the brokerage business done at the time. The results of their
examination revealed that these press reports were vastly exagger-
ated.

More than one-third of the brokers who had been subject to past
disciplinary actions were no longer in the industry. Less than 6
percent of the cases examined involved big producers, and in most
cases problem brokers could make only one firm change before they
were forced to leave the industry.

I don't mean to imply that the SEC did not uncover problems.
There is undoubtedly a need to beef up regular SEC examinations
as well as internal compliance systems at some particular firms. As
the GAO will recommend today, there needs to be more effective
reporting of disciplinary actions in the industry-run central reg-
istration depository and a strengthening of existing disciplinary
standards.

I would only caution that this committee not overreact to this
problem by imposing penalties without adequate due process for
those brokers who might have been disciplined for nonfraud-related
matters. Requiring that customer complaint information be made
available to the public as GAO suggests, strikes me as a dangerous
overreaction to the problem that might produce unintended results.

I hope to be able to return to hear the rest of the testimony. And
thank the Chair and our witnesses, and yield back the balance of
my time.

Mr. Markey. The gentleman's time has expired.

The Chair recognizes the Ranking Minority Member on the full
committee the gentleman from California, Mr. Moorhead.

Mr. Moorhead. Thank you, Mr. Chairman.

I certainly want to welcome the illustrious witnesses that we
have this morning. This is an important subject because the few
rogue dealers and brokers that we have cause great consternation
among the good people in the industry, which do constitute vir-
tually all of the industry. But it also causes concern among poten-
tial buyers, people who are in the market. And they are concerned
by that kind of behavior and it drives some people out of the mar-
ket. I think it is an important thing for us to look into and be as
careful as we can that we do eliminate those brokers that cannot
live up to the rules.

I am looking forward to the testimony today. I also have another
hearing going on at the same time, but it seems to happen so often.
I know your testimony will be very helpful to us, and we are very
concerned about this subject.

Mr. Markey. The gentleman's time has expired. And all time for
opening statements by the Members of the subcommittee has ex-
pired.

We will now turn to our first panel which consists of regulatory
institutions that have done excellent work in this area, identifying
the problems and making recommendations that I think will go a
long way towards ensuring that investors are protected against
rogue brokers.

And we will begin by hearing from Hon. Arthur Levitt, who is
the Chairman of the Securities and Exchange Commission.

Welcome back. Whenever you are ready, please begin.

STATEMENT OF HON. ARTHUR LEVITT, JR., CHAHIMAN,
SECURITIES AND EXCHANGE COMMISSION

Mr. Levitt. Chairman Markey and Members of the subcommit-
tee, I am grateful for this opportunity to testify on behalf of the Se-
curities and Exchange Commission on a subject that is especially
close to my heart, the SEC's efforts to raise the professional stand-
ards of the securities industry.

This month, as we mark the 60th anniversary of the SEC, we
also celebrate the unparalleled contributions of the securities in-
dustry to the economic well-being of the United States. In 1934,
businesses raised $641 million in our capital markets. Last year,
that figure broke the trillion dollar mark.

This massive investment is fueling our current economic growth.
Mutusd funds have brought tens of millions of Americans into the
market. In 1980, 1 out of 16 American households owned mutual
funds. Today, it is 1 out of 4.

For the first time in our history, investment company assets now
rival the deposits of the entire banking system. This huge influx
of new investors has really been great for America, and it has also
given new meaning to the concept of investor protection.

Mr. Chairman, as I have noted on a number of other occasions,
in my first year as Chairman of the SEC, hardly a day has passed
that hasn't reinforced my conviction that investor protection is the
mandate, the goal and the public trust that must be uppermost in
my mind and in my actions. Whether dealing with the problems of
the mutual funds industry, the activities of the Nation's securities
exchanges or the misdeeds of those who prey upon the public, safe-
guarding the interests of America's investors is what guides our at-
titudes and guides our decisions. I regard all of our investor protec-
tion initiatives as extremely important. But of them all, there is
one that resonates with a very personal meaning, and that is our
work to raise the professional standards of this industry.

As members of the committee know, I come out of the securities
industry. I was a broker, I was a supervisor, I know the pressures,
I have benefitted from the rewards, I am extremely proud of the
profession and the industry. I am also realistic about their prob-
lems. Individual investors are seeking security and growth in the
financial markets today as never before. Many are inexperienced
and don't understand the markets. A stock broker is their advisor,
their guide through the maze-like world of finance.

A broker's impact on a client's life can be every bit as profound
as a lawyer's or an accountant's or sometimes even a doctor's. That
professional reputation must be preserved. But lately I suspect that
that reputation stands somewhat threatened.

Public opinion surveys show that of all professionals, people have
the least confidence in lawyers, lobbyists and brokers. And this
state of affairs hurts the profession and really hurts our market.
The poor practices of a very few have hurt the good reputation of
the many. It is my goal to change that by raising professional
standards and by running unethical brokers out of the industry.

The first priority of the SEC is to protect individual investors.
Consumer protection is our birthright, our focus, our mission, and
really our passion. We take it personally when someone gets hurt
by a bad broker, and we are going to do everything we can to help
prevent it.

For that reason, in 1992, the Commission together with the New
York Stock Exchange and the NASD, undertook a review of the hir-
ing, retention, and supervisory practices of nine of the country's
largest retail brokerage firms. The results of this Large Firm
Project were released in May of this year.

We selected 161 branch offices for examination. It wasn't a ran-
dom sampling but was based on their large numbers of customer
complaints. One quarter resulted in referrals to enforcement. This
alone is significant evidence that sales practice abuses by brokers
is something that continues to require our attention.

We also examined registered representatives who had been the
subject of sales practice complaints, litigation, or disciplinary ac-
tions. More than one-third had already left the securities industry
by the time of our study, but, of those still in the industry, the ma-
jority had been able to change jobs at least once, indicating some
willingness among firms to hire individuals with a history of cus-
tomer complaints.

What do these findings tell us? Frankly, we were disturbed. We
weren't at all surprised to find sales practice abuses. And we con-
tinue to believe, as you do, that even one bad broker is one too
many.

But although the problems we found were serious, they were not
indicative in our judgment of a systemic breakdown. We found that
some firms were much better than others in minimizing bad prac-
tices, showing that the tone set at the top really can make a dif-
ference.

It is our belief that many cases of investor fraud, if not most,
constitute two essential failures, that of the broker and that of his
or her supervisor. And therefore in all cases where we do find bad
practices, we have begun to ask the question: Where are the super-
visors? Do they ask the right questions? How did they let this hap-
pen?

The Project report made a number of recommendations which we
have begun to implement. We identified four areas that need im-
provement. One is enforcement. We are going to be tougher on
sales practice abuses. That means more examinations and more ex-
pensive sanctions, which will raise the cost of bad practices. It also
means keeping bad brokers out of the industry.

And so I am announcing that from this day forward, any broker
applying to the SEC for reentry into the industry after an unquali-
fied bar for egregious misbehavior can expect the administrative
equivalent of climbing Mount Everest before he gets back in. We
impose bars only in these most serious cases, but, when we do.

then, absent extraordinary circumstances, they are going to be per-
manent.

Secondly, information. We need to develop better information
about bad brokers. We expect to come forward with measures that
will afford qualified immunity from defamation suits to firms that
disclose in good faith the reasons why a broker has been termi-
nated.

We have asked the SRO's to continue monitoring the timeliness
of forms that help identify possible sales practice problems, to have
their member firms report customer complaints quarterly, to re-
view sales practice allegations made in arbitration cases when they
are filed rather than completed, and to ensure the proper coordina-
tion and tracking of SRO investigations.

Third, access to information. We are working to build a better
central database to give firms, regulators, and the public easier ac-
cess to broker disciplinary records. We have been working with the
NASD to update its central registration depository. WTien com-
pleted in 1996, the CRD will enable regulators to search hundreds
of thousands of records to identify problem brokers and target
firms for examination. We have also asked the SRO's to make in-
vestors more aware of the NASD's toll-free number for inquiries
into a broker's disciplinary history.

And fourth, supervision. Firms really need to take a harder look
at a broker's disciplinary record before hiring. We are asking them
to include their legal and compliance departments in decisions re-
garding the hiring of sales people with a history of sales practice
problems. And, if a broker is hired against the recommendations of
those departments, we want someone up the chain of command to
put the decision in writing. We have also put firms on notice that,
if they do take the risk of hiring a broker with a bad record, they
must be particularly vigilant in their supervision. The whole chain
of command ought to be on red alert.

I should add that independent of these recommendations, we are
continuing to address the potential for abuse in sales practices such
as cold calling. Thanks to the work of this committee, President
Clinton has signed into law measures to protect consumers in con-
nection with sales made with the telephone. Our staff is now con-
sidering a rule to curtail what is abusive cold calling.

I am also announcing today that the Commission in coordination
with the NASD, the NYSE, and the North American Securities Ad-
ministrators Association is planning a second joint examination
sweep. While the Large Firm Project focused on specific large
firms, the second sweep will include small- and medium-sized
firms, and in the course of the next 6 to 8 months we will be visit-
ing scores of branches throughout the country.

To those who would prey on unsuspecting investors, this is a
warning: Clean up your act, or we are going to do it for you.

Mr. Chairman, I believe that the recommendations outlined in
our report, together with our ongoing activities in policing the in-
dustry, will go a long way towards removing the tarnish on the pro-
fession. And I look forward to discussing all of our proposals and
their status with you today.

But as I noted at the outset, it is equally important to raise
standards in the industry and we have identified two ways to do

this: One, enhancing education, and two, reexamining compensa-
tion. A broker, like a doctor or a lawyer, needs advance training
in his profession. In the financial industry, good training can make
the difference between a sales force and a sales farce.

Over the last few months an industry group known as the Coun-
cil on Continuing Education has been developing a curriculum that
promises to improve practices throughout the industry. The
premise of the program once it is in place is simple. A broker must
participate, or his registration will become inactive. I whole-
heartedly endorse the mission of this council. Its members are de-
veloping a curriculum, and SRO rules have already been proposed
for public comment. The aim is to have a system in place by July
of 1995. I look forward to reviewing and to embracing their pro-
posal.

Broker compensation is a far more difficult and complex issue. I
am concerned that some compensation practices may tend to exag-
gerate conflicts of interest; that is encourage brokers in some cases
to make trades rather than to do what is in the client's best inter-
est.

For example, is it appropriate for a firm to pay its sales force
more for principal transactions than for agency transactions? Is it
appropriate to differentiate compensation by product?

Many worthy and creative ideas are already in place or under
consideration. Some firms now offer a choice. When you open an ac-
count, you can pay by transaction or you have the choice of paying
an annual fee. Other firms pay brokers according to the assets
under their management for the first 2 years rather than throwing
them right out there on commission, sink or swim from day one.

I am also troubled by the use of contests that reward brokers for
selling one product over another. It is hard to see how that may
be in a client's best interest.

From the time I entered the securities business to this very mo-
ment, my only standard has been that the interests of the customer
must come before those of the broker, before those of the firm and
those of the industry. Sales contests, I believe, are an insult to that
notion because they seek to put a broker's interest in a trip to Ha-
waii, for example, above the client's interest in the best investment.

We don't pretend to have all the answers, but I do firmly believe
that the public's view of the industry is inextricably linked to com-
pensation practices. When a broker recommends a given security,
the investor should never have to second-guess whether the invest-
ment is in his interest or whether the broker is simply trying to
make a quick buck.

I have asked a committee of industry leaders headed by Dan
Tully, the chairman and CEO of Merrill-Lynch, to examine the
question of compensation and incentive practices. The committee
has already issued an open letter to the industry and will also
reach out to the public in an effort to address industry compensa-
tion practices, identify actual and perceived conflicts of interest,
and describe the best practices in the industry. We will be looking
forward to hearing what they have to say.

Mr. Chairman, I end where I began, and that is the American
investor. From my first day as Chairman of the SEC, I have made
it clear that the consumer is our touchstone, the measure by which

we appraise our every action, and the standard by which we judge
our success or failure as an Agency. Consumers must have faith in
the integrity of the brokerage industry. I know that industry will
work closely with us to see to it that their integrity is not com-
promised. And we are going to show no pity to the broker or firm
that breaches that faith. We are going to work closely with indus-
try leaders and with members of this committee to fulfill this man-
date.

Thank you.

[The prepared statement of Hon. Arthur Levitt follows. Attach-
ments to the prepared statement are retained in subcommittee
files.]

TESTIMONY OP

ARTHUR LEVITT, CHAIRMAN
D.S. SECURITIES AND EXCHANGE COMMISSION

CONCERNING THE LARGE FIRM PROJECT

BEFORE THE SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCE

COMMITTEE ON ENERGY AND COMMERCE

U.S. HOUSE OF REPRESENTATIVES

Chairman Markey and Members of the Subcommittee:

I appreciate this opportunity to appear before the
Subcommittee on Telecommunications and Finance ("Subcommittee"),
on behalf of the Securities and Exchange Commission
("Commission"), to discuss the Commission's recent efforts to
combat sales practice abuses in the securities industry. As the
members of this Subcommittee are aware, the Commission, working
in conjunction with the New York Stock Exchange ("NYSE") and the
National Association of Securities Dealers ("NASD"), recently
completed a review of the hiring, retention, and supervisory
practices of nine of the country's largest broker- dealers . The
Commission initiated this review, referred to as the "Large Firm
Project" or "Project," in response to increased public concerns
about the perceived proliferation of sales practice abuses.

On May 19 of this year, the Commission Staff ("the Staff")
publicly announced the findings of its Large Firm Project.
Commission, NYSE, and NASD staff conducted 170 broker-dealer
examinations of both home and branch offices of the nine firms
and focused their review on 268 registered representatives who
had been the subject of sales practice- related customer
complaints, litigation, arbitration, or disciplinary actions. We
found that :

• Of the branch office examinations conducted, one
quarter resulted in enforcement referrals.

• More than a third of the registered representatives
selected for review were no longer employed in the
securities industry.

• Of those that remained, the majority were able to

change jobs at least once, indicating a willingness
among firms to hire individuals with a history of
customer complaints.

• Some firms were much better than others in minimizing
sales practice abuses.

• Three of the nine firms accounted for 88% of the
enforcement referrals. This indicated to us that
certain branch office managers were not enforcing
supervisory and compliance systems.

• Finally, the largest revenue producing registered
representatives generally were not the subject of
investor complaints.

The Staff found sales practice abuses, but the problems
found are not indicative of a larger systemic breakdown.
Although one quarter of our examinations resulted in enforcement
referrals, this was not surprising. Our Scimpling was not random;
we selected branch offices on the basis of, among other things,
large numbers of customer complaints as reported to the NYSE. We
fully intended to follow-up with enforcement actions.

Another finding revealed by the report is that some firms
were much better than others in minimizing sales practice abuses,
demonstrating that the tone set at the top can make a real
difference. Managers and supervisors can and do set standards
that have an impact .

In response to our findings, and as part of the Commission's
general sales practice initiative, the Staff made a number of
recommendations that I believe will strengthen broker-dealer
compliance systems, enhance self -regulatory organization ("SRO")
efforts, and build public confidence in the integrity of the
securities industry. I have submitted a report to this
Subcommittee regarding our recommendations and I would like to
discuss the progress we have made in implementing these
recommendations with you today.
I. SRO Efforts

On August 4, 1994, the Divisions of Market Regulation and

Enforcement sent a letter to the SROs requesting that the SROs
advise the Commission regarding the actions they have taken or
plan to take to develop and implement the recommendations set
forth in the Large Firm Project Report. The responses from the
SROs generally agree with and support the overall findings and
recommendations of the Large Firm Project Report. Because the
NYSE and the NASD also will testify before this Subcommittee
today regarding their efforts to prevent sales practice abuse, I
will not dwell on the specifics of the SROs' responses and
initiatives. I would, however, like to discuss our
recommendations to the SROs.

A key finding in our Large Firm Report was that we need to
conduct more examinations and impose tougher sanctions when
abuses are found. Accordingly, the Staff asked the SROs to
devote additional resources to conducting examinations and to
prosecuting sales practice cases. We also asked the SROs to
develop better tools for identifying sales practice problems at
an earlier stage. Specifically, we asked the SROs to review
arbitration claims when they are filed rather than when they are
completed. This will enable the SROs to detect patterns of fraud
and supervisory negligence at an earlier stage. To further this
goal, we asked the SROs to consider adopting a rule, comparable
to NYSE Rule 351, requiring members to report customer complaint
information on a quarterly basis. ■'■ The NASD is currently in the
process of drafting such rules to file for approval with the
Commission.

In its letter, the Staff further requested that the SROs
closely monitor the timeliness of Forms U-4, U-5 and RE-3
filings, which are used by firms to report, among other things,
terminations for cause, customer complaints, disciplinary
actions, and arbitration awards and settlements. These forms,
which firms are required to file with the SROs, are a very
productive source for identifying possible sales practice
problems. We believe that in cases of untimely or non- reporting

of required information, SROs should increase their sanctions
against both firms and individuals.

I also would like to see the SROs better coordinate their
investigations to ensure that the SROs fully investigate all
matters and not duplicate their efforts. To this end, the Staff
has asked the SROs to review their existing procedures and, if
necessary, develop and implement a tracking system that would
identify clearly which SRO is investigating a particular matter.

The SROs also were asked to review and, if necessary,
enhance their sanctions against registered representatives and
broker-dealers who commit sales practice violations. I strongly
believe that disciplinary sanctions against such individuals and
firms should be severe. The Commission itself will devote
additional resources to prosecuting registered representatives
who have violated federal securities laws and Commission rules,
and we intend to review the adequacy of existing sanctions for
sales practice violations.

One area of particular concern for the Commission is the
re-entry of individuals who have been barred by the Commission
from the securities industry without any proviso for re-
application after the expiration of some period. We refer to
these bars as unqualified bars and they are one of the most
severe sanctions available to the Commission, reserved for
egregious cases. Unfortunately, some in the industry appear to
have a perception that, absent any intervening misconduct, SROs
will approve and the Commission will not object to applications
for re-entry by such individuals after five years. Such an
expectation is unwarranted. When the Commission imposes an
unqualified bar against an individual it evidences the
Commission's conclusion that the public interest is served by
permanently excluding the barred individual from the securities
industry. Accordingly, absent extraordinary circumstances, a
person subject to an unqualified bar will be unable to establish
that it is in the public interest to permit re-entry to the

securities industry. The Staff has sent a letter to the NYSE and
NASD clarifying Commission policy in this regard.

I also would like to mention that the NASD has embarked on a
multi -million dollar rewrite of its Central Registration
Depository ("CRD") system which should greatly assist the SROs in
their investigatory endeavors. I am sure that the NASD will
discuss their proposed new system with you today. When fully
completed in early 1996, this state-of-the-art, user- friendly
system will provide regulators with the ability to search through
hundreds of thousands of records to identify problem registered
representatives and the individuals and firms charged with
supervising them. The updated system also will provide firms and
investors with easier access to disciplinary records. The Staff
has been working closely with the NASD's CRD redesign team and
expects the new CRD to be an important element in our efforts
against p: oblem registered representatives.

Investor protection also entails helping investors protect
themselves. To do so effectively, I believe that investors need
information about their registered representative before they
open an account. It is essential that an investor be able to
choose a registered representative who is trustworthy and
reliable. To better protect investors, firms should inform
potential investors that the NASD operates a toll free hot-line
("800 number") that discloses disciplinary information about
firms and registered representatives. The Staff's letter to the
SROs asked them to consider adopting rules that would require
member firms to disclose to investors, before effecting any
transactions in their accounts, that this 800 number exists and
is available to provide investors with important disciplinary
information.

I would also like to note that in addition to the 800
number, the Commission and the SROs, as well as the North
American Securities Administrators Association ("NASAA"),
recently published a brochure for investors entitled "Invest
Wisely. " The brochure was created to provide investors with

information concerning selecting a registered representative,
making investment decisions, monitoring investments, and dealing
with investment problems.

I also believe that investors need more information about
disciplinary proceedings. Specifically, the public should have
access to information regarding not only completed disciplinary
actions, but also initiated disciplinary actions when charges are
filed by the SROs . The failure to disclose thi.=: information to
investors is not consistent with the public interest. The NASD
and NYSE already have instituted procedures to disclose initiated
disciplinary actions to the public through the 800 number; in its
recent letter, the Staff asked the remaining SROs to disclose
this information as well.
II . Commission Efforts

The Commission is strengthening its efforts to identify and
curtail sales practice abuses. For example, the Commission
intends to continue its aggressive oversight of SRO examinations,
as well as SRO sales practice examination and overall enforcement
programs. Our oversight endeavors have included increased
compliance inspections and regular meetings with senior staff of
the NYSE and NASD to communicate the importance of effective
sales practice examination and enforcement programs. The
Commission's efforts have led to an increased SRO commitment to
identifying and disciplining registered representatives who
commit or engage in sales practice abuses.

I also believe that an important means of maintaining an
aggressive examination posture is for federal, state, and SRO
staff to continue to work together. The Large Firm Project, as
well as the recent Penny Stock Sweep, the largest cooperative
examination effort ever undertaken by securities regulators,
demonstrate that by coordinating our resources we can make
significant progress to reduce fraud, abuse, and manipulation,
and add to overall investor confidence in the securities markets.
To this end, the Commission, in coordination with the NASD, the
NYSE, and NASAA, is in the process of planning another joint

regulatory examination sweep. Rather than focus on specific
large firms as we did during the Large Firm Project, during this
sweep we will include large, small, and medium-sized firms in the
industry and will target so-called "rogue" or problem registered
representatives throughout the industry. We plan to use CRD
information to target registered representatives who have been
the subject of customer complaints, arbitration proceedings, or
disciplinary actions, and who have changed employment frequently.
We look forward to again working cooperatively with the NASD and
the NYSE, as well as NASAA, in order to increase the level of
protection afforded to investors from abusive, fraudulent, and
manipulative activities.

We also intend to re -emphasize our own general examination
focus on registered representatives with large numbers of
customer complaints, arbitration proceedings, or disciplinary
actions. The Staff is exploring different methods of utilizing
the NYSE Rule 3 51 data in its regular examination program. In
addition, we are developing a program for the systematic review
of the allegations made in arbitration cases filed with the NASD
and other SROs . This will enable us to identify potential sales
practice abuses at an earlier stage.
Ill . Broker-Dealer Efforts

The regulatory agencies alone cannot stem sales practice
abuses. Rather, broker-dealer firms are also critical to

deterring abusive sales practices. Firms need to improve their
efforts in identifying problem registered representatives. In
particular, firms should amend their procedures to identify
registered representatives with large numbers of sales practice-
related customer complaints, arbitration awards, or settlements.
Firms should use, to a greater extent, NYSE Rule 351 data to
detect trends and patterns of customer complaints within
particular branches. Furthermore, firms should improve their
compliance systems and enhance their data processing and computer
capcibilities to assist branch office managers in performing
supervisory functions.

I would like to note that the industry recently has taken
steps towards enhancing the reporting and disclosure of sales
practice- related complaints and actions. On June 21, 1994, the
Commission received a letter from the Securities Industry
Association ("SIA") discussing the creation of an Ad Hoc
Committee on Regulatory Reporting and Disclosure ("Ad Hoc
Committee"). The Ad Hoc Committee plans to work towards
resolving reporting and disclosure problems and creating
effective and fair systems for reporting, retaining, and
analyzing sales practice- related data. The Commission intends to
work with the Ad Hoc Committee to enhance reporting and
disclosure requirements, giving due regard to privacy and
fairness issues.

One area of disclosure that should be improved is the firms'
discussion on Form U-5 of reasons for a registered

representative's departure from the firm. Full and accurate
disclosure is necessary to prevent registered representatives
from committing similar sales practice abuses at a new firm after
they have been terminated by their old firm. Firms and
supervisory personnel are concerned, however, that, in certain
instances, if they accurately and fully disclose their reasons
for terminating an individual, that individual may bring a
defamation action against the firm and supervisory personnel.
The Staff is exploring with the SROs means of affording qualified
immunity to firms for good faith disclosure on Form U-5. Even
without this immunity, however, broker -dealers presently have an
obligation to file accurate and complete Form U-5s.

Broker-dealer legal and compliance departments also have an
important role in preventing sales practice abuses. Firms should
have procedures governing the hiring of individuals having
disciplinary or employment histories involving abusive sales
practices that are more stringent than their general hiring
procedures . These procedures should identify the personnel
responsible for making the decision to hire a problem
salesperson. The procedures also should set forth factors

relevant to this hiring decision, and provide for heightened
supervision of prospective employees having a prior problem. We
believe these procedures should include a requirement that firm
management provide written justification for a decision to hire
or retain an individual that is taken in the absence of, or
against the express recommendation of, legal or compliance staff.

I have asked the Staff to consider whether there should be
greater regulatory sanctions against firms and supervisors who
hire problem registered representatives who subsequently commit
additional sales practice violations at their new firms. I
believe that broker -dealers and their supervisory personnel have
an obligation to apprise themselves of the disciplinary and
employment history of their sales personnel. Firms need to take
a harder look at a registered representative's disciplinary
record before hiring that individual. If a firm takes the risk of
hiring a registered representative with a bad record, the firm
must be especially vigilant in its supervision. If a particular
individual has had prior sales practice problems, this fact
should serve as a red flag to a firm that either the firm should
not hire the individual or the individual should be subject to
greater oversight by the firm and its supervisory personnel.
Supervisory deficiencies combined with lax hiring standards for
problem registered representatives gives rise to repeated sales
practice abuses. We will, accordingly, hold firms and
supervisors responsible for their employees' sales practice
abuses if they have ignored the warning signs while hiring a
problem registered representative. The recent Staff letter to
the SROs asked them to review their rules and consider increasing
sanctions against firms who hire a problem registered
representative who continues to commit sales practice violations.
Finally, in addition to the areas I have just discussed,
• there is another area that I believe warrants our attention. A
practice that is widely used in our industry, yet holds the
potential for abuse, is cold- calling . We receive complaints from

angry consumers who receive unsolicited calls and high pressure
sales pitches from securities firms, and continue to receive
these calls even after telling the salesperson never to call
again. This is harassment. Moreover, these high pressure sales
tactics may result in customers making inappropriate and risky
investments.

Some securities firms have procedures in place to govern the
cold-calling practices of their registered representatives, and
represent that they are able to use cold- calling as a legitimate
canvassing tool. There are others, however, that give the entire
industry a bad name. These persistent and abusive few affect
investors across the nation, making the problem seem pervasive.

There must be a stop to the practice of abusive cold-
calling. Broker-dealers, like all firms engaged in
telemarketing, are subject to the Telephone Consumer Protection
Act of 1991 and a Federal Communications Commission ("FCC") rule
promulgated thereunder. ^ Pursuant to the FCC rule, firms must:
adhere to time-of-day restrictions; establish "do-not-call"
lists; and establish training requirements, supervisory
procedures and identification requirements for cold- callers .

The Commission also intends to take action to adopt a cold-
calling rule. Last month. Congress passed and the President
signed new cold- calling legislation, entitled the Telemarketing
and Consumer Fraud and Abuse Prevention Act. * The Act requires
the Federal Trade Commission ("FTC") to enact cold-calling rules
within a year of the legislation and directs that the SEC adopt
substantially similar rules within six months of the FTC rules.
The Commission intends to work in cooperation with the FTC to
coordinate the rulemaking efforts.
IV. Continuing Education

Another crucial method of improving registered
representative compliance with sales practice rules and
procedures is to enhance registered representative education.
Enhancing education in the profession so that registered
representatives are always informed and knowledgeable about the

markets, about the products they sell, about the rules, and about
new developments in the industry will help protect investors and
build public trust. I have personally emphasized to NYSE and
NASD member firms that mandatory continuing education for
securities industry professionals should be one of the industry's
top priorities. In addition, an Industry/Regulatory Council on
Continuing Education ("Council"), composed of representatives
from the SROs, a cross-section of firms, and liaisons from NASAA
and the SEC, is developing a continuing education curriculum to
improve practices throughout the industry. Under the Council's
proposed program, every broker- dealer will be required to provide
its registered representatives and first -line supervisors with
annual continuing education relating to products and services.
In addition, and perhaps more importantly, the Council proposes
that all personnel who have been registered less than ten years

or who have been the subject of serious disciplinary violations
receive compliance, ethics, and sales practice training. The
idea behind this continuing education program is simple: any
registered person having direct personal contact with customers
will be subject to ongoing education and training requirements.
A registered representative must participate or his registration
will become inactive.

The Council has organized two working committees to develop
the elements of the continuing education program. The committees
have drafted enabling rules and designed the program structure,
content, and delivery mechanisms. The Council has submitted the
proposed rules to the various SROs for review and adoption. The
Council has an ambitious time frame for completing its work and
expects to have SEC approval for its rules in January 1995 and to
implement its program in July 1995. I wholeheartedly support the
mission and efforts of the Council.

In addition to continuing education, I believe that there is
a place for higher education of registered representatives.
Industry leaders have expressed support for a voluntary higher
education program, similar to the "Certified Life Underwriter"

degree for insurance brokers with several years of experience. I
have offered my support for industry efforts to develop this
concept further with our nation's top business schools. I
believe many registered representatives may wish to take
advantage of such a program, to distinguish themselves and offer
their clients even better service.

V. Compensation

In addition to education, I want to touch on the subject of
compensation. The public's trust and confidence in the
securities industry are strongly affected by registered
representative compensation. Investors develop trust and
confidence in a registered representative based on their
interactions with that individual. When a registered
representative recommends a security, the investor should not
have to wonder whether the investment is in his or her interest
or whether the registered representative is simply trying to make
a quick buck. Investors should feel that their registered
representatives are looking out for their best interest.

In order to focus industry attention on compensation
practices, I have asked a committee of distinguished individuals
("Committee") to examine compensation practices in the brokerage
industry. The Committee is chaired by Dan Tully, Chairman and
CEO of Merrill Lynch, and includes: Warren Buffett, Chairman and
CEO of Berkshire Hathaway, and former Chairman of Salomon
Brothers; Jack Welch, Chairman and CEO of General Electric;
Raymond Mason, Chairman and CEO of Legg Mason; Sam Hayes, a noted
Harvard Business School professor; and Tom O'Hara, Chairman of
the National Association of Investors Corp. The Committee's
mission is to identify industry compensation practices that raise
significant conflicts of interest between registered
representatives and customers, and suggest ways to eliminate or
reduce these conflicts. The Committee will focus specifically on
the factors that influence a registered representative when the
registered representative is attempting to make a sale. Last

month, the Committee released an open letter to the financial
services industry asking for comment from all parts of the
industry and public. My hope is that this Committee will
increase firm, registered representative, and the public's
awareness about compensation issues. Over the next few months,
the Committee plans to draft a paper that will discuss industry
compensation practices, identify actual and perceived conflicts
of interest, and identify the "best practices" in the industry -
- those compensation practices that minimize to the greatest
extent possible conflicts of interest between investors and
registered representatives.
VI . Conclusion

As the members of the Subcommittee can' see, we have made
progress in addressing sales practice abuses in the securities
industry. The Commission, the SROs, and most firms are committed
to removing problem registered representatives. We have
implemented or are in the process of implementing the variety of
recommendations and programs that I have discussed with you today
to eliminate sales practice abuse. In all these actions, our
highest aim is to protect the investing public and improve
investor confidence in the integrity of this nation's capital
markets .

1. NYSE Rule 351 requires that member firms report customer
complaint information to the Exchange on a quarterly basis.
In addition, the rule requires that member firms report
certain occurrences or events to the Exchange on NYSE Form
RE- 3. These events include, among other things, certain
customer complaints, arbitration awards and settlements, and
disciplinary actions.

2. The Penny Stock Sweep was a joint examination sweep by
federal and state regulators, as well as the SROs. The
Sweep was designed to measure broker-dealer compliance with
penny stock legislation and SEC rules and determine the
extent of penny stock activity in the United States. The
joint examination team released its 1993 Penny Stock
Examination Sweep report on June 28, 1994.

3. Telemarketers are subject to the Telephone Consumer
Protection Act of 1991 and the FCC rule promulgated
thereunder. See Pub. L. No. 102-243, 105 Stat. 2394
(1991) (codified at 47 U.S.C. § 227 (1992)); 47 C.F.R. §
64.1200 (1992) .

4. See H.R. Rep. No. 868, 103rd Cong., 1st Sess. (1994).

Mr. Markey. Thank you, Mr. Chairman very much.

We will turn to our second witness, Mr. James Bothwell, who is
the Director of the Financial Institutions and Market Issues of the
General Government Division of the General Accounting Office.
The General Accounting Office, known as the GAO, is the branch
of the government responsible for auditing how the various aspects
of the Federal Grovernment, or even private sector areas that the
government has an interest in, are operating and has the highest
reputation of any branch of government.

So we welcome you, Mr. Bothwell. Whenever you are ready
please begin.

STATEMENT OF JAMES L. BOTHWELL, DIRECTOR, FINANCIAL
INSTITUTIONS AND MARKET ISSUES, GENERAL GOVERN-
MENT DIVISION, GENERAL ACCOUNTING OFFICE

Mr. Bothwell. Thank you, Mr. Chairman.

Mr. Chairman and members of the committee. We are pleased to
appear today to discuss the oversight and discipline of unscrupu-
lous brokers by the Securities and Exchange Commission and the
securities industry's Self-Regulatory Organizations or SRO's. We
are also issuing today the report we have prepared on this subject
in response to your request and the request of Chairman Dingell.

In my testimony today, I will briefly summarize our major con-
clusions and recommendations. These focus on three areas: One,
the extent to which unscrupulous brokers are active in the securi-
ties industry today; two, regulatory and industry efforts to dis-
cipline unscrupulous brokers; and three, the capability of the secu-
rities industry to identify unscrupulous brokers through its
database on brokers' disciplinary histories.

We share your concern, Mr. Chairman, that investors are not
being sufficiently protected from the activities of unscrupulous bro-
kers, so-called rogue brokers. Even a few unscrupulous brokers can
cause serious financial harm to investors and have the potential to
damage public confidence in the securities markets. We found that
to better protect investors from unscrupulous brokers, surveillance,
detection, and disciplinary practices need to be strengthened.

Unscrupulous or "rogue" brokers can constitute a range of behav-
ior that can adversely impact investors. We defined unscrupulous
brokers as brokers who commit a significant breach of common
sales practice rules or have a history of repeated sales practice vio-
lations. In my prepared statement I go on to cite some of the com-
mon sales practice violations that occur.

Brokers who engage in such activities are subject to various dis-
ciplinary actions, both formal and informal, by SEC, State regu-
lators, SRO's, the courts and their employers. To address relatively
minor violations, SRO's can use informal actions. For example, they
can issue the broker a letter of caution, which is a warning letter,
or conduct a compliance conference, which is a conference between
SRO staff, the firm, and the individual broker, to arrive at correc-
tive actions for the violation.

To address more serious violations, formal disciplinary actions
can be used. These include imposing monetary fines, censures, res-
titution orders, suspensions of varying lengths, and bars from cer-

tain or all securities-related functions. SEC, State regulators, and
SRO's can each impose such formal actions.

Mr. Chairman, we could not determine the exact extent to which
unscrupulous brokers are active in the securities industry today.
This is because: one, sales practice abuse is often very difficult to
detect; two, the Central Registration Depository, CRD, which is an
information system that maintains information on brokers, does
not contain data on informal disciplinary actions; and three, the
CRD is not designed to provide summary data by type of violation
for the disciplinary histories it does maintain.

However, we were able to obtain CRD data showing the number
of active brokers with formal disciplinary histories. And I empha-
size formal histories. These formal histories included actions for se-
curities-related violations, such as sales practice abuse, and
nonsecurities-related offenses, such as drug possession and driving
while intoxicated. Our analysis of this data indicated that about
10,000 of the almost 470,000 active brokers listed in the CRD as
of November 30, 1993, had at least one formal disciplinary action
taken against them for a variety of violations, and 816 brokers had
three or more formal actions taken against them.

In our opinion, even a few unscrupulous brokers can cause seri-
ous financial harm to investors and have the potential to damage
public confidence in the securities industry.

Available evidence, however, points to shortcomings in the detec-
tion and discipline of unscrupulous brokers. State regulators re-
sponding to our survey viewed SEC and SRO actions as being too
lenient. Of the 44 State regulators who responded to our survey,
14 believed that SEC disciplinary actions were too lenient, 24
viewed NASD actions as being too lenient, and 11 viewed NYSE
and the New York Stock Exchange actions as being too lenient.

We found that certain disciplinary policies and practices could
contribute to this perception. For example, we found that even so-
called permanent bars, which are bars that prohibit brokers from
working in the securities industry in any capacity for an unspec-
ified time period, may not, in fact, permanently remove unscrupu-
lous brokers from the industry. This is because the Securities Ex-
change Act of 1934, as amended, allows brokers barred by SEC or
an SRO to return to the securities industry if SEC and the SRO
approve such action.

Between October 1991 and December 1993, SEC permitted one
permanently barred broker to return to the industry and approved
employment changes for five permanently barred brokers whom
SEC had earlier approved for reentry. In its May 1994 study, SEC
staff recognized the need to strengthen disciplinary safeguards and
recommended to the Commission the use of truly permanent bars —
that is, bars with no possibility of reentry to the industry.

In our review of current laws and regulations that are intended
to safeguard investors, we also found regulatory gaps that allow
unscrupulous brokers to migrate to other sectors of the financial
services industry. Currently, SEC and the Commodities Futures
Trading Commission are authorized by law to honor each other's
bars. That is, they can choose to prevent barred individuals from
migrating between the securities and the futures markets.

However, there is no similar law or agreements with SEC and
other regulators. This creates an investor protection gap. An un-
scrupulous broker can migrate to work in an industry that is not
federally regulated, such as insurance, and sell certain financial
products such as annuities in that industry.

Similarly, such a broker can work as a bank employee in a feder-
ally insured bank selling bank-sponsored mutual ninds if he or she
has a disciplinary history taken against them but has not been con-
victed of a crime. We found examples of migration in our sample
of disciplined brokers and in our follow-up of potentially unscrupu-
lous brokers that SEC identified in its recent staff study.

SEC's recent study also found problems in the detection and dis-
cipline of unscrupulous brokers. In July 1992, SEC initiated an ex-
amination of the employment and supervisory practices of nine of
the largest broker-dealers in the United States.

On the basis of customer complaint information, SEC identified
those branch offices and brokers most likely to have problems and
reported that problems existed with the hiring and supervision of
brokers at 25 percent of the 161 branch offices reviewed and made
40 referrals for potential enforcement action. The staff study made
specific recommendations to improve the hiring, supervision, detec-
tion, and discipline of problem brokers.

To safeguard investors and maintain public confidence in the Na-
tion's securities markets, SEC, State regulators, and SRO's need ef-
fective broker surveillance monitoring systems that can help them
identify brokers who have engaged in questionable sales practices
and sales practice abuse. The National Association of Securities
Dealers and State regulators maintain CRD, which is the only cen-
tralized source of information on brokers' employment and discipli-
nary histories.

Information in CRD is available to both regulators and investors
and is now relied on as a regulatory surveillance tool. However, we
found that CRD, which was originally designed as a broker reg-
istration system, has design limitations that weaken its capability
to support regulatory surveillance of unscrupulous brokers.

Also, CRD maintains records only of formal disciplinary actions,
not informal actions. Further, SRO's are not required to report to
CRD information about customer complaints, including information
about complaint disposition.

The reporting of certain customer complaint information is left
up to the individual broker. The direct reporting of such informa-
tion by SRO's to CRD, in our opinion, would help regulators and
SRO's monitor questionable sales practice activities at member
firms and industrywide.

In our opinion, the protection of investors and safeguarding of
public confidence in tne Nation's securities markets is of para-
mount importance. We are making a number of recommendations
to SEC and the Secretary of the Treasury to strengthen the detec-
tion and discipline of unscrupulous brokers.

We believe SEC should implement the recommendations of its
own staff study to strengthen disciplinary standards, including the
imposition of a permanent bar with no opportunity for reentry,
when warranted. NASD is currently working on a major redesign
of CRD.

To enhance regulatory surveillance of unscrupulous brokers, we
believe SEC should: one, continue to monitor the redesign of CRD;
and two, require SRO's to report directly all disciplinary actions,
both formal and informal, and customer complaints and the dis-
position of these complaints. .

Regarding disclosure of information on customer complaints and
their disposition, we believe the SEC should work with NASD to
develop procedures that balance regulatorv surveillance and inves-
tor interests, yet protect brokers from disclosure of unsubstantiated
complaints. This is a point I want to emphasize, that we share con-
cerns about due process and we are not saying that complaint in-
formation should necessarily be disclosed to the public. What we
are sajdng is that such information should be filed with the CRD
for use by regulators.

Also, we believe that Treasury and SEC should work with other
financial regulators to reduce the potential for unscrupulous bro-
kers to migrate freely from the securities industry to other seg-
ments of the financial services sector. Actions they should take in-
clude: one, increasing disclosure of CRD information to regulators
and employers in related financial services industries; and two, de-
termining whether legislation or additional reciprocal agreements
between SEC and other financial regulators are necessary.

Mr. Chairman, this concludes my prepared statement. I will be
pleased to answer questions.

[The prepared statement of James L. Bothwell follows:]

Prepared Statement of James L. Bothwell, Director, FINANCL^L Institutions
AND Markets Issues, General Government Division

Mr. Chairman and Members of the Committee: We are pleased to appear today
to discuss the oversight and discipline of unscrupulous brokers by the Securities and
Exchange Commission (SEC) and the securities industry's Self Regulatory Organiza-
tions (SROs). We are also issuing today the report we have prepared on this subject
in response to your request and the request of Chairman Dingell. In my testimony
today, I will briefly summarize our major conclusions and recommendations. These
focus on three areas: (1) the extent to which unscrupulous brokers are active in the
securities industry, (2) regulatory and industry efforts to discipline unscrupulous
brokers, and (3) the capability of the securities industry to identify unscrupulous
brokers through its data case on brokers' disciplinary histories.

We share your concern that investors are not being sufficiently protected from the
activities of unscrupulous brokers, so-called rogue brokers. Even a few unscrupulous
brokers can cause serious financial harm to investors and have the potential to
damage public confidence in the securities markets. We found that to better protect
investors from unscrupulous brokers, surveillance, detection, and disciplinary prac-
tices need to be strengthened.

Unscrupulous or "rogue" behavior of brokers can constitute a range of behaviors
that can adversely impact investors. We defined unscrupulous brokers as brokers
who commit a significant breach of sales practice rules or have a history of repeated
sales practice violations. Sales practice violations can involve such activities as: sell-
ing securities to an investor that are unsuitable in light of the investor's income,
buying or selling securities without the consent or knowledge of the investor, or ex-
cessive trading or churning in the investor's account. While these activities can gen-
erate additional income for both brokers and securities firms, they can harm inves-
tors financially and erode public confidence in the securities markets.

Brokers who engage in such activities are subject to various disciplinary actions,
both formal and informal, by SEC, state regulators, SROs, courts and their employ-
ers. To address relatively minor violations, SROs can use informal disciplinary ac-
tions. They can issue the broker a letter of caution, which is a warning letter, or
conduct a compliance conference, which is a conference between SRO stan, the firm,
and the individual broker to arrive at corrective actions for the violation. To address
more serious violations, formal disciplinary actions can be used. These include im-
posing monetary fines, censures, restitution orders, suspensions of varying lengths,

and bars from certain or all securities-related functions. SEC, state regulators, and
SROs can each impose such formal actions.

We could not determine the exact extent to which unscrupulous brokers are active
in the securities industry. This is because: (1) sales practice abuse is often difficult
to detect, (2) the Central Registration Depository (CRD), which is an information
system that maintains information on brolcers, does not contain data on informal
msciplinarv actions, and (3) the CRD is not designed to provide summary data by
type of violation for the disciplinary histories it does maintain.

However, we were able to obtain CRD data showing the number of active brokers
with formal disciplinary histories. These formal histories included actions for securi-
ties related violations, such as sales practice abuse and nonsecurities related of-
fenses, such as drug possession and driving while intoxicated. Our analysis of this
data indicated that about 10,000 of the almost 470,000 active brokers listed in the
CRD as of November 30, 1993, had at least 1 formal disciplinary action taken
against them for a variety of violations and 816 brokers had 3 or more formal ac-
tions taken against them.

In our opimon, even a few unscrupulous brokers can cause serious financial harm
to investors and have the potential to damage public confidence in the securities in-
dustry. Available evidence, however, points to snortcomings in the detection and dis-
cipline of unscrupulous brokers. State regulators responding to our survey viewed
SEC and SRO actions as being too lenient. Of the 44 state regulators who responded
to our survey, 14 believed that SEC disciplinary actions were too lenient, 24 viewed
NASD actions as too lenient, and 11 viewed NYSE actions as being too lenient.

We found that certain disciplinary policies and practices could contribute to this

Perception. For example, we found that even so-called permanent bars, which are
ars that prohibit brokers from working in the securities industry in any capacity
for an unspecified time period, may not, in fact, permanently remove unscrupulous
brokers from the industry. This is because the Securities Exchange Act of 1934, as
amended, allows brokers barred by SEC or an SRO (termed statutorily disqualified
brokers) to return to the securities industry if SEC and the SRO approve such ac-
tion. Between October 1991 and December 1993, SEC permitted one permanently
barred broker to return to the industry and approved employment changes for five
permanently barred brokers whom SEC had earlier approved for reentry. In its May
1994 1 study, SEC staff recognized the need to strengthen disciplinary safeguards
and recommended to the Commission the use of truly permanent bars — ^bars with
no possibility of reentry.

In our review of current laws and regulations that are intended to safeguard in-
vestors, we also found regulatory gaps that allow unscrupulous brokers to migrate
to other sectors of the financial services industry. Currently, SEC and the Commod-
ities Futures Trading Commission (CFTC) are authorized by law to honor each oth-
er's bars. That is, they can choose to prevent barred individuals from migrating be-
tween the securities and futures markets. However, there is no similar law or agree-
ments with SEC and other regulators. This creates an investor protection gap. An
unscrupulous broker can migrate to work in an industry that is not federally regu-
lated, such as insurance, and sell certain financial products in that industry. Simi-
larly, such a broker can work as a bank employee in a federally insured bank selling
bank-sponsored mutual funds if he or she has a disciplinary history, but has not
been convicted of a crime. We found examples of migration in our sample of dis-
ciplined brokers and in our follow-up of potentially unscrupulous brokers that SEC
icfentified in its recent staff study.

SEC's recent study on industry practices also found problems in the detection and
discipline of unscrupulous brokers. In July 1992, SEC initiated an examination of
the employment and supervisory practices of nine of the largest broker-dealers in
the Umted States. On tne basis of customer complaint information, SEC identified
these branch offices and brokers most likely to nave problems and reported that
problems existed with the hiring and supervision of brokers at 25 percent of the 161
branch offices reviewed. SEC dso made 40 referrals for potential enforcement ac-
tion. The staff study made specific recommendations to improve the hiring, super-
vision, detection, and discipline of problem brokers.

To safeguard investors and maintain public confidence in the nation's securities
markets, SEC, state regulators, and SROs need effective broker surveillance mon-
itoring systems that can help them identify brokers who have engaged in question-
able sales practices and sales practice abuse. The National Association of Securities
Dealers (NASD) and state regulators maintain CRD, which is the only centralized

1 The Large Firm Project: A Review of Hiring, Retention and Supervisory Practices, Division
of Market Regulation, Division of Enforcement, v.S. SecuritieB and Exchange Commission, (May
1994).

source of information on brokers' employment and disciplinary histories. Informa-
tion in CRD is available to both regiuators and investors and is now relied on as
a regulatory surveillance tool. However, we found that CRD, originally designed as
a broker registration system, has design limitations that weaken its capability to
support regulatory surveillance of unscrupulous brokers. Also, CRD maintains
records only of formal disciplinary actions, not informal actions. Further, SROs are
not required to report to CRD information about customer complaints, including in-
formation about complaint disposition. The reporting of certain customer coniplaint
information is left to the individual broker.^ The direct reporting of such informa-
tion by SROs to CRD would help regulators and SROs monitor questionable sales
practice activities at member firms and industrywide.

In our opinion, the protection of investors and safeguarding of public confidence
in the nation's securities markets is of paramount importance. We are making a
number of recommendations to SEC and tne Secretary of the Treasury to strengthen
the detection and discipline of unscrupulous brokers. We believe SEC should imple-
ment the recommendations of its staff study to strengthen disciplinary standards,
including the imposition of a permanent bar with no opportunity for reentry, when
warranted. NASD is currently working on a major redesign of CKD. To enhance reg-
ulatory surveillance of unscrupulous brokers, we believe SEC should: (1) monitor the
redesign of CRD and (2) require SROs to report directly all disciplinair actions, both
formal and informal, and customer complaints and their disposition. Regarding dis-
closure of information on customer complaints and their disposition, SEC should
work with NASD to develop procedures tnat balance regulatory surveillance and in-
vestor interests, yet protect brokers from disclosure of unsubstantiated complaints.

Also, we believe the Treasury and SEC should work with other financial regu-
lators to reduce the potential for unscrupulous brokers to migrate freely from the
securities industry to other segments of the financial services sector. Actions they
should take include: (1) increasing disclosure of CRD information to regulators and
employers in related financial services industries and (2) determining whether legis-
lation or additional reciprocal agreements between SEC and other financial regu-
lators are necessary.

Mr. Chairman, this concludes my prepared statement. I will be pleased to answer
questions.

Mr. Markey. Thank you very much.

Now we will turn to questions from the subcommittee Members,
and the Chair will recognize himself.

Let me ask you this, Mr. Chairman. You mentioned in your open-
ing statement that as a follow-up to the study which you did of the
nine largest firms, that now you are going to do a sweep of firms
of all sizes and that you are going to do it in coordination with
other regulatory agencies. Could you give us some sense of what
the plans are for that sweep and what those firms and the invest-
ing public should expect in terms of what kinds of results should
be produced from your study?

Mr. Levitt. I don't want to suggest that we are going to enter
firms with armed guards and line up the brokers and search them
for weapons or anything of that kind. But we are going to — to-
gether with our SRO's — we are going to visit a large number of the
smaller firms, the regional firms about the country, to investigate
and consider what the practices are at each firm, to see whether
procedures are being followed or violated, to evaluate the extent of
supervision that is exercised.

It would be my hope and expectation that for instance a manager
should have some contact with the key customers of that office.
That is not always a practice that is followed, but it is a good prac-
tice and it tends to kind of weed out abuses that may develop.

We are going to talk to brokers and work with compliance people
and do a fairly thorough appraisal and evaluation of what those

2 Brokers are required to report to CRD customer complaint information that alleges damages
of $10,000 or more, fraud, the wrongful taking of property, or is settled for $5,000 or more.

practices are in segments of the industry that were not included in
our initial sweep.

Mr. Markey. So do you have an idea as to how many firms may
be targeted and what the completion date of this study might be?

Mr. Levitt. My guess is that this study will probably take 8 or
9 months to complete. I am not certain as to the specific number
of firms, but, when that is established, if it has not already been
established, I will get back to you with that number.

Mr. Markey. You would give us some report back with regard to
what your findings are?

Mr. Levitt. Absolutely.

Mr. Markey. In the SEC's May 1994 large firm project report,
the SEC staff concluded that there was no systemic rogue broker
problem at the nine brokerage firms which it had examined. That
finding was based on the staffs review of hiring, retention and su-
pervisory procedures at the nine firms as well as a review of the
disciplinary and customer complaint histories for the 268 registered
representatives that vou looked at. However, the results of the re-
view disclosed that there were compliance problems at 25 percent
of the branch offices reviewed, and that as a result, 40 referrals
were made to the SEC enforcement division for possible enforce-
ment action.

What overall conclusions about the industry as a whole can you
draw from the fact that the SEC found compliance problems at 25
percent of the 161 branch offices that you reviewed?

Mr. Levitt. Well, I think that the 40 referrals of possible viola-
tions probably should be put into some perspective. I guess specifi-
cally, in planning the sweep, the staff selected those branch offices
most likely to have problems that were based on customer com-
plaint information in an attempt to enhance its enforcement oppor-
tunities. While the number of referrals was disturbing, it wasn't a
total surprise given the deliberately selective sample, and it wasn't
indicative of a systemic problem.

I might say at this point that I don't personally believe that this
industry is populated with thousands of criminals and bad actors
who should be placed in jail. Nor do I think there are very many
people walking around with halos.

But I think there are clearly brokers, lots of brokers, who are
playing it pretty close to the line. And I think it is in the interest
of American consumers and customers to see to it that we move
those brokers back a little bit from that line. So long-winded an-
swer to your question is that we didn't find a systemic problem and
the number of referrals came from the way we selected the sample.

Mr. Markey. So you culled out initially those branch offices that
potentially were going to be problems and left the other 90 percent
of the universe alone? And among those branch offices that you did
examine, you found problems only in 25 percent of them that were
worthy of further referral over to the enforcement office?

Mr. Levitt. A significant number. Any number is significant, and
I think we will have a clearer picture as we complete the second
sweep.

Mr. Markey. Now, what should the expectation be with regard
to specific actions taken against those 40 who have been identified
as problem individuals within the industry?

Mr. Levitt. A number of the problems and individuals that were
identified have been the objects of investigations and complaints
and ongoing actions, and we are going to pursue that aggressively.
The results of this exercise, if I were to capsulize what we intend
to do, is to increase our examination and sales practice efforts. It
is going to be a major focus of the Commission during coming
years.

We are going to see to it that firms improve their compliance ca-
pability. I might say at this point that, from my exposure to firms,
I believe that they are spending more money and this is a higher
priority than it has ever been before. We are going to see to it that
there is compliance with SRO reporting requirements. We are
going to consider additional supervisory requirements. We are
going to urge the firms to enhance their compliance and legal de-
partments.

We are going to see to it that the SRO's will enhance coordina-
tions of their own sales practice investigations, and we will adopt
rules which will require disclosure, the availability of the NASD
toll free hotline so that consumers will have a better vehicle, a bet-
ter way of finding out whether their broker has a clean record and
also a better way of communicating to us what their complaint
level is. We are going to try to make the Commission as consumer-
oriented as possible so we feed up from the bottom in terms of
what the consumer's relation is with the firms that have practices
that are not up to standard.

Mr. Markey. And will that information be made available to all
consumers?

Mr. Levitt. Yes.

Mr. Markey. All consumers?

Mr. Levitt. Yes. We are in the process of producing brochures
on different products to alert consumers in terms of what is good
practice in the industry. One is already out there. We are about to
produce one on mutual funds and there will be others as we go
along.

Mr. Markey. Let me continue to return to the methodology of
your study, which I think was quite sound. You looked at nine
firms and then you looked at those branch offices that seemed to
have indications of problems, so that you targeted those branch of-
fices, and then you identified 40 enforcement referrals that existed
amongst these nine firms.

But the interesting conclusion that I think you come to in your
study is that 88 percent of the 40 referrals come from only three
of the nine firms that you looked at. So you further narrowed it
down in terms of the firms which seem to have real supervisory
problems in terms of looking at their brokers and ensuring on an
ongoing basis they understand the high standards that they would
have to meet in terms of their relations with customers. Do you
think that the fact that such a high percentage is concentrated in
only three firms does give a strong indication of a failure to super-
vise within those three firms?

Mr. Levitt. I think clearly that among those three firms, there
were procedures which should be tightened and practices which
should be improved upon. I will feel more comfortable when the
study is broadened. In terms of citing any of the particular firms.

we are certainly going to pursue practices in those firms, but I
can't say to you, I can't assure you, that other firms that didn't
come out quite as badly in the survey may not have other problems
that require the attention of the Commission. I think clearly there
is a cause to go further and we are going further, but I wouldn't
isolate those three firms as being totally unique in terms of prac-
tices throughout the industry.

Mr. Mawcey. Again, in summary, do you believe those three
firms are more in need of examination and perhaps jawboning by
the SEC?

Mr. Levitt. Sure.

Mr. Markey. To ensure that they do upgrade with the others?

Mr. Levitt. Yes.

Mr. Markey. Now, let's take the fact that the nine firms are
amongst the largest in the country, and in at least three of them,
you found some serious problems with regard to their supervisory
system that they have established. What does that tell us with re-
gard to how some smaller firms in the industry might deal with
these issues?

In other words, since the larger firms have many more resources,
are much more sophisticated than smaller and medium-sized firms,
is it likely that the smaller firms will not have the systems in place
to provide the kind of guidance, the kind of protections that the
larger firms have been able to provide? And even there, in some
instances, because of the porousness and the relative unevenness
of the application of the standards which have been developed,
problems were found with those larger firms.

Mr. Levitt. Not necessarily. My experience in the industry has
shown that systems can be important and resources are obviously
important, but almost unique in American industry, the commit-
ment and the quality and the caliber of leadership that runs that
firm and sets the standards will determine the nature of how the
firm deals with its customers. I know personally, having worked
with the compensation committee and others in the industry re-
cently, that some of the very best practices I have found have been
in the leadership with some of the smaller firms, some of the re-
gional firms. That is not always so, and some small firms have hor-
rendous practices, so I wouldn't generalize. Again, I think after the
second sweep we may be in a better position to determine what the
interlay is between practices in large and small firms and what
kind of resources are absolutely fundamental to doing the job that
is necessary to protect American investors.

Mr. Markey. Let me ask you, Mr. Bothwell, your report, the
GAO report, indicates that it is not yet possible to ascertain the
full extent to which unscrupulous brokers may be active within the
industry at this time. Can you explain to the subcommittee why it
is difficult to identify the range of problem that does exist, the
number of rogue brokers that may be out there preying upon inno-
cent investors?

Mr. Bothwell. Mr. Chairman, as I mentioned in my statement,
the information that exists is incomplete at best. The available in-
formation includes formal disciplinary actions, both pending and al-
ready taken, but it doesn't include informal actions, such as warn-
ing letters that have been received by brokers because of their

practices. And it doesn't include records of compliance conferences,
where SRO's or the SEC sat down with brokers and talked about
their problems; nor does it include a centralized record of customer
complaint data and how these complaints were disposed of.

We think that information on customer complaints and their dis-
position, as well as informal actions, can serve as warning signals
or red flags that the SRO's and the SEC could use to identify more
readily, and the firms themselves could use to identify more read-
ily, problems with employees or potential employees.

So the numbers of disciplined brokers that we have could, in es-
sence, just be the tip of an iceberg. I am not saying that it is, but
it is conceivable that it is. That is why we are making rec-
ommendations that all this data be inputed into the CRD, but not
necessarily that it be made available to the public.

We recognize that there are due process concerns and privacy
concerns, but it should be, we believe, centralized and made avail-
able to regulators, not only in the securities markets, but also to
related markets: the futures markets, and insurance markets. In-
surance companies sell investment products too, as well as securi-
ties firms. If someone has been barred from the securities industry
because they have made a misrepresentation about the risks of se-
curities, I think it would be a very good thing for that information
to be made available to State insurance commissioners so that per-
son couldn't freely migrate to the insurance industry and sell an
annuity which is an investment product as well.

Same thing for people who migrate to the banks to sell mutual
funds. We believe that information should be made available to
bank regulators, as well. We are concerned not only with keeping
bad apples out of the securities industry, but also keeping them out
of the financial services sector in general.

Mr. Markey. But just to get back to the larger point which I was
trying to elicit from you, Mr. Bothwell. Your conclusion is that nei-
ther your study nor the SEC study at this stage is able to ascertain
whether or not you have identified the iceberg of problem that ex-
ists in terms of number of brokers that may be out there, the per-
centage of brokers that may be out there preying upon the inno-
cent, or you have only identified the tip of the iceberg. At this
point, we don't know whether it is iceberg or tip of iceberg, and fur-
ther exploration is going to be needed in order to ascertain the
exact extent to which this problem does exist.

Is that what you are telling the subcommittee?

Mr. Bothwell. Yes. As I understand it, the SEC focused on the
large firms because it is only the NYSE that requires its members
to report customer complaint information. I think it is a very good
step the SEC is taking to look at the smaller, medium-sized firms,
because there have been certainly many instances in the past
where very egregious problems took place in firms that were not
members of the New York Stock Exchange, but were members of
NASD or one of the regional exchanges. But I think the fact that
the consumer complaint patterns and historical records aren't there
is really a very crucial missing piece of information.

Mr. Markey. So on the one hand, we can say at this point there
is no evidence that there is a systemic breakdown, but on the other
hand we can't say with absolute certainty that there aren't much

more serious problems out there because of the inabiHty to examine
the data in a way that can give a comprehensive view of the indus-
try as a whole; is that correct?

Mr. BoTHWELL. I think that is fair.

Mr. Markey. Do you agree with that, Chairman Levitt?

Mr. Levitt. I think I would say that while evidence doesn't indi-
cate a systemic problem, I think both the experience of this exam-
ination, as well as our ongoing relationship with this industry, sug-
gests that there are areas of improvement that must be made to
protect the market investors, and hopefully your work in highlight-
ing this issue will motivate the firms, with perhaps some general
guidance from the Commission to do the right thing.

Mr. Markey. Thank you. My time has expired.

Let me turn and recognize again the Ranking Minority Member,
the gentleman from Texas, Mr. Fields.

Mr. Fields. Thank you, Mr. Chairman.

Chairman Levitt, first of all, I want to applaud you for the way
that you are discharging your responsibilities. I think you are
doing a professional job in a very serious capacity.

Let me go back to what the chairman was just trying to elicit,
and let me underscore again, no one wants to protect a rogue
broker, you know, someone who is acting in a fraudulent or illegal
capacity. And certainly all of us are sensitive to those people who
have lost money or been affected by the actions of someone of that
particular nature. And also I think that there is an admission that
in this particular profession, just as you see in the legal, medical
and accounting and all of the other professions, there are some
problem actors, and again I think there is consensus that those
who are problems should be dealt with severely, and that it should
be a very quick action.

But let me ask it another way. From your analysis, is there an
epidemic of rogue brokers, because that terminology has been used
in some press reports?

Mr. Levitt, I think you may have noticed in my testimony I
didn't use that expression, "rogue broker." I wish it hadn't been
used. It wasn't our expression. It is not your expression. It was an
expression created in another venue.

I don't know that there are any more so-called rogue brokers
than there are rogue doctors or rogue accountants or rogue any-
thing else, but I would say that, with the influx of relatively unso-
phisticated investors into the investment field, the opportunities for
misdeeds, compromise of integrity, and zealous greed are such that
I think that your work on the committee and our work at the Com-
mission must be to raise the standards in the industry.

So my answer to your question is, as I have said before, I don't
think there are an alarming number of criminals out there in the
securities industry, but I do believe that investor interests have to
be protected in a variety of ways, and I am dissatisfied with the
general level of protection right now and improvements have to be
made. That is what we are trying to get at.

Mr. Fields. Chairman Levitt, let me hasten to say, we applaud
you for that effort, and if I could, I want to run through some of
the points that you made regarding the four improvements that

you would like to see, as I took those down: enforcement, informa-
tion, access to information, and supervision.

Let me try to focus for just a moment on the second and third
prong of that, the information and the access to information, and
let me start by asking you exactly what you mean by the "qualified
immunity."

As I understand it, you are talking primarily about qualified im-
munity when a firm files the U-5 termination report and the pros-
pect that there could be a defamation suit emanating from that
particular report, but I wanted to ask you, you know, what you en-
vision by that and can that be done by SEC regulation, or will you
need some type of legislation from Congress?

Mr. Levitt. Well, currently firms are required to disclose the
reasons for terminating sales reps in the report that is filed with
the CRD known as the U-5. And the issue of qualified immunity
arises out of the concerns by firms and supervisory personnel about
the possible liability for accurately disclosing the reasons for termi-
nating problem sales reps.

What that means is that firms very often are so terrified of put-
ting down the reasons a really bad apple has been terminated, even
though they should put those reasons down — they are so terrified
of litigation that they don't do it, and the next employer really is
blind-sided by this.

I guess that we believe that it would be appropriate to take steps
to ensure a greater pressure of candor on the part of firms and su-
pervisors relating to the reasons for terminating these reps.

Now, I, again, don't believe that this U-5 should be used as a ve-
hicle to get even with a rep who goes to another firm. That would
be perfectly horrendous, but, by the same token, where there is a
rep who has really abused an account, taken advantage of an ac-
count in an outrageous way, that should be known to anybody who
thinks about employing that person.

I don't think we will need legislation for this, and we are consid-
ering at the Commission various ways that we can do this without
going to a legislative solution to try to balance the interests of pro-
tecting the privacy and the rights of brokers with what we are try-
ing to accomplish in terms of a greater level of disclosure.

We are not there yet, but when we are, I would like to talk to
you about it. It is an issue that you are concerned with. I would
like to tell you what practice we are going to embrace and see if
you agree with us that that is the way to go.

Mr. Fields. What is your timetable?

Mr. Levitt. I would hope within the next several months we
would come up with a program for enhancing the kind of disclosure
that is available in the U-5. Before we announce anything, I will
discuss it with you.

Mr. Fields. The third point that you made was access to infor-
mation, centralized database, and my question will be, what would
you anticipate in that centralized database, realizing that there is
already a great deal of information available, but what would you
envision? Who would have access to that database?

Mr. Levitt. Well, I think that that database has got to be very
pointed. It can't be the repository for every minute piece of infor-
mation that bears upon a broker and his record. It can't be the re-

pository for every customer complaint which can really result in
vengeful, spurious kinds of observations that pour into the
database and make it absolutely trivialized and meaningless.

We want to be certain that that database is very pointed in
terms of displaying information about really bad performance. The
NASD is working on a system in improving that database, and I
guess I would say to you that the database should convey essential
information without impacting the civil rights of individuals whose
names are included.

Mr. Fields. Well, it seems to me that, you know, what you want
to do is very important, particularly in getting to your primary ob-
jective, which you have sounded in every hearing we have had, and
that is investor protection. And again, those of us on this panel
want to see investors protected, want to see the investor have as
much information as possible, but to me there is a difficulty in put-
ting in information that is necessary determining whether someone
is a fraudulent or illegal actor or someone who has had a number
of disciplinary problems versus information that is in a record that
is there because someone is not happy with the way an investment
has turned out, perhaps due to no cause of the person who gave
the advice, and to me that is the sensitivity in which this must be
approached, and I think it is a very difficult problem.

Mr. Levitt. It is a difficult problem. I would say that the bulk
of our effort with respect to redesigning the CRD will be to give us
the technical ability to search hundreds of thousands of records to
identify problem brokers and target firms for examination, but we
will continue to be mindful, as we have in the past, of not using
this in any form of witch hunt and any form of infringement upon
the rights of brokers or anybody else in the Nation. We will try to
use it as a means of saying to us: Commission, we are seeing a
large number of problems existing in this region or at this firm and
a lot of very serious complaints and several actions that have taken
place, and it is time to have a conversation with management to
see how far this goes.

I think that is the legitimate way a CRD can be used, and I am
mindful of the dangers of an illegitimate way which terrorizes bro-
kers, a means for vengeful customers to take advantage of them.
We are terribly sensitive to that, and I think we will continue to
draw a balance between what we need to do our job and where we
run the danger of stepping over the line and hurting the interests
of firms or customers.

Mr. Fields. Thank you, Mr. Chairman.

Mr. Markey. The gentleman's time has expired, and I have a few
more questions, if I may, before we move to the second panel.

As you know, this is the Subcommittee on Telecommunications
and Finance. We have jurisdiction over the telecommunications in-
dustry as well, so as a result, we have a — kind of a vested interest
in the success of 800 number lines, and there are some problems
with them, we admit, but yet in the long run, we think that it is
a tremendous advantage for consumers, for investors to be able to
get access to information by an 800 number by some simple one-
stop shopping telephone call that will avail them of the information
which they need in order to ensure that they know about the his-
tory of a broker's disciplinary history.

As you know, we have included in the investment advisors bill
that was passed out of the House of Representatives a provision
which would establish a toll free number to provide similar infor-
mation about investment advisors.

Do you agree, Mr. Chairman, that that provision is important,
that it does help to ensure that investors have the information they
need to protect themselves against unscrupulous individuals in the
investment community?

Mr. Levitt. I think it is an absolutely wonderful tool and one we
hope to promulgate, and I think a large part of that is who is on
the other end of that 800 number. Because as good as it is, if we
don't have someone who is sensitive and capable and experienced,
it can cause more problems than it can remedy.

I thought you were going to ask me about cold calling, however.

Mr. Markey. Maybe we can allow you then to comment on that,
if you want.

Mr. Levitt. Haven't you, just as I have been the object of cold
calls late at night or while you are having dinner trying to sell you
products that you didn't need in a way that you felt was really

Mr. Markey. Congratulations. I have seen that you have a new
job, Mr. Markey, and you are doing a lot better than anyone ever
thought you were going to do. I am here now to help you to manage
this windfall that you have now that you have been elected to the
United States Congress.

I am kind of, in fact, shocked that someone would call me with
that kind of a pitch, but they have over the years, and if they are
doing it to me, as the chairman of the committee with oversight
over cold calls, God knows what they are doing off of a blind list
with just names on it of people who have been promoted or given
a raise which is made public. So what can we do to protect people
against that kind of intrusion upon their lives?

Mr. Levitt. Well, I think this is another area that when abused
can really give the industry an image which I think is destructive
to investor perceptions. Our securities industry is the best and the
greatest in the world because investors perceive it to be fair and
open, and any of the activities which compromise that make our in-
vestors less secure and create in my mind a dollar and cents cost.

So while I believe that cold calling is an important element used
by American commerce and by brokerage firms, I feel that it has
to be used in a responsible way, and the Commission staff is con-
sidering a rule to curtail abusive cold calling.

Congress recently enacted the Telemarketing and Consumer
Fraud and Abuse Prevention Act, and the new legislation man-
dates that the FTC promulgate rules regulating telemarketing
within 1 year and then requires the SEC to promulgate
telemarketing rules consistent with the Act within 6 months there-
after.

I think there are a number of factors which have to go into this.
I think that whoever calls and tries to sell you a security or a bond
should tell you at the outset what he or she is there to sell you.

Furthermore, they ought to be in a position to tell you that you
can hang up at any point if you feel that this is intrusive, and I
think it is particularly important that anyone who tries to sell you
a particular security be mindful of the "know your customer" rule

and be certain that you are an appropriate customer for that par-
ticular security. So this is the area that we are thinking about.

This is what we will be talking to the industry about. You have
started us down this road, and I think cold calling today is prob-
ably one of the most vexing phenomenons in society, along with the
blowing of horns and a whole of other annoying circumstances.

Mr. Markey. Congressmen trying to shake your hand at a super-
market while you are trying to get out with the groceries 2 weeks
before an election.

It is an oft-noted point that as this telecommunications revolu-
tion expands, that there are tremendous benefits conferred upon
the public, but at the same time, there are a concomitant number
of problems that begin to develop if those with less scrupulous mo-
tives decide that they want to misuse the technology, and that is
really all we are talking about, and I want to continue to reiterate
that the vast, vast, vast majority of all the brokers and all the peo-
ple who are trying to market these products are good and decent,
honest people.

We are talking here about those that at the margin seek to gain
a little extra advantage beyond what is proper and they give a bad
name to everyone in the industry, and the others in the industry
actually have a stake in controlling those people because the rest
are playing by the rules and the others are giving a bad name to
the overwhelming majority that are trying to conduct themselves
in a professional and a responsible manner.

Let me just ask a couple more questions, if I could. The regula-
tion of broker-dealer sales practices is predicated upon a system of
self-regulation which requires all broker-dealers to belong to indus-
try self-regulatory organizations, such as the New York Stock Ex-
change or the National Association of Securities Dealers. These
SRO's, self-regulatory organizations, are in turn subject to Securi-
ties and Exchange Commission oversight.

Now, prior to the GAO reports on the issue of sales practice over-
sight, there was disclosure that the SEC often finds sales practice
violations at the firms which had been previously examined by the
SRO's and at which the SRO's did not detect the violations which
were identified by the SEC.

To what extent were the compliance problems and the matters
referred for enforcement described in your report previously identi-
fied by the self-regulatory organizations? In other words, how large
of a gap existed, as you looked at these nine firms and then at the
40 that had problems, how large a gap existed between what the
self-regulatory organizations had been doing and then what the
SEC did when it went into the very same situations?

Mr. Levitt. My recollection was that that gap was not signifi-
cant, but, to be specific, I would like to reexamine that issue and
get back to you on that. My recollection is that the gap was not
great in that I don't think it would be fair to say that a substantial
number of problems were overlooked by the SRO's, but I would
really like to verify that.

Mr. Markey. Perhaps, Mr. Bothwell, do you have any recollec-
tion of what the gap was that existed between what the SRO's had
done and then what the SEC was able to identify as a problem in
each one of those branch offices?

Mr. BOTHWELL. No, we don't have any more additional informa-
tion than is in the SEC staff study. I believe something like 98 of
the 268 representatives they identified had left the industry. That
might have been the result of an SRO-type of action or not. But
I am not sure either way.

Mr. Markey. Well, we tried to do, looking at the two reports, a
little bit of analysis, and I think what we have concluded, and we
will maybe send this over to you; between the two agencies, per-
haps you can get back to us with corroboration or further refine-
ment of this, but we found that the SRO's had identified, them-
selves, 14 of those that were later sent over to the SEC for enforce-
ment referral, but that 26 had not previously been identified by the
SRO's, which creates somewhat of a gap.

And perhaps, again, the SEC and the GAO, as you continue to
look at this, you can help us to identify what questions are raised
by the fact that the SEC's methodology of going into these firms
identified two or three times the number that the SRO's did that
would be justified for referral and further action by the enforce-
ment division.

And let me go through another brief set of questions and then
we can move onto the second panel.

One of the most frequent complaints that this subcommittee
hears from investors is that the process of investigating and adju-
dicating investor complaints moves at too much of a glacial pace,
allowing brokers who commit sales practice abuses to remain in the
industry for many years and continue ripping off the public.

On the next panel, the subcommittee will hear from two individ-
uals who have gone through the process of bringing sales practice
complaints against brokers, and needless to say, they are not going
to be pleasant stories. In fact, for the average investor out there,
they will raise the hair on the back of their necks wondering what
will happen to them if they ever got into a situation like this with
the adjudicatory process.

What concerns the subcommittee about both of these cases is
that it appears to have taken forever for the SRO's or the SEC
even to take action against the brokers in question. The New York
Stock Exchange began looking at Mr. Bandyk's activities, but
turned the case over to the SEC in October of 1992 at the SEC's
request.

The SEC, however, did not file an injunction to prevent Mr.
Bandyk from committing further sales practice abuses and seek
discouragement of his ill-gotten gains until May of this year.

With respect to Mr. Swirsky, the subcommittee understands that
the New York Stock Exchange opened an investigation in October
of 1991 but then dropped it when they became aware that the
NASD already had a pending investigation of Swirsky's activities
and the NASD has informed the staff that it has yet to file any
charges against Mr. Swirsky.

Can you explain why it is that even in cases where investors win
in arbitration, or a substantial settlement, that there is not more
prompt action by the Commission or the SRO's to bring enforce-
ment action?

Mr. Levitt. I think all the Commissioners are very mindful of
the importance of seeing to it that these matters are disposed of

as expeditiously as possible because we recognize the potential dan-
gers to investors. The staff is mindful of that also. These cases took
longer than most.

I would say to you that any firm knowing that a broker has been
accused of the kinds of problems that Bandyk and Swirsky were in-
volved with will get rid of those brokers in their own self-interest,
because to keep them at the firm jeopardizes the reputation and
the image of the firm, but I think that one of the goals of the Com-
mission is to move cases of this kind as expeditiously as possible.
And I can say to you when we have weekly meetings on enforce-
ment matters, one of the first issues that is asked on any case that
takes more than a reasonable period of time is to say to the re-
gional office that is responsible, why has this case taken this long?

We have got to do better, and I think we are doing better, but
from time to time cases for a variety of reasons will take a great
deal of time. We have to be mindful of protecting the interests of
people who are involved and go through a fair due process.

Mr. Markey. Well, we are, on this subcommittee more than any
other place, mindful of the limited resources at the Securities and
Exchange Commission, and we are trying mightily to remedy that
and

Mr. Levitt. Whatever help you can get to get us our budget re-
quest approved, because by October 1st, we close down unless
something

Mr. Markey. We are on a full court press to insure that the Se-
curities and Exchange Commission is given all the resources which
it has requested, and again, I appreciate how much you have to do
in an expanding marketplace and how difficult it is for you to dis-
charge all those responsibilities simultaneously with limited re-
sources, but at the same time, the signal to the rogue brokers or
others and to the investing community is justice delayed is justice
denied, and the longer it goes that any of these malefactors are
brought to justice the more likely it is that a wrong signal is sent
to others out there that they just might be able to get away with
it because the system just can't deal with them.

So we want to get you the resources, and I would ask as well
that you would look at a way of insuring that the process is tele-
scoped in terms of the time frame in which these people are made
accountable for any of their actions. I would appreciate that.

I don't have any other questions at this time. I don't know if the
gentleman from Texas would like to be recognized again.

Mr. Fields. Thank you, Mr. Chairman.

Just a real short comment involving cold calling. I guess I come
at this issue from a different perspective, and I realize my perspec-
tive is not really analogous to this particular situation, but I
worked my way through college and law school selling cemetery
property door-to-door, and for anybody in this room thinking God
doesn't smile on you, just think about selling cemetery property
door-to-door and your problems are put in perspective.

I agree with you that there should be professionalism, particu-
larly in this industry, and that vexing problems should be ad-
dressed. The calls late at night, the nondisclosure of information,
someone dealing in a fraudulent or, you know, misrepresentative
manner. I don't think there is any disagreement with that.

I hope that you go slow though and that you do not impede the
entrepreneurial spirit that is out there, and I personally believe
that the government can't micromanage every situation, and I don't
believe that there is some consumer responsibility, and I don't be-
lieve we live in a risk-free society.

Having said that, I realize that this situation that you are talk-
ing about is vastly different from the one I experienced, but again,
there are some analogies, and I just hope that as you proceed on
this, that you will take all of these things into consideration, and
I would certainly like to be involved in this particular issue in the
formation of a response as we proceed.

Mr. Levitt. Let me respond to that by saying that my partners
and my bosses and the people that have worked for me in my var-
ious careers have come to recognize the fact that if a potential em-
ployee came to me with a resume that said they had sold vacuum
cleaners door-to-door or they had cold called to sell encyclopedias,
that within about 10 minutes, they would be employed.

Mr. Fields. What about cemetery property?

Mr. Levitt. Absolutely. So I think that is terribly, terribly impor-
tant, and I appreciate good salesmanship.

What I am talking about, however, is an abuse case. I don't think
the government should micromanage it. I do believe that, working
with the industry by calling attention to it, the problem will be
largely solved. And again, there are very few modifications that I
would call for in this regard, and I think it is the SRO's working
with the firms that will come up with a consensus solution, and
that is the way it should go.

Mr. Fields. Mr. Chairman, that is appreciated, because it has
been the experience of this Member that whenever there is a prob-
lem, the Commission, the industry, in many, many instances has
found the consensus that you talked about, and I hope that in this
particular instance, that is what happens, because again, there is
a recognition that there have been some abuses, that there are
some problems and that those ought to be identified and fixed.

Thank you very much.

Mr. Levitt. Thank you.

Mr. Markey. The gentleman's time has expired.

And just for the record, I worked my way through college in the
ultimate cold call industry driving an ice cream truck street to
street, and while I admit that there were suitability issues raised
by mothers as I was trying to interest some of my customers in
some of the products that they could spend their 12 cents on, I was
always able, I think, to escape, but I am glad to know that I would
have been, as I guess the gentleman from Texas would have been,
a prime candidate for employment in the industry that you super-
vise.

Mr. Fields. Maybe we should ask the chairman. Chairman
Levitt said that honking a horn was vexing. You didn't honk your
horn, did you?

Mr. Markey. To tell you the truth, if you want to hear my story
quite briefly, when I arrived in Lexington, Massachusetts, the
birthplace of the Revolution, they actually had a statute on the
books prohibiting the selling of any victual by means of ringing a
bell, and it had been on the books since 1798. I did not know that

there was such a statute in the town of Lexington until the police
department escorted me to the police station to explain the statute
to me and to very graciously escort me to the town border.

However, I had been selling in this town for the preceding month
before I had been notified of this rule, and I returned the next
night without ringing my bell and the children came down to the
designated place at the appointed time at each hour, and I in-
formed them that it was my last night there and I could not sell
them ice cream.

The next week at the Lexington board of selectmen, with 30
mothers and children in the back of the room, the board of select-
men in 1965 voted to repeal the 1798 statute showing that if there
is, in fact, a proper organization at the grassroots, that you can, in
fact, change the law.

Now, interestingly, I asked my staff to go back and to check that
law because I was giving a speech in Lexington about 6 weeks ago,
and in 1973, 8 years after I had that statute changed when I was
18 years old — my first legislative victory when I was 18 — the law
was put back to 1798 in 1973, which again shows that the price
of freedom is eternal vigilance, and these children are continuing
to be deprived in the bastion of freedom, the symbol of liberty in
our country, but that is for the next generation of ice cream men
to battle that fight.

But anyway, let me ask each of you if you would give us your
1 minute summation as to what it is that you want the subcommit-
tee to retain as we move onto the next second panel.

Mr. Bothwell.

Mr. Bothwell. Just very briefly, Mr. Chairman. I think that
Chairman Levitt and the SEC are taking a great amount of very
good remedial actions in working with the SRO's and securities
firms. I agree with almost everything the Chairman said this
morning and what the SEC is trying to do, and with the rec-
ommendations that are contained in the SEC staff study.

However, we do believe that the focus should be a little bit wider
and that steps should be taken to prevent migration of unscrupu-
lous brokers from the securities industry to other financial services
industries. I don't believe that is an issue that has had very much
attention paid to it at all, and it needs to be paid attention to as
all these separate industries come together and are selling essen-
tially the same types of investment products.

In addition, we do believe that there is a need to update the CRD
system, which is so important and is being looked at to be a sur-
veillance tool. It needs to contain more information about customer
complaints and the disposition of complaints. That type of informa-
tion doesn't have to be necessarily very detailed, but certainly sum-
mary information is starting to be collected by the NYSE for their
member firms, was used by the SEC to target the branches they
went to, and is a valuable surveillance tool to use. We believe that
complaint information, as well as information on the informal dis-
ciplinary actions that are taken, should be contained in the CRD
system as well.

Mr. Markey. Thank you, Mr. Bothwell, very much. And your
conclusion, Mr. Levitt.

Mr. Levitt. The markets today are so very different from what
they were as recently as 5 years ago with the proliferation of new
products, new techniques, and, most significantly, the inflow of
hundreds of thousands of new and relatively unsophisticated inves-
tors, that I think the techniques of surveillance and oversight and
supervision have got to be tailored to today's circumstances. We
have as objectives upgrading educational standards and examining
and considering and highlighting good practices in the compensa-
tion field; we will try to eliminate conflicts of interest and, see to
it that we have the tools together with the SRO's and the firms to
root out bad practices where they exist. This is an ongoing program
that is a continuation of the mandate of the Commission, and we
intend to pursue that hopefully aggressively, creatively, and fairly.

Mr. Majikey. Thank you, Mr. Chairman, very much, and we
thank you, Mr. Bothwell. That will complete the first panel, and we
will now move to the second panel. We would ask the witnesses to
move up to the table, and we will try to reset it for the second
group of witnesses.

We thank each of our witnesses on the second panel for your
willingness to participate in this very important hearing, and what
I would like to do is, by way of laying the foundation for what the
discussion will be, is to recognize Mr. Earl Steenstra, who is an in-
vestor, who is here from Grand Rapids, Michigan to testify as to
his experience in the investment world, and what I would like to
do, Mr. Steenstra, as well as each one of the other witnesses, is to
ask you to keep your opening statement to no more than 5 min-
utes.

If you can do that, you will be of much help to the subcommittee,
and it will also allow us to have much more detailed follow-up
questions with each of you in the question and answer period. So
we are going to be monitoring up here with a stop watch your
opening statements. At 5 minutes, your time will expire.

So try as best you can to summarize the major points which you
want the subcommittee to take from your testimony and then we
will give you an opportunity in the question and answer period to
elaborate upon your major points. So we will recognize you first,
Mr. Steenstra, and whenever you feel ready, please begin.

STATEMENTS OF EARL J. STEENSTRA, INVESTOR; MARY E.
MURRAY, INVESTOR; MARC E. LACKRITZ, PRESIDENT, SECU-
RITIES INDUSTRY ASSOCIATION; EDWARD A KWALWASSER,
EXECUTIVE VICE PRESIDENT, NEW YORK STOCK EXCHANGE;
JOHN E. PINTO, EXECUTIVE VICE PRESIDENT, NATIONAL AS-
SOCIATION OF SECURITIES DEALERS; AND JOHN R. PER-
KINS, COMMISSIONER OF SECURITIES, OFFICE OF THE MIS-
SOURI SECRETARY OF STATE

Mr. Steenstra. Thank you very much, Mr. Chairman. And to
the subcommittee members for giving me the opportunity to talk
to you in just a few minutes about some experiences that I have
had. And I don't profess to be an expert, and I certainly am not
one in the field of investments. I am a consumer of my own, but
I am here primarily to represent my sister-in-law who is now de-
ceased. She unfortunately passed away very quickly and very sud-
denly, unexpectedly about 7 weeks ago, but I think each of you

probably have the documentation and basically her story and my
involvement in her life over the past several years.

I am also a personal representative of her estate and have been
involved in a lot of her financial matters and investments over this
period of time, and so I can testify pretty well to what has gone
on in the, I would call it, the reckless abuse and mismanagement
of her investment portfolio by the party that you mentioned this
morning, Mr. Bandyk in Grand Rapids.

Nancy was about 55 years of age when she opened the account
with the local investment firm in Grand Rapids, to which Mr.
Bandyk was the registered broker, and she received a small
amount of inheritance from her mother who had just passed way
that particular year in 1986. Both she and my wife, Mary, shared
in a little bit of an estate and to that sum, Nancy invested some
monies that she had received from her late husband's estate, who
had passed away a year or so before that, and started with an in-
vestment of a couple hundred thousand dollars.

Nancy was, as most of us are, just common folk and looking to
set up some retirement, had not had any previous investments, and
Tom came along, as the dealer through this large brokerage firm
and sat down and made a portfolio for her. We were there at the
time. We all signed agreements with them. We had to sign an
agreement for a margin account which he said was the way that
that particular agency processed all their buys and sells, and cat-
egorized some of her investments to be conservative, low risk, se-
cure, because she was looking for income rather than any risk or
growth.

Over the years, Mr. Bandyk changed two different times to three
different agencies, each time taking Nancy's account with him, and
each time as he left the other agency, in retrospect, we looked back,
he changed the level of investment from that low risk, very con-
servative, secure account to more of a high risk account, did this
on his own, setting up his own documentation and moving on.

We became involved more directly with her in 1989. She had a
diagnosis of some breast cancer, had surgery, was under chemo-
therapy and radiation therapy, and during that time, Mr. Bandyk
started, to use the account even more extensively than he had the
previous several months, and if you look in the documentation that
we submitted, he far exceeded the legal definition or the court's
definition of churning.

The total balance eroded from that period of time, even in 9
months, was from approximately $170,000 down to into the mid-
80,000 dollars. He had convinced her very often about the fact that
her assets were actually growing, but he neglected to tell her that
her margin account, the debt was also growing at the same time,
and even though she said to stop buying, she did not give him the
authority, he kept on sending the various confirms until she finally
couldn't take anymore, said you have got to quit. He showed her
again that the assets were still growing, but he didn't for a few
months and then again he started doing it.

At that time she expressed some concern and we became in-
volved. I think that as I listened to the dialogue this morning be-
tween the expert witnesses of the first panel and yourselves, I feel
like I am reiterating many of the things that all of you have al-

ready seen and things of which you are aware, but you know that
2 percent of the people, or 2 percent of the brokers who go into
these unscrupulous areas, mean an awful lot more to maybe those
2 percent of us investors who get touched by those people.

And if in fact a trillion dollars that the chairman exhibited this
morning in terms of the amounts of dollars invested in the market,
2 percent of that can amount to a couple billion dollars, and I think
that it has become a very serious concern to most of us who are
at that level investing.

To make a long story short, in Nancy's situation when we deter-
mined what it was, we went to the management of a particular
agency, asked what can we do to file a complaint. He indicated,
well, you can write to the chairman of the SEC and they will look
at it and that was about the basis of it.

I asked particularly what kind of systems do you have in place
that would guarantee that you would give protection to your inves-
tors so this wouldn't happen again. They said, we have reports but,
by the time the manager gets it, it is 2 or 3 weeks after the fact,
we slapped his wrists a few months ago, and that was it.

Mr, Markey. If you could try to summarize.

Mr, Steenstra. I think basically there are several things that we
feel are very important in this process in terms of the moving of
people from agency to agency. There are ways I believe that it can
be controlled and can be passed on. There is no reason for a broker
like this to leave one agency for another.

I do think that there can be systems in place, that the brokerage
firm itself has to take leadership in protecting the consumer and
not having these people on staff, I think the brokerage firm has to
take the leadership because they are determining the market by
their advertising because if E,F. Hutton speaks, we listen. Pruden-
tial is the rock, we are all bullish on the market. They need that
kind of leadership to make sure they don't hire those kinds of peo-
ple.

[The prepared statement of Earl J. Steenstra follows:]

Statement of Earl J. Steenstra, on behalf of Nancy M. Friedrich, deceased

I. Introduction

TTiis irrformaticn has been compiled for tfie purposes of a presentation made to the
U.S. House of Representatives Sub-Commtttee on Telecommunications and Rnance relative
to tna deaJings of stock broker transactions in Grand Rapids, Michigan witti Nancy M.
Friednch. Narcy Friednch was my sister-ln-law (sister of my wife, Mary) who passed away
on July 22. 1994 at the age of 63. Nancy was a widow, her husband passing away in
December. 1984. She has since that date become a close integral part of our own family
and was an assoaate m business with me. Nanc/ had developed some modest funds from
not husband's estate while also adding a smaller amount of money to her investment
portfolio from the estate of her mother who passed away in 1986. It is the handling of these
funds by a stock brokerage fimi m Grand Rapids and one of their associate brokers that
became the basis for negotiations with cnarges and/or complaints. The handling of her
investment account caused tremendous amount of value loss to Nancy and jeopardized her
retirement planning. The following information emphasizes the mishandling of her account tiy
the brokerage agency and its broker. I was deeply involved with Nancy dunng these times of
turmoil for her, meeting with the brokerage firm and attomeys through settiemenL I am
currently her Personal Representative for her estate.

II. Hiatnrv data - 1986 throunh i991

After the death of Nancy and Mary's mother, some funds were distnbuted to each
daughter at the stock brokerage firni of E. F. Hutton/Shearson Lehman in Grand Rapids. At
the time these funds were transferred into Nancy's name, documentation was completed
between the stock broker, his name is Tom, and Nancy. We were all present completing the
necessary applications for our relationships with this agency and the broker. Tom. This
being the major portion of Nancy's initial investment, the designation of the account was to
be conservative and with income stock. Tom indicated that he needed a marginal account
agreement signed as their particular agency processed all buys and sells through the

marginal account. This initial amount in Nancy's account with this brokerage firm was
approximately 350,000.00. Shortly thereafter. Nancy received approximately SISO.OOO.OO
from life insurance proceeds and trust monies from the estate of her deceased husband
which she added to the balance in the Shearson Lehman account. These investments were
primarily in low risk, secure government securrties. stocks and bonds. These financial
transactions were completed by the end of 1987. incidentally, I withdrew the funds given to
my wife and myself and placed with another brokerage firm as I was not comfortable and
confident of Tom's abilities and motives as a stock broker. Nancy decided to stay with this
agency and broker.

After approximately 1 1/2 years. Tom went to another stock brokerage firm, TTiompson
Mc Klnnen for a short time before a merger took place between T/M and Pm Bache.
Nancy's account was transfen«J to Thompson Mc Kinnen but no new paperwork was
completed and signed by Nancy at the time of the Pru Bache merger or assumption of T/M.
Tom completed the necessary paperwork on his own entering into the Pru Bache system. In

September, 1989. approximately $170,000.00 plus were established in the account at Pru
Bache. Nancy had withdrawn some funds prior to this for the purchase of a condominium. I
personally did not review with Nancy much of her investment program prior to this time.
Also, at the time of our review of her investments which were the basis for our charges
and/or complaints, we did not perform a review of her accounts with Shearson Lehman but
only what happened from this date (9/89) on through 6/90.

Beginning late fall, 1989, Nancy underwent surgery for breast cancer, having
malignant tissue removed and following treatments included radiation and chemotherapy for
the next several months. Otjviously, the stress and anxieties related to surgery and the
implications of the disease itself had an impact on Nancy's ability to understand and to deal
with matters of financial investments, particularly in light of the frequencies of buy/sell
confirmations, call letters and statements which occurred very frequently over the next
several months.

During the following 3-4 months, there were frequent transactions without the
permission of Nancy, buy/sell orcJers came to her home and iDefore she could call Tom,
additional confirms came. When she telephoned Tom, he passed it off tjy saying that she
was increasing her asset value of her portfolio to em excess of $250,000.00 or S275. 000.00.
He failed to tell her of the increasing debt in her margin account. In fact, nothing was
mentioned to her about rt. After a few months, she again told Tom to stop buying and selling
so that she could begin to taJce a look at what was going on with her account. In addition,
she had recerved some margined call letters indicating her margin account was over it's
limits. Tom told her not to worry, that the funds crossed between the sell and buy orders.
He ag^n reiterated to Nancy that the assets in her portfolio increased to over $350,000.00
but again said nottiing about the increasing detjt in the margin account. Activity sutssided for
a few monttTS but again for about 30 days m Apnl and May of 1990. a flurry of buy/seJI orders
again came. Nancy mentioned to me of her concern over the frequency of orders but did not
understand the statements and other material she constantly was receiving. She told me
she had asked Tom to stop his buying shortly before this and mentioned to me of her
receiving the margin call letters. I reviewed with her her statements and the debt incurred in
her marginal account. With the senousness of the situation, she cailed for an appointment
with Tom who had |ust left on a 3 week vacation out of the country. We an-anged for a
meeting with the agency manager shortly thereafter.

In the meeting with the agency manager, the account was bnetty reviewed and a new
representative was presented to Nancy and myself to handle her investments while Tom was
on vacation. The request was to immediately change brokers at this point recognizing that
the value of the account had eroded after the pay-off of the margin account balance. It was
learned in this meeting that Tom nad been warned by the agency a few months pnor as to
the hyper-activity of several of his clients. Apparently, once Tom left for vacation otfier
clients had called Pru Bache expressing concerns about the status of their account as well.
In fact, the new representative sakj Tom had a philosophy of buying high and selling low

v«hich conflicted with tha philosophy of Pru BacheV i also asked for a clarification of Nancy's
nghts should she desire to file a complaint. A weak effort to explain her rights and file a
complaint with the Securities Commission was made with the results of such a complaint
minimized tjy the local agency to her. No attempt was made to justify nor rectify any of the
problems with the account. The new broker agent tried to invest in more realistic holdings
recognizing Nancy's sole source for her retirement planning. The only promise made to
Nancy was that in the selling of her then currgnt holdings into new risk-free investments
would be at one of thsir lowest possible rates. Her account was (M an asset managed
accounti Shortly after this time, i arranged for Nancy and myself to visit with a local attorney
from Warner, Norcross and Judd for the purposes of reviewing options and to seek direction.

111. Valuations, losses and settlement

The following facts and figures demonstrate the reckless and inappropnate handling
ana management of the investment portfolios by Pru Bache and its agent. Tom:

- Saptemtjer. 1 989 - the initial value of the portfolio as established at Pai Bache
approximately $170,000.00 plus.

• June. 1 990 - "the estimated value of the portfolio at the time of discovery and the
absence of the broker was approximately 537.000.00.

- Calculated fees for marginal account utilized between 9/89 and 6/90 was m excess
of $14,000.00.

• Total dollar amount of tradings between 9/89 and 6/90 exceeded S1.1 million, far
exceeding the limits of chumino of 5 times the value of the portfolkj.

- 8/90 - the amount of net loss to Nancy Friednch based upon expert analysis and
opinion axcaeded 597,000.00 including fees, commission to Tom, mark« gains or losses
relative to this pwtod of time and reckless or inappropnate trading by Tom.

IV. Setrtament

After analysis and expert opviion as to trie nature of tfie erosion and causes for the
excessive activity In tiie account, decisions were maoe to proceed with negotiations witti the

corporate attorneys of PrudentiaU Based Securities Corporation. This decision was made
based on the following criteria:

- Pnj Bache position was that Nancy was somewhat responsiple since she had
received buy/sell orders indicating some excessrve trading pctentiaJ. This ssemed to t)e an
issue if Nancy would decide funher litigation.

- The cost -for an investor to proceed with court litigation could end up costing Nancy
her total investment and/or her total loss without any compensation over the next several
years. The concem here was that a smaJI or moderate investor does not have the
capabilities of withstanding long and costly coun actions to protea or recover their losses.

- The legal costs for attorney fees, etc. would be most reasonable to complete this
negotiation process as. soon as possible and begin rebuilding.

A settlement amount was finally agreed upon by both parties in 5/91 in the amount of
547,000.00 paid directly by Pai Bache Securities. Out of this Nancy had to pay the
attorney' 3 fees for representation.

To further Indicate inappropnate management. Tom left Pmdentiai Securities and was
employed with another agency as indicated in the attached supplemental reports even after a
time in which Pru Bache was well aware of the difficulties Tom had presented to them as a
certified stod< broker. Tom even sent a letter to Nancy invnir^ her to tail< with him at his
new employment relative to her investments shortly after these difficulties surfaced.

V. ( ^(gnclusions

It was obvious that a certified stocx brcxer was aole to transfer positions from one
brokerage finn to another and to a third or fourth with someone knowing of complaints and/or

inciscrertons in handling customer's accounts. While under scrutiny at Pru Sache. Tom was
ailcwGd to continue managing client's accounts and recommend investments without proper
suoarvision. Pru Bache indicated that the recorting system they maintained tool< 14 days
betore the manager became aware of activities created by their certified agents.

In severaJ discussions that Nancy and I had during this time and after, we often
questioned how a broker could change from one brokerage firm to another without some of
his or her history, whether good or bad. become a matter of record for the hinng brokerage
firm. Secondly, it woild seem necessary for a brokerage fimi to develop internal systems
aiemng management to any such excessive trading practice or infenor rated purchases made
by any of tneir certified agents, particularty aiter any such incidents had occun-ed in that
agents past. Thirdly, it would seem appropnaie for a specific procedure to be m place for
low to moderate income and/or values m anyone's portfolio for restitution of losses by the
brokerage firm without going into court or the filing of lawsuits. Nancy could have lost her
antire value and net worth by brfriging such a large corporation into the litigation process and
had to settle for lesa. Fourthly, we felt that any such brokerage firm wtio has had a
complaint and/or charge* leveled against any such of it's agents should immediately notify
the state and federal regulatory agencies of the nature of the complaint and the registered
agents certification number for cross checking and cross filing purposes. Perhaps a rating
system of the individual brokers could have been instituted so that dients know of the ratings
and performances of the people in whom they have entrusted their reorement monies.

In conclusion, one has to recognize that large stock brokerage firms try to estaOlish
their credibility and reputation through massive media productions. £F. Hutton speaks and
we need to listen. ...Prudential exhibits 'the rock* of investments... others are bullish in the
market. The reputation deserves a responsibility to all clients but more so to those smaller
or moderate investors who rely on the strength of the company to hire and maintain taity
ethical staff and appropnate procedures.

Mr. Markey. Our second witness is Mary E. Murray who is an
investor here from North Falmouth, Massachusetts. We ask if you
would limit your opening statement to 5 minutes.

STATEMENT OF MARY E. MURRAY

Mrs. Murray. Thank you, Chairman Markey, and members of
the subcommittee for inviting me to testify today. I am Mary Eliza-
beth Murray, and I live in Falmouth, Massachusetts on Cape Cod.
Before I retired in 1984, I was a Latin and French teacher at a
public high school in Framingham, Massachusetts.

My husband Joseph and I had eight children and Joseph passed
away in 1983. Joseph had always made the investment decisions
for us and, to this day, I know almost nothing about investing. Be-
fore Joseph passed away, our accounts had been handled by a
broker, Gerald R. Swirsky. I believe the investments were pri-
marily blue-chip stocks.

In 1984, Mr. Swirsky transferred to Prudential-Bache Securities
now known as Prudential Securities and I opened an account with
him. I have a small pension and rely on my limited capital for
extra income. The new account form reflects income as my invest-
ment objective.

I trusted Mr. Swirsky to handle my account and accepted every
recommendation he made. I did not understand most of the activ-
ity. I closed the account in early 1990 after my tax preparer re-
viewed my records and said she was horrified. I retained Attorney
David E. Shellenberger of Boston who filed for arbitration with the
National Association of Securities Dealers.

A consultant, Mary E. Calhoun, of Watertown, Massachusetts
analyzed the account. I lost $125,000. The average account equity
was $99,554, while commissions totaled $174,730, and margin in-
terest totaled $23,907. The annual turnover rate was 4.2 percent
and the account would have had to return 30.1 percent a year just
to cover commissions and margin interest.

Further, most of the investments purchased in the account were
speculative or high risk. I was very successful in my arbitration,
winning $419,460 including attorneys fees, opportunity cost and
punitive damages. I understand that my case was very unusual in
that I was made whole.

Attorney Shellenberger believes that improvement should be
made to the arbitration system in order that all investors with le-
gitimate claims may have a better chance of a fair recovery. Attor-
ney Shellenberger at his own expense had the hearing record tran-
scribed. I authorized him to send the transcript and other docu-
ments to the New York Stock Exchange for possible enforcement
action.

Attorney Shellenberger did so in November 1991. In March 1992,
Attorney Shellenberger contacted the Exchange and was informed
that it had deferred its investigation to the NASD. The NASD
never took any action. I understand that Prudential has settled two
other claims by Mr. Swirsk^s customers for respectively $50,000
and $107,500.

Mr. Swirsky transferred to Tucker Anthony in November 1993
and was suspended for 2 months by the Massachusetts Division of
Securities for selling before his registration with a new firm was

approved by the States. In addition, Massachusetts and Florida
have placed restrictions on his activities.

No regulator has taken any enforcement action against Mr.
Swirsky for his sales practice abuses. Attorney Shellenberger ad-
vises me he has found that indeed regulators only very rarely take
action against broker misconduct. I am deeply concerned about this
and believe that serious sales practice abuses should result in a
long suspension of the broker, or better, a lifetime bar. I am con-
cerned that many other people, including many senior citizens, are
vulnerable to the predations of unethical brokers and brokerage
firms.

In conclusion, I believe that as a retired person, the law of the
land should be consistent with the model of the London Stock Ex-
change, dictum naum pactum, my word is my bond, rather than ca-
veat emptor, buyer beware.

Thank you.

[The prepared statement of Mary Elizabeth Murray follows:]

Prepared Statement of Mary Elizabeth Murray

Chairman Markey and Members of the Subcommittee: This submission is made
in connection with the hearing being held on September 14, 1994. I have been re-
quested to provide information concerning my experiences as an investor, my experi-
ence in the resulting arbitration proceemng, and my observations on the adequacy
of existing systems for identifying and disciplining brokers who have committed
sales practice abuses.

I was bom in 1919, and am now 75 years old. I retired to Falmouth, Massachu-
setts on Cape Cod in 1984, and before that I lived in Framingham, Massachusetts.
I was married to Joseph Murray in 1947, and we had eight children. Once our
youngest child was ready for school, about 1967, I returned to work, teaching Latin
and French at a public high school in Framingham until I retired in 1984.

At the end of 1983, my husband passed away. Our investments had been handled
by a broker, Gerald R. Swirsky. My husband had made the decisions concerning the
account, and to this day I know virtually nothing about investments. I believe the
investments were primarily in what I understand are called "blue chip" stocks, such
as American Telephone & Telegraph, General motors, Exxon, and Pacific Gas and
Electric.

In August 1984, Mr. Swirsky changed firms, becoming a broker at Prudential-
Bache Securities, now known as Prudential Securities. The new account form accu-
rately reflected that I am a widow and that I was seeking income. I receive a small
pension, and am dependent on the modest capital I have had since my husband
passed away.

Between August 1984 and April 1990, I maintained the account with Mr. Swirsky
at Prudential. 1 followed every recommendation Mr. Swirsky made, including selling
my shares of American Telephone & Telegraph. I did not understand most of the
investments, but trusted Mr. Swirsky to properly advise me.

In the Spring of 1990, my tax preparer reviewed the brokerage records and told
me she was horrified at the activity. She referred me to an attorney, David E.
Shellenberger, in Boston.

For four and one-half months, Attorney Shellenberger repeatedly requested copies
of my monthly statements from Prudential. Prudential did not comply with the re-
quests, and in November 1990, I filed an arbitration claim agsiinst Prudential and
Mr. Swirsky before the National Association of Securities Dealers (NASD). My attor-
ney received the missing statements through discovery, and filed an amendment re-
flecting the analysis of the activity.

The arbitration hearing was held on July 23 and 24, 1991. I testified as to my
financial circumstances and the fact that I had trusted Mr. Swirsky and followed
all of his recommendations. I did not have a good understanding of what had hap-
pened to my account. However, Mary E. Calhoun, a consultant based in Watertown,
Massachusetts, had analyzed the activity and testified as to her findings.

It was stipulated that my account had an out-of-pocket loss of $125,000. Ms. Cal-
houn testified that the account had an average equity of $99,554, that purchases
totaled over $2.4 million, that commissions and commission credits totalled
$174,730, and that margin interest totalled $23,907. Ms. Calhoun determined that

the average annual turnover rate was 4.2, and that the account would have had to
return 30. 1% a year just to cover the costs of commissions and margin interest.

Ms. Calhoun also testified that most of the investments purchased in my account
were speculative or high risk. Mr. Swirsky had made purchases totalling over $1.1
million in Data Switch stock and warrants. Prudential's own research reports, which
were obtained through discovery and introduced at the hearing, classified Data
Switch as speculative. I lost $81,955 in Data Switch securities alone.

Ms. Calhoun further testified that there had been unsuitable overconcentration in
certain securities. At one point, Mr. Swirsky had put me in a position in Data
Switch on margin totalling $396,000, representing 182% of the equity in the ac-
count.

Ms. Calhoun also determined that Mr. Swirsky had traded mutual fund shares
and unit investment trusts. She testified that this was inappropriate since these in-
vestments are supposed to be held long-term.

At the hearing, one of the documents introduced was a Prudential compliance
form called "Active Account Information," on which Mr. Swirsky had misstated my
income and net worth, and had falsely represented that the account had been profit-
able. The form also included the branch office manager's notation that the account
had generated $78,000 in commissions in the prior 12 months. The manager admit-
ted that he had not conveyed the commission figure to me.

The award issued by the arbitration panel was as follows. Loss: $125,000; Oppor-
tunity Cost: $145,000; Attorney's Fees: $80,000; Punitive Damages: $50,000 (against
Prudential alone); Interest: $10,000; Costs: $9,460; Total: $419,460

The award includes the panel's finding that Prudential had "demonstrated a con-
scious disregard of the Claimant's rights and an open-eyed reckless disregard for the
Claimant's money." The award also states that "Prudential Securities, Inc.'s super-
vision of Swirsky and Claimant's account was nearly absent."

The award was the highest securities arbitration award in Massachusetts. Attor-
ney Shellenberger advises me that the award is extremely unusual, in that I was
"made whole." While the arbitration process worked very well in my case, Attomev
Shellenberger believes that improvements should be made in the system so that all
aggrieved investors with legitimate claims will have a better chance of fair recovery.

Attorney Shellenberger, at his own expense, had a transcript made of the hearing.
I authorized him to send a copy of the transcript to the New York Stock Exchange
for possible enforcement action, which he did by letter dated November 25, 1991.
On March 25, 1992, Attorney Shellenberger wrote the Exchange inquiring as to the
status of the case. The Exchange informed him that it had "deferred its investiga-
tion" to the NASD. I understand that the Central Registration Depository (CRD) re-
flects no action taken by the NASD.

I know from the hearing that Prudential had previously settled a claim by an-
other of Mr. Swirskys customers for $50,000. I learned by reading the June 1993
Community Newspaper series, "Bad Brokers," that, after my case. Prudential set-
tled yet another customer claim for $107,500.

I have learned that the CRD reflects that Mr. Swirsky transferred from Pruden-
tial to Tucker Anthony Incorporated in November 1992. The Massachusetts Division
of Securities placed temporary limitations on Mr. Swirsk/s activities as a condition
of his registration, and Florida has also placed restrictions on him.

I have further learned that the CRD now reflects that, in late 1993, the Massa-
chusetts Division of Securities suspended Mr. Swirsky for 60 days for "accepting
customer orders while his transfer of registration was pending and not yet final-
ized."

However, the regulators have failed to take any enforcement action against Mr.
Swirsky for his misconduct in handling my account, and his alleged misconduct in
handling the accounts of the other two customers whose claims were settled.

Attorney Shellenberger advises me that it has been his experience that the regu-
lators only very rarely take any disciplinary action. I am deeply concerned about
this, and believe that serious sales practice abuses should result in a long suspen-
sion of the broker, or better, a lifetime bar. I am concerned that many other people,
including many senior citizens, are vulnerable to the predations of unethical brokers
and brokerage firms.

Mr. Markey. Thank you, Mrs. Murray, very much.

Our next witness is Mr. Marc Lackritz who is the president of
the Securities Industry of America and we welcome you back,
Marc, to the subcommittee.

If you could move that mike over.

STATEMENT OF MARC E. LACKRITZ

Mr, Lackritz. Thank you very much, Mr. Chairman.

Mr. Chairman and members of the subcommittee, I am Marc
Lackritz, president of Securities Industry Association, and I appre-
ciate the opportunity to come here this morning and address these
very important questions that are of central importance: First, how
can we, the securities industry, continue to earn and maintain pub-
lic trust and confidence. Are there further steps that we need to
take that self-regulatory organizations or government regulators
need to take, steps beyond what we are already doing, to ensure
that the very high standards we have set are met by everyone in
this industry.

These are important questions, Mr. Chairman, because of the
critical role the securities industry plays in the economic growth of
this country. From 1990 through 1993, our industry raised over
$4.4 trillion for job creating, innovative, internationally competitive
corporations. That is $4.4 trillion out of a $6 trillion economy.

We have raised hundreds of billions of dollars annually for cities,
counties and States to build roads and bridges, hospitals and
schools and housing, and we have increased the wealth and savings
of over 50 million individuals who have invested in our capital
markets. Our success is a testament to the hundreds of thousands
of ethical, hard-working individuals who work in securities firms
across the country and to the millions of investors who have placed
their trust and confidence in them.

We know that trust is hard earned and easily lost. In some cases
the actions of a few have been reported by the press as evidence
of practices throughout the industry. However, the myth of the
rogue broker, the large producer run amok, has been disproved by
the facts set forth in the recent SEC report.

Charges of widespread recidivists, brokers with multiple discipli-
nary actions who continue to stay in the business, also have been
shown to be false by the report of the GAO. And we therefore wel-
come the opportunity to participate in your hearings which we be-
lieve will help Congress and the public better understand our in-
dustry's record of protecting the public's trust.

Our industry's number one priority is promoting trust and con-
fidence in our markets. As the subcommittee well knows, firms in
our industry have spent millions of dollars improving compliance
systems and adopting new policies and procedures to protect cus-
tomers and to identify and keep bad brokers out of our business.
We are highly regulated and closely supervised by the SEC, the
SRO's and the States. Our record shows that the overwhelming
numbers of registered representatives and their supervisors uphold
the very high standards that we have set for this industry.

Mr. Chairman, my written testimony sets forth data on the num-
ber of arbitration claims and complaints filed against broker deal-
ers. In 1993, for example, the most recent year for which we have
data, the ratio of arbitration claims to completed transactions was
66 ten-thousandths of 1 percent, an extraordinarily low number of
complaints for any industry.

We have set forth on the charts there the record of the last 3
years mapping out the number of arbitration complaints that have
been filed with all self-regulatory organizations against the number

of transactions in the markets, and they show a ratio of less than
.01 percent of claims filed versus transactions completed. I use
these numbers not to minimize the problem of sales practice abuse,
but to put the numbers of incidents in perspective.

Clearly we wish there were no complaints, or better, that no
broker ever gave a customer a reason to complain. Our industry
works remarkably well, and the facts prove that. We are continuing
to work toward improving our systems, policies and procedures in
order to enhance trust and confidence in our industry. We are also
working with the SEC, the SRO's, and the States.

For example, we are working to help implement the rec-
ommendations of the joint securities industry, the Regulatory
Council on Continuing Education, to develop and implement a con-
tinuing education program for firms. Our industry is committed to
ensuring that brokers are fully informed of all regulatory and ethi-
cal requirements and that they understand the products that they
are selling.

SIA has also created a committee which includes many of the in-
dustry's top compliance people to work with the SEC, SRO's, and
the States on issues relating to the reporting and disclosure of
sales practice complaints and disciplinary actions. We strongly sup-
port the NASD efforts to modernize and rebuild the Central Reg-
istration Depository system and we agree with the SEC's rec-
ommendation to address the liability of broker-dealers and their as-
sociated persons with respect to State law defamation actions in
connection with filing on form U-5.

Broker-dealers need immunity from lawsuits for their U-5 filings.
While we believe information in the CRD which is available to the
public should not include unsubstantiated complaints, we support
the creation of a separate system by the NASD to require reporting
of all complaints for regulatory purposes. We believe regulators
need and should have this information about firms and individuals.

In conclusion, Mr. Chairman, I want to reiterate that the success
of the securities industry in playing its essential role in the coun-
try's capital formation process results from the basic integrity and
honesty of the hundreds of thousands of people who work in our
industry and who every day help increase the wealth and saving
of millions of Americas.

I want to urge the subcommittee to be careful when the press or
others use terms like rogue broker or recidivist in attempts to
mischaracterize an entire industry. The facts which this sub-
committee has helped bring to light as a result of its inquiry show
that problem brokers are indeed a tiny fraction of our industry.
Nonetheless, we continue to look for ways to improve upon our
record.

Thank you for inviting us to participate.

[The prepared statement of Marc E. Lackritz follows:]

Prepared Statement of Marc E. Lackritz, President, Securities Industry

Association

Chairman Markey, Congressman Fields, Members of the Subcommittee.

I am Marc Lackritz, President of the Securities Industry Association. ^ I appreciate
the opportunity to testify before the Subcommittee to address a question of central
importance to our industry, to the investing public and to all users of our capital
markets: How can we, the securities industry, continue to earn and maintain public
trust and confidence? More specific to this hearing: Are there further steps that can
be taken by the industry, the self-regulatory organizations (SROs), the Securities
and Exchange Commission (SEC), the states and the Congress steps beyond what
all of us are doing today — to ensure that the very high standards we have set for
the securities industry are met by everyone in the industry?

These are important questions, because of the critical role of the securities indus-
try in the economic growth of this country. From 1990 through 1993, the securities
industry raised over $4.4 trillion for corporations in this country, enabling them to
grow, create jobs, and compete in international markets. In addition, our industry
has raised hundreds of billions of dollars annually for cities, counties, and states,
providing the funds to build the infrastructure on which all of us depend. We have
raised the seed capital for high technology start-up ventures that have grown into
worldwide competitors, and we have provided the capital for mature manufacturing
companies that continue to be the strength of our industrial base.

As the capital we have raised has been put to productive use, we have increased
the wealth and savings of over 50 million individuals who have invested in our secu-
rities markets. These individuals have been able to buy homes, send their children
to college, and enjoy their retirement years, because our industry has provided the
advice and the tools to increase their wealth and savings.

Our success over the years is a testament to the thousands of ethical, hard-work-
ing individuals who work in securities firms across the country and the millions of
investors who have placed their trust and confidence in them.

We know that trust is hard-earned and easily lost. In our business, a few well-
publicized examples of illegal or unethical behavior can tarnish the reputation of an
entire industry. In some cases, the actions of a few have been reported by the press
as evidence of practices throughout the industry.

However, the myth of the "rogue broker" — the large producer run amok — has been
disproved by the facts set forth in the recent SEC report.^ Charges of widespread
"recidivists" — brokers with multiple disciplinary actions continuing to stay in the
business — also have been shown to be false by the report of the General Accounting
Office (GA0).3 We, therefore, welcome the opportunity to participate in these hear-
ings, which we believe will help Congress and the public better understand our in-
dustry's record of protecting the public's trust.

Let me reiterate that our industry's success depends upon the public's trust and
confidence. We certainly cannot maintain confidence in our industry if we fail to ac-
knowledge and address weaknesses in the system, however small. As this Sub-
committee knows, our industry has spent millions of dollars in continuing efforts to
improve compliance systems, to implement stronger procedures to protect cus-
tomers, and to identify and keep bad brokers out of the business if at all possible.
We are strongly committed to working with this Subcommittee, with the SEC, with
the SROs and with the states to make further improvements wherever possible.

However, I want to underscore that these efforts are aimed at curbing the actions
of a very small number of wrongdoers. The record of our industry shows that the
overwhelming numbers of registered representatives and their supervisors uphold
the high standards we have set for this industry.

Now let me address that record.

A review of the number of complaints filed for arbitration shows that in 1993
there were 6,561 arbitration claims filed, during a period in which there were
98,745,723 completed trades'* — a ratio of arbitration claims to trades of sixty-six
ten-thousandths of one percent. It should be noted that these are raw numbers on
arbitration claims, without regard to the merit of the claims.

^The Securities Industry Association is the securities industry's trade association representing
the business interests of about 750 securities firms in North America, which collectively account
for about 90 percent of securities firm revenue in the United States.

2 SEC Division of Market Regulation and Division of Enforcement, The Large Firm Project,
A Review of Hiring, Retention and Supervisory Practices (May 1994).

^GAO, Securities Markets: Actions Needed to Better Protect Investors Against Unscrupulous
Brokers (September 1994) (Advance Copy).

•*This number includes trades in NYSE-listed issues reported on the Consolidated Tape,
NASDAQ/NMS issues, and Amex issues. See attached chart.

The SEC statistics on customer complaints show that in 1993, there were 2,603
sales practice complaints lodged against broker-dealers.^ That is less than one com-
plaint for eveiy 50 million snares traded; or one complaint for every 19,762 stock-
nolders. The SEC data reflect unproven allegations, without regard to merit.

Clearly, we wish there were no complaints — or better — that no broker ever gave
a customer a reason to complain. But I believe there are few, if any, other industries
where the number of complaints per transaction is as low as ours. Our industry
serves our clients remarkably well, and the facts prove that.

The report of the General Accounting OfBce uses a different measure to assess
the record of our industry. ^ The GAO reviewed the disciplinary histories of the
467,000 active brokers in the Central Registration Depository (CRD).' It found 9,799
registered representatives, or about two percent of tne industry, with one or more
disciplinary actions against them.^ Of tnese, 7,297 had only one action against
them; 1,686 had two; and 816 (two-tenths of one percent of the total) had three or
more disciplinary actions against them. This record hardly reflects an industry rife
with recidivism.

That brings me to the specific subject of this hearing, as stated in your letter of
invitation, the subject of 'rogue brokers." When the term rogue broker is used, it
conjures up the image of a large producer running amok, trampling investors, wid-
ows and orphans in his path; his handlers — branch managers and other super-
visors — scrambling to get out of the way and powerless to intervene because of the
force of large commissions generated by the broker.

It is wholly untrue to suggest, as some articles in the press have done, that this
image characterizes the securities industry — or even a small fraction of the indus-
try. In its Large Firm Project, the SEC found that of the 268 registered representa-
tives selected for review based on histories of sales practice related customer com-
plaints, only 15, or six percent, were among the 50 largest producers at their firms.
The SEC data are important, because they debunk the theory that supervisors
somehow "wink" at violations by these brokers because they are large producers.

In our industry, firms and individuals know they can be disciplined for "failure
to supervise." 9 The potential financial liability for a firm and its management can
be tremendous; the reputational damage can be even more severe. Enforcement ac-
tions against firms and individuals may be instituted by the SEC, the states, and
the SROs; huge fines may be and have been sought and levied against firms and
individuals; and career-ending sanctions may be imposed against individuals, from
branch managers to heads of firms. In addition, plaintiffe' lawyers look for the
slightest misstep to provide the basis for costly, and in some cases extortionate,
class actions.

With the legal and financial consequences I have just described, no manager has
an interest in looking the other way when confronted with sales practice problems,
or even the suggestion of sales practice problems. Nor does anyone have an interest
in hiring a broker who might deliver a potential lawsuit or regulaton^ action, re-
gardless of the amount of commissions that might be generated. The SEC's findings
show that only a small fraction of brokers with compliance problems are the big pro-
ducers. Thus, the suggestion that managers have a financial incentives to duck tneir
supervisory responsibilities is obviously wrong.

I think the myth of the "rogue broker" and the "see no evil" supervisor should
be laid to rest. It is a grotesque mischaracterization of this industry.

Having said this, we cannot ignore the fact that a disproportionate amount of
damage to the industry's image and to the public's perception of the industry is done
by a small number of brokers. We, therefore, are continuing to work toward improv-
ing our systems, policies and procedures, not just to address the problem of bad bro-
kers, but to enhance trust and confidence in our industry more broadly. We also are

^ There were a total of 5,187 complaints to the SEC concerning broker-dealers in 1993. Com-
plaints other than those related to sales practices involved account transfers, order processing,
fees, loss or theft of securities, and receipt or delivery of money, documents, certificates or other
materials.

*This discussion is based upon our review of an advance copy of the GAO report, released
by the Subcommittee on September 8, 1994.

''The CRD is a computerized filing and data processing system operated by the NASD to
maintain information concerning NASD member broker-dealers and their registered personnel.

® The GAO report notes that some of these actions involved nonsecurities-related infractions,
such as driving while intoxicated.

^Section 15(bX4XE) of the Securities Exchange Act of 1934 authorizes the SEC to impose
sanctions upon a broker or dealer if it finds that such broker or dealer "has failed reasonably
to supervise, with a view to preventing violations ... [of the securities laws or rules there-
under] . . . another person who commits such a violation, if such other person is subject to his
supervision."

working with the SEC, the SROs and the states in a number of areas where we
beUeve improvements can be made. The recent SEC staff report provides a number
of constructive recommendations in this regard, and I would like to talk about some
of the things we are doing and that we believe should be done.

In September 1993, the joint Securities Industry/Regulatory Council on Continu-
ing Education ("the Council") issued a report calling for a formal two-part continu-
ing education program for securities industry professionals. The program will re-
quire uniform periodic training in regvilatory matters (the "RegiJatory Element")
and ongoing programs by firms to ensure that registered representatives and their
supervisors are well informed about the products they sell (the "Firm Element"). It
is anticipated that the SROs will adopt rules to implement the program by Novem-
ber of this year and the SEC will approve them by January 1995. The target date
for implementation of the program is July 1995.

The SIA Board has enthusiasticadly endorsed the Council's recommendations, and
we are working with the Council to assist in developing and implementing a con-
tinuing education program for the Firm Element. Our assistance will help smaller
firms, in particular, that do not have sufQcient education and training resources to
develop programs of their own.

Under the Firm Element part of the program, each firm will be required to con-
duct an analysis of its training needs and establish a training process that meets
certain minimum requirements. Firms must maintain records that clearly dem-
onstrate the content of the training program and completion of the program by indi-
viduals. Such programs will be required to meet minimum standards, such as iden-
tifying the investment features and associated risk factors of products, determining
their suitability in various investment situations, and explaining applicable regu-
latory requirements that affect the products and services. The SROs will have the
ability to require members to provide specific training in any area the SROs deem
necessary.

The Regulatory Element part of the program requires that all registered persons
participate in a prescribed computer-based training session on their second, fifth,
and tenth registration anniversary dates. Persons who have been registered for
more than ten vears and have not been the subject of a serious disciplinary action
(an action resulting in $5,000 or more in fines) during the most recent ten years
will be exempt from the Regulatory Element. However, any person who would other-
wise be exempt will be required to re-enter the program for another ten years upon
becoming subject to certain disciplinary actions. The computer-based training pro-
gram wul be designed to transmit inwrmation on compliance, regulatory, etlucal
and sales practice standards. Failure to complete the required training session dur-
ing the prescribed period will result in an individual's registration becoming inac-
tive. In short, they could not continue to work in our industry.

Our industry is committed to ensuring that brokers continue to be fully informed
of regulatory and ethical requirements and that they understand the products they
are selling. We are proud of^ our record of fair treatment of customers and the sav-
ings-generating, wealth-creating service we have performed for our customers. We
welcome the opportunity to participate in a continuing education program that we
believe will improve on that record.

Over the past vear, the SIA also has been working to address issues relating to
the reporting ana disclosure of sales practices complaints and the resolution of com-
plaints and other disciplinary actions. Let me emphasize that, while this is the right
thing to do in light of the supervisory responsibilities imposed upon us by our regu-
lators, it also is in the business interests of our firms to have accurate information
on the disciplinary history of brokers as they leave one firm and seek emplo3anent
with another. No one in our industry wants to hire a compliance problem.

Our industry, and its regulators, share a common interest in this regard. Accord-
ingly, the SIA has created an Ad Hoc Committee on Regulatory Reporting and Dis-
closure to work with the SEC, the SROs and states on these issues. Many of the
top legal and compliance people in the industry are members of this Committee.

There is strong support within our industry for the NASD's efforts to modernize
and rebuild the 13-year-old CRD system. We believe the NASD's efforts will result
in greatly improved technical capabilities.

At the same time, we believe every effort should be made to improve the accuracy
of information supplied to the CRD system. In this regard, we strongly endorse the
recommendation in the SEC's Large Firm Report to address the liability and immu-
nity of broker-dealers and their associated persons with respect to state law defama-
tion actions in connection with filings on Form U-5. As the SEC's Large Firm Report
acknowledges, disclosures made on Form U-5 have been the subject of litigation and
arbitration, and substantial awards have been made in some cases. This has had

an understandably chilling effect on firms in reporting the reasons for termination
of an individual. We should not be sued for doing what the law requires us to do.

We also believe information in the CRD, which may be made available to the pub-
lic, should not include unsubstantiated complaints, such as allegations of fraud re-
quired to be reported on question 22H of Form U-4. We question the fairness to in-
dividuals when mere allegations of misconduct are made available to the public —
allegations that may remain on an individual's record even if the customer with-
draws his complaint or it later is determined that the registered representative's
conduct was appropriate. The CRD should contain current information about deci-
sions and formal regulatory actions, which the public has every right to know.

We recognize, however, that regulators need and should have the broadest type
of information about firms and individuals, including unsubstantiated complaints,
in order to fulfill their oversight responsibilities and focus their enforcement efforts
appropriately. We fully support the NASD's plans to develop a system similar to the
system maintained under Rule 351 of the New York Stock Exchange (NYSE), which
requires member firms to report all customer complaints. This system, which we un-
derstand would be separate from the CRD, would create a compilation of statistical
data on complaints based on uniform codes to identify the nature of the allegations
and the product area. The NYSE's system has proven to be an effective way to flag
individuals or specific offices at NYSE member firms for further review. However,
the unsubstantiated complaints reported to the NYSE have not been made available
for public disclosure and have been used exclusively for regulatory purposes. We be-
lieve the NASD's system should be used in a similar manner. While unsubstantiated
complaints are not indicative of wrongdoing and should not be publicly disclosed,
they are a useful tool for regulators.

We, therefore, agree with recommendations that our industry and its regulators
should develop more effective systems for reporting and analyzing data on regu-
latory actions and allegations of improper sales practices. We are committed to
working with the SEC, the SROs and the states to improve the tools available to
regulators and the industry to ensure that the high standards we have set for this
industry are met.

The securities industry has played an essential role in raising capital for business
and government. In fulfilling this role, it has increased the wealtn and savings of
millions of Americans. Our success is a testament to the basic integrity and honesty
of the hundreds of thousands of individuals who work in our industry.

Nonetheless, we continue to look for ways to improve upon our record. Indeed, we
are excited about initiatives for continuing education and training, which we believe
will help us provide even better service to customers. In addition, we strongly sup-
port efforts to improve reporting and appropriate disclosure of the disciplinary his-
tories of our members.

We appreciate the interest this Subcommittee has shown in these issues. Thank
you for inviting us to participate in this hearing.

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Mr. Markey. Thank you very much.

Our next witness is Edward Kwalwasser, executive vice presi-
dent of the New York Stock Exchange. Welcome back.

STATEMENT OF EDWARD A. KWALWASSER

Mr. Kwalwasser. Mr. Chairman and members of the sub-
committee, thank you for this opportunity to appear before the sub-
committee on behalf of the Exchange to discuss the presence of
problem registered representatives in the securities industry.

We believe that identifying problem registered representatives is
critical to safeguarding the integrity of our markets and seek all
opportunities to identify any individual who jeopardizes or threat-
ens to erode public confidence in the markets. The Large Firm
Project which identified certain problem situations provided the
SEC and the SRO's with an opportunity for enhancing the regu-
latory system, and most importantly, it created an even higher in-
dustry awareness of the seriousness with which regulators view
unscrupulous brokers. The SEC report on the Large Firm Project
included specific recommendations for change, and the Exchange
responded to those recommendations by implementing changes that
we believe will enhance our regulatory program.

My written testimony provides an overview of the Exchange's
regulatory program for monitoring sales practice activities of mem-
bers and member organizations. The testimony also describes the
Exchange's continued commitment to identify problem registered
representatives and to the substantial financial, human, and tech-
nological resources allocated to the regulatory program by the Ex-
change.

I would now like to focus on the specific questions raised by the
subcommittee in its August 15th letter. I do not believe that gen-
erally brokers with significant or repeated disciplinary problems
are permitted to remain employed by Exchange member organiza-
tions. The Exchange devotes enormous amounts of time and re-
sources to identifying and prosecuting problem registered rep-
resentatives to ensure that they are not permitted to remain em-
ployed in the securities industry.

Of the Exchange's 250 disciplinary proceedings concluded against
current or former registered representatives, since January 1992,
only 21 involved individuals with any previous disciplinary history.
Furthermore, during this period nearly 50 percent of the sales
practice cases resulted in bars or suspensions of 1 year or more. It
is our experience that once an individual is barred for a period of
greater than a year, that individual has a difficult time in becom-
ing reemployed in the securities industry.

I believe our regulatory program is effective in identifying prob-
lem brokers. Our systems were the basis for the data used in the
Large Firm Project for identifying problem registered representa-
tives and the SEC commended them as highly effective. Our en-
hanced automated systems which compile and sort complaint data
can identify possible problem brokers by branch or firm and follow
a broker from firm to firm.

Our procedures call for review of all member organization com-
plaint reports regardless of the size of the firm. This information
then becomes a critical element of our examination risk assessment

matrix which is utilized to identify problem brokers or branches for
review during on-site examinations.

Our record in enforcing the Exchange's rules in the Securities
Exchange Act over the last 5 years shows that the Exchange de-
votes significant resources to the sales practice cases. In fact, over
85 percent of our case load involves sales practice cases. Of the 595
disciplinary proceedings completed over 3 years ended December
1993, 523 were brought against associated persons and member or-
ganizations and 147 of those proceedings have resulted in perma-
nent bars. The Exchange has not in the last 10 years allowed any
individual which it permanently barred to become reemployed with
an Exchange member organization.

Once a person is identified as a rule violator, swift and effective
enforcement action is taken. Today an average enforcement inves-
tigation takes approximately 11 months to complete.

With regard to recommended changes as set forth in our re-
sponse to the SEC on the Large Firm Project, the Exchange has
made enhancements to its sale practice programs such as increas-
ing the number of sales practice examiners and the frequency of
our sales practice examinations. In addition, the Exchange has im-
plemented the recommendation of the report to make available to
the public all formal disciplinary proceedings when initiated
against member organizations or registered representatives.

I believe that the supervisory practices and compliance systems
and controls of our member organizations have been increasingly
effective in identifying potential problem register representatives.
Member organizations are reporting to the Exchange, in increasing
numbers, instances of potentially violative activity. This dem-
onstrates that the actions taken by the Exchange to strengthen re-
porting of potentially violative activity have been successful.

However, despite the effectiveness of member organizations' com-
pliance systems and the Exchange's regulatory programs instances
of sales practice misconduct will occur. Therefore, the Exchange
will continue to look for new ways to refine and improve our sys-
tems and procedures for detecting and deterring sales practice
abuses.

Thank you. I would be happy to answer any questions.

I would like to make one additional statement. You were talking
about methodology with respect to the Large Firm Project and in
determining what instances the SRO's took action against a sales-
men. I think you ought to look at the 90-some-odd people who are
out of the business. I think a majority of those were put out by
SRO enforced actions, so that out of the total number, I think you
would find that a majority of those were found and prosecuted by
the SRO's.

[The prepared statement of Edward A. Kwalwasser follows:]

Edward A. Kwalwasser

Testimony

Before The Subcommittee On

Telecommunications and Fmance

September 14. 1994

Mr. Chairman and members of the Subcommittee, my name is Edward A. Kwalwasser and I
am Executive Vice President, Regulatory Group, of the New York Stock Exchange (the
"Exchange"). Thank you for this opportunity to appear before the Subcommittee on
Telecommunications and Finance on behalf of the New York Stock Exchange to discuss the
presence of "problem registered representatives" in the securities industry.

The focus of my testimony will be on the Exchange's regulatory programs for monitoring the
sales practice activities of our members and member organizations and will include the
Exchange's perspective on problem registered representatives. I will explain the current
systems and procedures in place, including recent initiatives and enhancements aimed at
improving the regulatory program. However, before addressing the specific programs, I
would like to give a brief overview of the Exchange's Regulatory Group.

OVERVIEW

The Regulatory Group of the Exchange consists of three operating divisions: The Division
of Member Firm Regulation — responsible for examination and analysis of the financial and
of)erational condition of member organizations as well as their sales practices; the Division of
Market Surveillance - responsible for surveillance of all trading activity on the floor of the
Exchange; and the Division of Enforcement — responsible for investigating and prosecuting
violators of Exchange rules and the Securities Exchange Act of 1934 and the rules
thereunder. Currently there are 480 people in the Regulatory Group representing 33% of the
Exchange's total staff of 1450 and our budget for 1994 is in excess of $75 million.

The Divisions of Member Firm Regulation and Enforcement play key roles in the sales
practice element of the regulatory programs. The Exchange has committed significant
human, technological and training resources to the Divisions to ensure maintenance of strong
and effective regulatory programs. As a result, both Divisions have hired additional staff
and have been allocated resources to automate and upgrade various regulatory systems.
Major systems changes are being made in Member Firm Regulation which impact virtually
every aspect of its regulatory program and assist in identifying potential sales practice
problems.

We believe that a knowledgeable, well-trained staff is essential for effective regulation.
Accordingly, the Exchange conducts an annual recruiting program for examiners as well as
training seminars and educational courses for current staff. For example, staff is regularly
trained in new or complex products such as collateralized mortgage obligations and derivative
products and educated on the risks associated with such products in order to determine
suitability for investors.

The Self-Regulatorv Structure

Self-regulation is based on the premise that regulation is good business and that effective
supervision is essential to the successful operation of every broker-dealer. We believe,
therefore, that the system of self-regulation begins with the broker-dealer and places heavy
reliance on its adherence to rules of conduct and the exercise of effective supervision and
control over all its operations and personnel.

The Exchange plays a critical role in the system of self-regulation and, while self-regulatory
responsibility starts with Exchange members and member organizations, the Exchange
maintains an extensive system for monitoring and regulating the activities of its membership.
As part of its oversight responsibility, the Exchange works to ensure that the high standards
of business conduct set by the Exchange and by its members and member organizations, and
that are prescribed by law, are met. In carrying out its responsibilities, the Exchange uses a

broad range of techniques that includes sophisticated and comprehensive computer-assisted
analysis, field visits by Exchange examination staff, constant monitoring of the status of, and
information relating to, its membership and finally, the investigation and prosecution of
violators of Exchange rules and the Securities Exchange Act of 1934 and the rules
thereunder.

EXCHANGE OVERSIGHT SYSTEMS

The Exchange is responsible for the financial, operational and sales practice regulation of its
members and member organizations including approximately 330 member organizations
which deal with the public. These organizations service 40 million customer accounts,
operating from 11,300 branch offices world-wide and employing 140,000 registered
personnel.

As part of the in-field examination process, a staff of Exchange examiners visits, on an
annual basis, every member organization dealing with the public for an on-site inspection of
their books and records. The scope of the examination program is customized by the
Exchange based on perceived regulatory risk for each organization. In addition to financial
examinations, a specialized staff of examiners conducts sales practice examinations of
members and member organizations.

The Exchange currently employs 31 highly skilled sales practice examiners who specialize
only in sales practice compliance issues. These examiners examine the largest 16 retail firms
on an annual basis in order to identify potential problem registered representatives and to
identify potential abusive practices in customer accounts. These firms represent 58% of the
customer account base, 60% of the registered representative population and 35% of the
branch network of all member organizations.

This specialized unit also conducts an additional 40 to 50 regular examinations of member
organizations annually, prioritized on perceived risk, and performs special examinations or

for cause examinations of new products and potential problem situations which may arise
during the year. It also participates with the SEC and other regulators in cooperative
examination projects such as the "Large Firm Project" and "Penny Stock Examination
Sweep" conducted in 1993.

The task of identifying problem registered representatives, or branch offices that should be
the subject of an examination, is a difficult one. To facilitate the process and to enhance our
ability to identify a problem, the examiners accumulate considerable data on a Sales Practice
Risk Assessment Matrix ("Matrix").

Prior to commencing an examination, the examiners are required to prepare a detailed Matrix
containing information obtained both from Exchange records, as well as member organization
records. Major components of the Matrix are customer complaints, prior disciplinary
history, litigations, arbitrations. Exchange Form RE-3', Form U-5^, extensions of time, late
payments, canceled trades, as well as statistics obtained from the member organization's
internal management reports, such as trade activity and commission runs, etc. The
examiners will review and analyze this information for possible patterns to identify a specific
salesperson, customer account, and/or branch office warranting examination. Once
identified, the examiners review the underlying customer account activity and related
documentation for evidence of abuse. Examples of activities for which the examiners review
are excessive trading or churning, suitability, and unauthorized trading.

' Exchange Form RE-3 is required to be submitted to the Exchange pursuant to Rule 351
("Reporting Requirements") whenever a member, member organization or registered or non-registered
employee is or becomes the subject of one or more reportable events (e.g. . certain litigations,
disciplinary actions, suspensions, etc.). Form RE-3 requires a complete and detailed description of
the matter forming the basis of the reportable event.

^ The Uniform Termination Notice for Securities Industry Registration ("Form U-5") is the
standard industry form submitted to self-regulatory organizations for registered persons who have
been discharged or terminated. Form U-5 requires an explanation of the reasons for the discharge or
termination and requires full details of outstanding complaints, litigation and other material matters.

The sales practice examination of a large firm will generally involve the review of thousands
of accounts, a visit to as many as fifteen to twenty branch offices and numerous interviews
with salespersons and supervisors. The examination may last for approximately twelve
weeks. In addition to providing the basis for evaluating the effectiveness of a firm's
systems, the examination often identifies a number of accounts which may have been abused.
These accounts and the identity of the registered representative are then referred to our
Enforcement Division, which then conducts a further investigation of the facts and pursues
disciplinary proceedings, if necessary. If a lack of supervision is detected that matter is also
forwarded to Enforcement for review.

An integral part of the sales practice effort is the Investor Complaints and Inquiries section of
the Exchange which receives complaints directly from the investing public. The section is
staffed by four analysts and one manager.

The analyst's function is both to obtain the firm's response to the complaint and to determine
if the registered representative and/or firm may have violated Exchange or SEC rules and

therefore warrant referral to the Enforcement Division. The analyst must review the
compliance history of the registered representative involved by checking the CRD', the Rule
351(d) customer complaint report," and open Enforcement cases. When the firm has
provided the response to the customer and the documentation requested by the Exchange, the
analyst assesses this documentation and recommends a disposition, including possible referral
to Enforcement. During 1992-1993, the Investor Complaints and Inquiries section made 71
enforcement referrals and so far this year 25 referrals have been made. In addition, the
complaints have become an integral part of the examination planning process and are a key
component of the risk assessment matrix prepared to assist the examiners during in-field
examinations.

' The Central Registration Depository ("CRD") is a centralized system, in which the Exchange
participates, to process applications (Form U-4), termination notices (Form U-5) and amend
information on these forms as submitted by members and member organizations.

* Exchange Rule 351(d) adopted in 1988, requires member organizations to report all customer
complaints to the Exchange on a quarterly basis.

Enhancements

On an ongoing basis, the Exchange endeavors to enhance its surveillance programs by
assessing and responding to new industry developments and issues. During the last few
years the Exchange has initiated significant changes in its sales practice program which have
enabled us to better identify problem registered representatives. In 1994, the sales practice
examination staff was increased by 5 people. The allocation of additional resources allowed
us to expand our successful sales practice examination program. All firms conducting a
public customer business will now receive a comprehensive sales practice examination by our
specialized sales practice examiners once every four years, while continuing to examine the
16 largest retail firms annually. This will expand our specialized sales practice coverage to
approximately 100 firms annually. In addition, those firms which do not receive a
specialized examination will receive a modified sales practice review during the annual
review by our financial examiners. In 1994, the Exchange revised the examination
procedures for the modified sales practice review to include a risk assessment matrix that
identifies specific registered representatives or customer accounts for review.

In 1994, the Exchange also made enhancements to its automated surveillance system to
identify potential problem registered representatives, by expanding its use of Rule 351(d)
complaints' data base. The newly developed system assigns specific risk factors to reported
sales practice complaints, and those registered representatives exceeding certain parameters
are selected for further investigation. The Exchange has assigned a full time sales practice
examiner to coordinate the investigation of the circumstances surrounding the allegations.
The investigation may be conducted by examiners in the field if a current examination is in
process, by a special examination or by an in-house investigation. The in-house investigation
will require documentation requests which will include customer account statements so that
an activity review can be conducted. The enhanced program will, we believe, identify
problem registered representatives sooner and will result in more immediate regulatory
action.

To further enhance the identification of currently employed brokers with multiple complaints,
the Exchange is identifying brokers with 5 or more complaints (regardless of the severity of
the complaints) in the system and has instituted a procedure to manually check each such
individual against the CRD so that we know their current employers. This information will
allow us to focus on these individuals during our examinations. While this manual tracking
is expensive and labor intensive, we believe the additional effort is worthwhile in that it may
lead to uncovering a problem registered representative more expeditiously.

The Exchange's Rule 351(d) customer complaint data base and its automated retrieval system
was credited by the SEC with greatly contributing to the success of the "Large Firm
Project", an important undertaking conducted jointly with the SEC and NASD, in that use of
the data base facilitated the planning process and provided the identity of registered
representatives with multiple complaints. The "Large Firm Project" involved a review of
certain practices, Le., hiring, retention and supervision, of nine of the largest retail broker-
dealers. The Exchange, along with the SEC and NASD, conducted 170 special examinations
over more than a year-long period. The examinations especially focused on 268 registered
representatives with a large number of customer complaints.'

RULES

The Exchange, as noted earlier, strongly endorses the self-regulatory process and believes
that this process works extremely well for the securities industry.

The Exchange has undertaken many regulatory initiatives designed to strengthen the
supervisory and compliance functions of members and member organizations and to require
them to demonstrate to the Exchange that they are meeting their supervisory and compliance
responsibilities. Certain rule changes were intended to strengthen the role of compliance
personnel by pushing compliance responsibilities and consciousness up to the senior

' The Exchange's response to the SEC's May 1994 report on this project entitled The Large Firm
Project: A Review of Hiring. Retention and Supervisorv Practices , is attached as Exhibit A.

management at member organizations and emphasize the message that compliance is good
business. We believe that the following rules foster this environment.

Rule 342 - Approval. Supervision and Control

Rule 342, the Exchange's primary rule with respect to supervision, requires general partners
or directors of each member organization to provide for appropriate supervisory control and
to designate to a general partner or principal executive officer the overall authority and
responsibility for internal supervision and control of the organization and compliance with
securities laws and regulations. This person may delegate to qualified principals or
employees responsibility and authority for supervision and control of each office, department
or business activity. - '

The purpose of this rule is to ensure that each area of the member organization's activities is
properly supervised and that lines of responsibilities for such supervision are clear.

Rule 342.13 - Compliance Official Qualification Examination

To ensure that compliance officials have the specialized knowledge, skills, and ability
necessary to oversee member and member organization compliance activities, the Exchange
developed compliance official qualification examinations. Each compliance officer must
become qualified by passing the appropriate examination(s).

Rule 342.30 - Annual Compliance Report

This rule requires that the Chief Executive Officer or managing partner of the member
organization, as well as control persons (pursuant to Rule 354) of the member organization,
e.g.. the parent comjjany, receive by April 1 of each year a report covering the compliance
activities of the firm. The report must include any significant compliance problems,
including customer complaints and must be available for Exchange inspection.

Rule 345 - EJnplovees - Registration. Approval. Records

Rule 345 requires that persons performing sales functions be qualified and registered with the
Exchange. Specific supplementary provisions to the rule require members and member
organizations to investigate the previous record of persons they contemplate employing and to
maintain employment records. In addition, applications on Form U-4' must be filed with
the Exchange for persons required to be registered. Form U-4 must be kept current during
the course of employment by filing amendments to the form as appropriate. This is a very
important source of information concerning disciplinary history.

Rule 351 - Reporting Requirements

This Rule requires member organizations to report events such as rule violations, customer
complaints, criminal arrests, monetary settlements and disciplinary actions by SROs and
governmental bodies. Reports are generally made by filing Form RE-3, a form prescribed
by the Exchange. This form is a significant source of information concerning possible
violative conduct. As a result of a termination of employment based on a reportable event, a
member organization would file Form U-5. A credit to the industry is that most violative
conduct is detected by member organizations' internal compliance systems and is reported to
appropriate self-regulatory organizations. During 1993, the Exchange received over 9,000
RE-3 and U-5 forms which is a significantly greater number than that reported in any prior
year. This self-policing, combined with a strong regulatory program, creates an eff«;tive
industry mechanism for identifying and reporting problems on a timely basis.

* The Uniform Application for Securities Industry Registration or Transfer ("Form U-4") is the
standard industry form submitted to self-regulatory organizations for individuals required to be
registered. This form requires detailed disclosure of background information, including information
regarding employment and disciplinary history.

Statutory Disqualifications - Rule 19h-l of the Securities Exchange Act of 1934

During the two year period of December, 1991 through December, 1993, the Exchange filed
approximately 26 Rule 19h-r applications with the Securities and Exchange Commission for
registered individuals subject to a statutory disqualification ("SD"). Half of these applicants
were SDs due to securities related disciplinary actions and half were SDs due to the
applicant's criminal conviction.

There are currently 63 registered individuals associated with member organizations who are
subject to a statutory disqualification and have been approved after a Rule 19h-l filing.

The Exchange monitors the terms and conditions of employment and verifies that a firm's
representations concerning such are being followed. Copies of a firm's supervision letter(s),
which include the special supervisory procedures to be followed, are given to the examiners
when they visit a firm for its annual examination.

Continuing Education - Enabling Rules

The Exchange is playing a major role in developing the industry's continuing education
program for all registered individuals dealing with the public. As proposed, a uniform
program will be adopted by all SROs which will have a "Firm" and a "Regulatory" element.
The program will require registered persons to participate in interactive computer-based
training on their second, fifth and tenth registration anniversary dates. The computer-based
training will encompass regulatory and compliance issues, sales practice concerns and
business ethics. In addition, the program will require that each member organization train
their registered persons on an ongoing basis in such topics as new products, sales practices,
risk disclosure and new regulatory requirements and concerns. We believe continuing

^ Detailed reporting to the SEC is required by the Exchange pursuant to Rule 19h-l under the
Securities Exchange Act of 1934 (the "Act") in each case when an individual who is subject to a
statutory disqualification seeks admission to or continuance in the industry. Statutory disqualification
generally describes certain conduct or actions which would prohibit a person from becoming
associated or continuing association with a broker or dealer. Members and member organizations are
required to submit to the Exchange (for filing with the SEC) details concerning an^ current or
prospective employee subject to a statutory disqualification.

education, combined with existing qualification requirements, will improve the quality of
investor service and advice. The Exchange will monitor compliance with the continuing
education requirements to ensure compliance with the program.

ENFORCEMENT

NYSE Enforcement Program — Disciplinary Systems and Procedures

For the self-regulatory process to work effectively rules must be aggressively enforced. The
objective of an effective enforcement program is to deter violative activity and thereby induce
compliance and instill confidence in the marketplace.

In order to accomplish this objective, the Exchange committed a significant amount of
resources to the Enforcement Division. The staff increased from 42 people in 1988 to 111
people in 1993. The additional staff has allowed the Exchange to complete 595 disciplinary
proceedings against members and member organizations and their associated persons over the
last three years ended December 1993. Of the 595 proceedings brought, 79* involved
failure to supervise charges. Additionally, out of the 595 disciplinary proceedings, 523 were
brought against associated persons (including registered representatives) of members and
member organizations and 147 of those proceedings resulted in permanent bars.

Further, our experience shows that of the 250 disciplinary proceedings concluded against
current or former registered representatives since January 1992, only 21 of these proceedings
involved individuals with a previous disciplinary history. Of the 250 proceedings against
registered representatives concluded in this period, nearly 50% resulted in bars or
suspensions of a year or more and nearly 50% of those were permanent bars.

The Division of Enforcement investigates and prosecutes violations of Exchange rules and the
Securities Exchange Act of 1934 and the rules thereunder in the areas of sales practice and

Thirty two (32) pertain to supervisory charges against member organizations.

supervision, market trading and financial and operational responsibility. Sales practice and
supervision matters make up approximately 85% of the Division caseload and, consequently,
the substantial majority of Enforcement resources are dedicated and committed to those
cases.

Significant Enforcement Cases

Commitment to sales practice matters is also evidenced by the creation within the
Enforcement Division in 1988 of a specialized sales practice unit. This unit, composed of
investigators and attorneys experienced in developing and prosecuting sales practice cases,
was formalized in order to provide specialization and expedite the enforcement process in
these types of cases. This expertise has since been broadened to all ten enforcement units.

Charging member organizations and supervisory personnel with substantive violations is
significant since the practice reflects the Exchange's belief that member organizations and
supervisory personnel should be held accountable for misconduct by their employees and
clearly sends a message to the industry that the Exchange will not tolerate abusive sales
practices.

The following two cases illustrate the Division's commitment to bringing such cases:

In 1992, the Division of Enforcement concluded a major investigation of an Exchange
member organization that covered sales practice activities in ten of its branch offices
across the country.

Over 100 customers were interviewed and 75 sworn investigative depositions were
taken. The Division ultimately filed charges for sales practice and supervisory
violations against the firm, two division managers and eight branch office managers,
and imposed fines of $900,000. We also filed a number of underlying cases against
the individual salesmen involved and obtained bars of several years in each case
concluded.

As part of the settlement, the firm was required to undertake a review of its
supervisory procedures under the auspices of the audit committee of the Board of its
parent corporation and make appropriate changes designed to prevent a recurrence of
violative activity.

In another significant disciplinary proceeding, the Exchange took action against a
member organization resulting in a censure and fine of $750,000 and an undertaking
that the audit committee of its Board conduct a review and make recommendations for
changes to certain areas of firm compliance. Disciplinary actions were also instituted
against 3 firm supervisors including the Branch Office Manager, and 8 registered
representatives for serious sales practice deficiencies in the largest branch office of
the firm. The action against the firm also involved systemic operational problems.

Approximately 240 customers were interviewed and sworn testimony was taken from
35 employees of the firm. The firm settled with customers for more than $1.8
million.

The Enforcement Process

The enforcement process starts with the receipt of new matters from a variety of sources
including filings which member organizations are required to make with respect to customer
complaints, arbitrations and terminations. Filings made on Forms U-5 and RE-3 are primary
sources of notice to the Exchange of sales practice abuses.

During the last five years there has been a significant increase in such reports filed with the
Exchange - from approximately 4,000 in 1988 to 9,300 in 1993. This is due in part to
several Exchange regulatory initiatives including formal and informal enforcement actions by

the Exchange; Information Memoranda clarifying the need to file amended Forms U-5; and
improved monitoring of late filings through examination and enforcement inquiries. Further,
formal enforcement actions have been instituted by the Division of Enforcement against
major retail firms when the staff detected a pattern of nonreporting or late filings. The
Exchange continues to monitor the major retail firms for patterns of late filings.

The Exchange's initiatives on improving the timeliness of filings received the following
comments in the "Large Firm Report":

"...the NYSE in recent years has taken steps to assure that member firms and their
associated persons follow their repwrting obligations and timely submit reports for
regulatory review. In this regard, the NYSE's ability and commitment to ensuring
that member firms promptly file reports of events such as settlements of civil lawsuits

or arbitrations and terminations from employment, has improved substantially. The
Exchange notified its membership in early 1990 of the importance of complying with
its reporting requirements, warning that non-compliance may subject them to
'appropriate disciplinary action.'"

The report goes on to say that:

"At the same time that the NYSE aggressively attempted to educate its member firms
with regard to their reporting obligations, it also brought a number of formal and
informal disciplinary actions against member firms for failure to file required reports
or for failing to file such reports in a timely manner... The combination of an effective
educational campaign and aggressive enforcement activity with regard to the reporting
rules has been effective."

With certain exceptions, filings submitted to the Division of Enforcement are subject to a
preliminary investigation which is an information gathering process to provide a basis on
which to make a decision whether to open a formal investigation.

The purpose of a formal investigation is to gather facts to determine whether violations have
occurred and normally includes conducting interviews of customers, taking sworn testimony
of member organization personnel (including supervisors), document production and technical
analysis. If a formal investigation reveals violative activity, a disciplinary proceeding may
be initiated by the Division of Enforcement before an Exchange hearing panel.
A disciplinary proceeding is similar to an administrative hearing or court trial. Charges
alleging violations against the persons or firms involved (called the respondents) are filed and
the hearing takes place before an independent hearing panel consisting of an Exchange
hearing officer and two industry representatives who are functionally peers of the respondent.
The respondent may be, and usually is, represented by an attorney. Both sides may elicit
testimony, cross-examine witnesses and introduce other evidence. After the trial, the hearing
panel determines the guilt or innocence of the respondent. If the verdict is guilty, the panel
determines the appropriate sanctions. Possible sanctions that may be imposed by the hearing
panel include censures, suspensions and permanent bars, as well as fines and other
appropriate relief.

Hearing panel decisions may be appealed to the Board by a respondent, or by the Division on
behalf of Exchange management, or any member of the Board can request a review. The
actual appeals are heard by the Committee for Review before submission to the Board for its
decision. Decisions of the Board may then be appealed by respondents to the SEC, and
thereafter to the Federal Courts.

The number of disciplinary proceedings brought by the Division of Enforcement has
increased dramatically. In 1988, the Division of Enforcement completed 58 disciplinary
proceedings compared to 189 in 1993. The Division also has a greater number of contested
proceedings now than in the past - for example, in 1988, 19 cases were contested compared
to 64 in 1993. Contested litigation is manpower intensive, and much of this litigation is
more complex requiring multiple hearing sessions to complete. This increase in contested
litigation refiects, in part, the Exchange's "raising the bar" and seeking higher sancUons.

Disclosures

The SEC in its report on the "Large Firm Project" has recommended that the SROs make
available to the public all formal disciplinary proceedings when initiated against member
organizations and registered representatives.

Since April 1994, the Exchange has been reporting to the CRD each pending formal
discipliniiry proceeding initiated by the Division of Enforcement. In addition, we have been
reporting significant changes in the status of a pending formal disciplinary proceeding during
the pendency of such a proceeding, including the issuance of a decision by an Exchange
hearing panel, the filing of an appeal to the Exchange's Board of Directors, and the issuance
of a decision by the Board.

Qualified Privilege for Form U-5 Filings

There is currently much debate and controversy over whether the statements contained in a
Form U-5 as filed by members and member organizations may be deemed defamatory and
consequently actionable under certain state laws.

The filing of Form U-5 is an important regulatory tool as it discloses the nature of and
reasons for termination of a registered person's employment and the circumstances
surrounding such termination. Accordingly, it is essential that those filing the form give
detailed, accurate information on a timely basis, without threat of being subject to a
defamation action. The Exchange believes that, in order to foster an atmosphere that
encourages full and complete disclosure on filings, it may be appropriate to grant qualified
immunity for statements made on the Form U-5. Such qualified privilege, along with the
Exchange's stringent enforcement of the filing requirements, will work to strengthen the
regulatory efforts relating to tracking and investigating registered representatives with
disciplinary problems.

CONCLUSION

The Exchange will continue to strengthen its sales practice program and the self-regulatory
process. We believe that the enhancements made during 1994 will increase our ability to
more readily identify problem registered representatives. In addition, the "Large Firm
Project", in which the SEC and SROs worked jointly to identify and review the activities of
problem registered representatives, was successful not only in identifying some problem
situations and opportunities for improving the system but also in increasing the industry's
awareness of the seriousness with which regulators view violative conduct. The success of
the "Large Firm Project" has also led to continued discussions among regulators about
conducting a second sweep of the industry, this time including state regulators in the project.
The SEC, SROs and state regulators are currently identifying individuals with both multiple

complaints as well as prior disciplinary history for review. We anticipate that this project
will begin during the last quarter of 1994.

We believe that projects such as the "Large Firm Project", and enhanced regulatory
surveillance mechanisms and a vigorous and effective enforcement program will act as a
deterrent to problem registered representatives. However, despite the effectiveness of SRO
oversight and enforcement programs and member organizations' compliance programs,
instances of sales practice misconduct will continue to occur. Nevertheless, we continue to
strongly believe that the self-regulatory system is effective and that the standards established
for detecting problems and reporting them to SROs work well. We will, however, continue
to look for opportunities for improvement and aggressively pursue sanctions against both
firms and individuals for abusive sales practice conduct.

Index of Exhibits:

A. NYSE Response to SEC Report The Large Firm Project: A Review of Hiring.
Retention and Supervisory Practices. (May 1994)

11 WnJ Stroct

New rortL NT WOM
EXHIBIT A
2« IK SI50

Ri<*ioiH A. Om»u
F.WH-uli»<< Viic Chuiniu

August 29, 1 994 ,..., ,,^,j„„

Mr. Brandon Becker Mf\/C^

Director is « o£l

Division of Market Regulation utmywt

Stock {iduitgn, Inc.

Mr. William McLucas

Director

Division of Enforcement

Securities and Exchange Commission
450 Fiftfi Street, NW
Mail Stop 5-1
Washington. D.C. 20549

Dear Messrs. Becker and McLucas:

This responds to your August 4, 1994, letter requesting a report on the
actions the Exchange has taken, or plans to take, to address certain issues
discussed in your letter relating to the SEC's May 1 994 Large Firm Project
Report.

At the outsat, I should emphasize that the Exchange appreciates the
opportunity to work along with the SEC and the NASD in this important
undertaking. The results of the special examinations conducted in
connection with the Large Firm Project were very encouraging to us since
they confirmed the Exchange's view that generally member firms have in
place today extensive and effective supervisory practices and procedures to
deter and detect sales practice misconduct by their sales personnel.

Our responses to the information you requested in your letter follow.

Increased Examination Efforts -

The Large Firm Project Report concluded that SROs need to increase
examination efforts to ensure that member firms have adequate supervisory
and compliance systems to detect problem registered representatives. In
this regard, the Report encourages the SROs to devote additional resources
to conducting examinations and to focus additional attention on the review
of sales practice allegations made in arbitration cases. The Report also
stated that the Exchange should make greater use of Rule 351 Information
to detect trends and patterns of complaints.

With respect to Exchange examination efforts, the Large Firm Project Report
noted that:

"The NYSE conducts a specialized sales practice examination annually
of its largest member firms and in 1994, expanded its program to
review all other firms on a four year cycle. ' (Large Firm Project
Report, p. 7)

Before 1994, the Exchange annually conducted detailed sales practice
examinations of the largest 16 retail firms and approximately 55 additional
firms, including visits requested by the financial and operational examination
staff. By committing five additional Sales Practice examiners to this activity
in 1994, the Exchange has been able to expand these comprehensive sales
practice examinations to cover approximately 100 firms annually so that all
firms dealing with the public will be subject to an extensive sales practice
examination at least once every four years. The largest 1 6 retail firms will
continue to be examined annually. Exchange examiners in the Regulatory
Review units will continue to conduct a modified sales practice examination
annually of those firms that do not receive the specialized examination in
any given year.

In its recent oversight inspection of the Member Firm Regulation Division,
the SEC staff found this program to be effective.

Two other enhancements were made this year in our member firm
examination and surveillance programs that should better facilitate the
identification of registered representatives engaging in possible abusive sales
practices. One relates to increasing the Regulatory Review unit examiners'
focus on customer account reviews and the second relates to improvements
to the Exchange's surveillance systems to flag potential problem registered
representatives.

With respect to the latter, the Exchange has gained substantially more
experience in using its Rule 351 automated complaints data base. In fact,
the Report noted that:

"The NYSE's Rule 351 data base, which contains customer complaint
information for NYSE members. ..is extremely useful and was of
significant help to the staff ' (Large Firm Project Report, p. 12)

Our enhanced surveillance system, relying on the Rule 351 data base,
assigns specific risk factors to reported sales practice complaints and
registered representatives exceeding certain programmed parameters -
generally, five or more sales practice complaints - are selected for further
investigation.

The Exchange recently dedicated one full-lime Sales Practice examiner to
coordinate the investigation of the circumstances surrounding the allegations
contained in the complaints against registered representatives flagged by the
system. This should identify problem brokers sooner and result in more
timely regulatory action. The actual investigation may either be conducted
in the field (if an examination of the member firm is currently in progress or
if a special examination is required) or in the Exchange's offices in which
case documents are requested to facilitate the review of customer account
activity including account statements and other documents.

Further, data on registered representatives with five or more complaints are
sorted by firm and updated on a quarterly basis. This information is then
compared to data in the Central Registration Depository and, after analysis,
the staff might initiate an immediate review or flag certain individuals for
special review during their next regularly scheduled examination.

With respect to your specific comments concerning allegations made in
arbitration cases, we agree with your observation that a review of arbitration
matters is a good resource for identifying sales practice abuses and, in fact,
the review of such matters has been, for some time, part of our examination
program. This is accomplished through field reviews by our examiners of

customer complaints that are the subject of pending arbitrations and of final
arbiuation decisions. Sales practice examiners will continue to review both
arbitration matters and litigation to identify registered representatives for
possible further review.

Sanctions --

The Large Firm Project Report recommended that sanctions against
registered representatives who engage in serious sales practice abuses
should be significant and that:

"...there is a need to devote additional resources at the firm, SRO and
Commission level to detection and prosecution of registered
representatives who have a history of sales practice problems or who
commit sales practice violations." (Executive Summary of Large Firm
Project Report, p. iii)

There were also a number of statements in the Report concerning
substantial sanctions in NYSE disciplinary actions and the significant
Increase m resources committed to NYSE enforcement activities. For
example, the Report concluded with respect to SROs as a group that:

'Over the past five years, the SROs have increased substantially their
staff resources devoted to enforcement matters, have brought more
sales practice and failure to supervise cases, and have increased
sanctions for violative conduct." (Large Firm Project Report, p. 5)

With respect to increased resources and enforcement actions at the NYSE,
the Report cited the increase m the Enforcement staff from 42 in 1985 to
1 11 in 1993 and the increase in enforcement actions from 58 in 1988 to
189 in 1993.

The Report also stated that:

"...the Exchange in recent years has brought many more disciplinary
actions against member firms and their associated persons, [footnote
deleted) Many of these matters.. .involved significant sales practice
abuses and resulted in significant fines and other sanctions against
the member firms, (footnote deleted]"' (Appendix A to Large Firm
Project Report, p. 5)

The Exchange intends to continue to expend substantial resources in pursuit
of its Enforcement program and seek appropriate sanctions m all matters it
prosecutes.

In your letter, you asked us to inform you of the status of our review of the
rules with regard to ensuring the existence of adequate broker-dealer hiring
procedures and sanctions for hiring registered representatives with a history
of sales practice abuses.

The securities industry is highly regulated and is characterized by suingent
requirements governing entry, approval and qualifications before registration
is granted to deal with public customers. Standard industry-wide forms

'With respect to the prosecution o1 misconduct by essociated persons, the Exchenge,
for example, has concluded almost 50 disciplinary actions involving Branch Office Managers
since 1989.

require disclosure of complaints, convictions and disciplinary records via
Forms U-4 and U-5.

StaTutory disqualification rules prohibit a member firm from hiring a person
subject to a statutory disqualification without SRO approval and review by
the SEC.

Member firms are required to do background checks and submit fingerprint
records on all prospective employees.

Several enforcement cases have been brought against branch office
managers who failed to supervise adequately a registered representative
where the facts indicate that the BOM was on notice of past complaints or
regulatory problems at previous employers. Supervision is part of every
enforcement investigation. The supervision of high risk brokers has been an
increasing focus of sales practice investigations.

SRO Reporting Requirementa --

The Large Firm Project Report recommended that the SROs continue their
efforts to monitor the timeliness of required filings such as Forms U-4, U-5
and RE-3, through examination and otherwise and that they should increase
the sanctions against firms and individuals where instances of
noncompliance are discovered.

The Report emphasized the importance of member firms' compliance with
SRO filing requirements on Forms U-5, U-4 and RE-3 as a source of notice to
SROs of sales practice abuses and urged an increase in enforcement actions
for noncompliance.

We were pleased with the observations and conclusions in the Report
regarding Exchange efforts in this important area:

" ..the NYSE in recent years has taken steps to assure that member
firms and their associated persons follow their reporting obligations
and timely submit reports for regulatory review. In this regard, the
NYSE's ability and commitment to ensuring that member firms
promptly file reports of events such as settlements of civil lawsuits or
arbitrations and terminations from employment, has improved
substantially. The Exchange notified its membership in early 1990 of
the importance of complying with its reporting requirements, warning
that non-compliance may subject them to 'appropriate disciplinary
action.' (footnote deleted)"

The Report goes on to say that:

"At the same time that the NYSE aggressively attempted to educate
its member firms whh regard to their reporting obligations, it also
brought a number of forma! and informal disciplinary actions against
member firms for failure to file required reports or for failing to file
such reports in a timely manner.. ..The combination of an effective
educational campaign and aggressive enforcement activity with regard
to the reporting rules has been effective." (Appendix A to Large Rrm
Project Report, p. 51

There has been a significant increase in reports and filings with the
Exchange -- from approximately 4,000 in 1988 to 9,300 in 1993 •- despite
raising the reporting threshold for Form RE-3. This Is due in part to several

Exchange regulatory initiatives including Information Memoranda clarifying
the need to file amended Forms U-5 (see NYSE Information f\/)emos 90-17
and 90-45); improved monitoring of late filings through examination and
enforcement inquiries; and formal and informal enforcement actions by the
NYSE.

In the last few years, formal enforcement actions have been instituted by
the Division of Enforcement against major retail firms when the staff
detected a pattern of nonreportJng or late filings. The Exchange continues
to monitor the major retail firms and each filing for patterns of late filings.

During 1991-1993, approximately 15 summary fines ware issued by the
Division of Enforcement against member firms for nonreporting or late
reporting of reportable events.'

Tracking Systems -•

In your letter, you requested that we review our existing procedures for
coordinating information between SROs and inform you of the results of the
review including any possible recommendations to improve tracking
systems.

Present deferral procedures provide for communications on Forms U-5 filed
by dual reporting members. We have found the present system to be
workable and effective in avoiding roguiatory duplication.

We would like to schedule a further meeting with the SEC and other SROs
to discuss this recommendation in more detail, particularly with respect to
the need to track the current status of an investigation being conducted by
another SRO.

We intend to continue to discuss with the various SROs during our regular
quarterly meetings possible improvements to present procedures and
opportunities for electronic deferral and communications via the advanced
computer links of the new CRD system.

In addition, serious consideration is being given to a recommendation during
a recent SEC oversight of the preliminary investigation process to include in
the standard information request letter a reminder to the firms to promptly
inform the Division of Enforcement if another SRO has requested information
with respect to the same filing or report.

Disclosures —

The Large Firm Project Report recommended that the SROs make available
to the public all formal disciplinary proceedings when initiated against
member firms and registered representatives.

Reflecting the Exchange's initiative in this regard, the Repoa stated that,

"The NYSE's Board of Directors approved a proposal to make
statements of charges public by having them available through CRD.
The disciplinary filings to the CRD from the NYSE commenced on April
25, 1994. (Large Firm Project Report, p. 14)

'It should be noted t^6t the CRD system aulometlc«lly imposes a fine of $100 for U-5
reports that are filed more than 30 days after termination.

For approximately four months, the Exchange has been reporting to the CRD
each pending formal disciplinary proceeding initiated by the Division of
Enforcement as well as significant changes in the status of a pending formal
disciplinary proceeding during the pendency of such a proceeding including
the issuance of a decision by an Exchange hearing panel, the filing of an
appeal to the Exchange Board of Directors, and the issuance of a decision by
the Board.

As you know, since October 1992, final NYSE disciplinary actions have been
available to subscribers to Westlaw. In addition, in July 1994, the Exchange
began providing Compliance International with copies of final NYSE
disciplinary actions for reproduction in so-called "C-Text". Compliance
International is the US associate of Compliance Limited, a UK-based
corporation reproducting C-Text financial-related text for the European
market since 1 987.'

In your letter, you also asked for the status of our review of the Large Firm
Project Report recommendation concerning disclosure to investors, opening
new accounts, of the availability of information through the NASD's Central
Registration Depository ("CRD") system.

We will raise this issue with the appropriate Advisory Committees at the
Exchange but we would note that the NYSE participated with the SEC in
developing and issuing an investor protection brochure, Invest Wisely -■
Advice from Your Secunties Industry Regulators, sent to member firms
which were encouraged to provide copies to their customers. The brochure
includes the toll-free hotline number to obtain information on disciplinary
actions taken by securities regulators and criminal authorities.

Conclusion —

The Exchange recognizes that despite effective supervisory and compliance
programs at member firms, instances of sales practice misconduct will
occur. In this regard, the Exchange is committed to continuing to review its
examination and enforcement programs directed at member firm sales
practice activities to identify and implement improvements to increase their
effectiveness.

Please let me know if you need any additional information.

jincerelyi

cc: W.H. Donaldson, E.A. Kwalwasser, D.P. Doherty, S. Pallante, R.
f^cSweeney, G. Clark

^C-Text is an electronic database of current SRO, ExchongM and Federal rule* and
rogulations within a text retrieval format designed for compliance practitioners and advisors.

Mr. Markey. Thank you.

Our next witness is John Pinto who is the executive vice presi-
dent of the National Association of Securities Dealers.
Welcome, Mr. Pinto. Whenever you are ready, please begin.

STATEMENT OF JOHN E. PINTO

Mr. Pinto. I appreciate the opportunity to appear here before
you today and other members of the subcommittee to present the
NASD's views on the issues raised by problem registered represent-
atives and the actions we have taken to address them.

In general, NASD agrees with the findings of the SEC report
that problem brokers, while certainly not widespread or pervasive,
are nevertheless deserving of increased attention by regulators. We
also generally agree with the report's recommendations and believe
that those which affect the NASD either have been or can be imple-
mented without the need for legislative action.

For 1994, as part of the regulatory plans, each of our 14 district
offices was required to identify and conduct intense sales practice
examinations of main offices, branch offices, and individuals associ-
ated with those offices who raise regulatory concerns due to, among
other things, past misconduct relative to abusive sales and trading
practices. Thus, these trade sales practice matters are being given
the highest regulatory priority across the country by the NASD.

Also, we have increased the use of decisions in arbitration cases
as a source to identify problem representatives with a new formal-
ized program which provides for regulatory referrals to our district
offices *br investigation and possible disciplinary action.

The NASD is engaged in a multi-million dollar redesign of the
CRD system which will be state-of-the-art and user-friendly to pro-
vide regulators with the ability to search through hundreds of
thousands of records, to identify and flag problem brokers, and to
target firms and branches for examination in a more effective way.

While the CRD redesign is under way, the NASD has developed
an interim, automated system to identify and analyze the current
registered representative population and give greater regulatory
tools to focus our examinations on problem representatives and
firms. New initiatives are also under way in the form of a new re-
porting rule to be considered by our Board of Governors next week
that will require members to report occurrence of certain specified
material events and quarterly statistical data on customer com-
plaints, again providing us with additional regulatory tools.

With regard to sanctions for sales practice violations and con-
trary to Mr. Shellenberger's views, the NASD has averaged close
to a thousand disciplinary actions each year. Fines have increased
from $11.5 million to $44 million between 1989 and 1993, with a
increase of orders of restitution which is designed to put money
back into the pockets of investors from $1.5 million to $11 million
over the same period.

Through our rules, notices, publications and educational con-
ferences, members have been repeatedly reminded of their obliga-
tions when hearing or retaining a problem representative and that
normal supervision is not sufficient for a problem representative
which requires special supervisory practices to be tailored to ad-
dress the particular problems of that individual.

Briefly, with regard to the GAO report, we would certainly wel-
come having additional regulators directly report their disciplinary
actions into CRD.

Concerning the GAO report on formal disciplinary actions and
customer complaint information, I wanted to clarify a comment
made by Mr. Bothwell on this point because we view this as ex-
tremely important data that is already captured in a sophisticated
NASD database and used extensively for regulatory purposes. Also,
customer complaint information is currently captured in CRD when
it meets the reporting thresholds of Form U-4.

We believe this structure is appropriate, and therefore support
the GAO's concept that it may be necessary to maintain separate
databases, one for regulatory surveillance and one for public disclo-
sure.

Because problem representatives who are either barred from the
securities industry, severely sanctioned or who leave hoping to
avoid its regulation can migrate to other financial services indus-
tries, the NASD is working to share NASD data with other finan-
cial services industries.

We have met with banking regulators and already provide infor-
mation to State insurance commissioners on problem representa-
tives who are also registered insurance agents. We welcome the
wider use of CRD by members of related financial industries that
are potential employers of problem representatives and we are
available to work with the SEC and State securities regulators in
this regard.

The NASD agrees with and strongly supports the SEC's rec-
ommendation that some protection is necessary to encourage firms
to report accurately the reasons for an employee's termination on
the form U-5 that they file with SRO's. We are concerned that a
fear of litigation has reduced member candor in filing U-5s, and
therefore we believe that providing limited liability protection for
members will go a long way to providing more information that we
could utilize for regulatory purposes.

We would also support legislation if rulemaking is determined
not to be the most effective approach to devise uniform policies on
liability and qualified immunity.

Finally, relevant to two of Chairman Levitt's remarks, the NASD
has been a long-standing and very proactive supporter of continu-
ing education for the securities industry and we are anxious to
work with the SEC on its tougher stance on barred individuals
which Chairman Levitt announced today.

Thank you.

[The prepared statement of John E. Pinto follows:]

Testimony of John E. Pinto

Executive Vice President, Regulation

National Association of Securities Dealers, Inc.

Introduction

I am John Pinto, Executive Vice President for Regulation of the National
Association of Securities Dealers, Inc. (NASD). 1 appreciate the opportunity to
appear before you today to give the NASD's views on problem registered
representatives in the securities industry, and the recommendations of the May
1994 Securities and Exchange Commission (SEC) staff study entitied The Large
Firm Project: A Review of Hiring, Retention and Supervisory Practices (SEC
Report).

Your invitation letter requested our views on brokers with a history of sales
practice abuses, customer complaints^arbitrations, lawsuits, or other significant
disciplinary problems. Specifically, your letter asked our views on the impact of
problem representatives on investors; the current system for identifying and
punishing such brokers; the need to strengthen securities firm supervision and
internal controls; SEC and self regulatory organization (SRO) penalties; and
changes needed for problem brokers in SEC and SRO rules or legislation. Your
letter requested that we provide our views on these areas in the context of the
specific findings and recommendations of the SEC Report.

In general, we agree with the findings of the SEC Report, that problem
brokers ~ while certainly not wide spread or pervasive - are nevertheless
deserving of increased attention by regulators. I have attached as Exhibit A the
NASD's response to the SEC Report as requested in the SEC's letter of August 4,
1994. We also generally agree with the recommendations of the SEC Report that
affect the NASD and most of those recommendations either have been or can be

implemented without the need for legislative action. However, one very important
issue that does require rulemaking or legislation involves qualified immunity from
civil liability for broker dealers who are fulfilling their regulatory responsibilities
and obligations to disclose the reasons for a registered representative's termination
from employment. I will speak more about this critical issue later in my
testimony.

The NASD

The NASD is a self-regulatory organization registered with the SEC as a

national securities association under the Securities Exchange Act of 1934. The
NASD is the only such association so registered. The NASD owns, operates and
regulates the Nasdaq Stock Market, which is the second largest securities market
in the world. The NASD is also charged with the responsibility of regulating the
vast over-the-counter securities markets, including both debt and equity.

The NASD has 5,350 broker-dealer members, with ahnost 51,000 branch
offices employing 490,000 registered sales persons and principals. The scope of
the NASD's regulatory jurisdiction extends to all such members and their
associated persons. While the 2,830 staff of the SEC and the roughly half that
number of state securities regulatory staff must deal with all aspects of securities
regulation, the majority of the 2,200 person staff of the NASD focuses on
regulation of its members, regulation and operation of Nasdaq and oversight of the
over-the-counter securities markets. Through close coordination with federal and
state regulators, overlap and duplication is minimized, freeing govermnental
resources for securities regulation to be focused on other areas.

The NASD carries out its examination, disciplinary, and other regulatory
responsibilities through its Washington headquarters and 14 District Offices

located in major cities throughout the country In addition to disciplinary
committees that work with each District Office, the NASD has a national Market
Surveillance Committee that deals specifically with market and trading related
issues. A committee of the NASD Board of Governors, the National Business
Conduct Committee, reviews as an appellate body the disciplinary activities of the
District Business Conduct Committees and the Market Surveillance Committee,
and seeks, to the extent possible, uniformity in disciplinary actions. Final NASD
disciplinary actions can be appealed to the SEC and then to the United States
Courts of Appeals.

The NASD is governed by a 29 member Board of Governors drawn from
its membership, leaders of industry and academia, executives of Nasdaq
companies, and the public. The Board, through a series of standing and select
committees, monitors trends in the industry and promulgates rules, guidelines,
interpretations and policies that it deems necessary to protect investors and the
markets.

The SEC Large Firm Project and Report

Along with the SEC and the NYSE, the NASD was an active participant in

the SEC's Large Firm Project, which focused on those problem registered
representatives who have been the subject of sales practice complaints, allegations
by customers in litigation or arbitration, or have otherwise been subject to
disciplinary action by regulatory authorities. The Large Firm Project focused on
the hiring, retention, and supervisory practices of the nine largest broker-dealers in
the United States, which were selected because they accounted for about one-half
of all customer accounts in the U.S. The NASD, along with the SEC and the
NYSE conducted 170 examination in 32 states, reviewing 268 problem registered
representatives encompassing the main offices of the nine firms, and 161 branch
offices.

As a preliminary matter, the NASD would like to acknowledge the
extremely cooperative manner in which the examinations underlying the SEC
Report were planned and conducted. This joint regulatory effort involving the
NASD, SEC and NYSE, on the heels of two significant joint penny stock
initiatives in 1991 and 1993, the latter of which included 40 states as well, firmly
establishes the benefits and positive results that flow from combining the
resources of the securities regulators in cooperative, targeted programs.

Along with ten specific recommendations to better identify, regulate, and
discipline problem registered representatives, these examinations showed that the
largest revenue producing brokers were generally not the subject of investor
complaints.

The analysis of problem representatives in the nine major firms for the SEC
Report, while certainly an important segment of the registered representative
population, was only a small percentage of the total number of personnel
registered with the NASD. Thus, the NASD developed an automated regulatory
system capable of analyzing the entire population of 490,000 active registered
representatives in the CRD system. While this issue is addressed in more detail
later in my testimony, by computer capturing data from our registration and
regulatory systems into a newly created database we are able to assemble
registered representative information to identify representatives with disciplinary
history. This profile report consolidates all regulatory information that we have
that may indicate problems, including disciplinary actions, arbitrations,
terminations for cause, and customer complaint data. Importantly, we are able to
utilize this new capability to sort this data according to a number of different
criteria, depending on the regulatory problems targeted.

r\^ A^^^ —

The GAO Report

The NASD has just recently been provided with the GAO's report

Securities Markets: Actions Needed to Better Protect Investors Against
Unscrupulous Brokers {GAO Report). That report discusses the extent of activity
by unscrupulous brokers, regulatory and industry efforts to discipline
unscrupulous brokers, and the industry's ability to identify such brokers through
its database of disciplinary histories. Findings and recommendations of the GAO
Report largely parallel the SEC Report. My testimony will address concerns noted
in the GAO Report after those of the SEC Report.

NASD Actions on Brokers with Compliance Problems

As referenced earlier, the Subcommittee's invitation letter posed a variety
of questions on problem representatives and their impact on investors; the current
system for identification and punishment; the need to strengthen securities firm

supervision and internal controls; SEC and SRO penalties, and changes needed for
problem representatives in SEC and SRO rules or legislation.

The NASD has taken a large number of significant actions that address the
concerns identified by the SEC Report, especially the recommendations covering:
(1) increased examination efforts and sanctions in sales practice matters; (2)
enhanced compliance by firms and registered representatives with SRO reporting
requirements; (3) tracking systems; and (4) additional disclosures. In addition,
we have also addressed several concerns highlighted by the GAO Report,
including. (1) direct reporting by SROs and the SEC to the CRD; (2) reporting of
only formal actions to CRD; (3) need to create a data base for all customer
complaint information; and (4) migration of problem representatives to other parts
of the fmancial services industry. We discuss these concerns below.

INCREASED EXAMINATION EFFORTS AND SANCTIONS IN SALES PRACTICE
MATTERS

Commitment of Additional Resources to Sales Practice Problems

The NASD Regulation program for 1994 required that each of our District

Offices develop a regulatory plan that identified examination priorities for the

year, which included a conunitment to devote additional examination and

enforcement resources to problem representatives. In this regard, each District

Office was required to identify and conduct intense sales practice examinations of

main offices, branch offices, and individuals associated with such offices who

may pose certain regulatory concerns due to, among other things, past misconduct

related to abusive sales and trading practices. . The Strategic Plan for NASD

Regulation for 1994-1996 also specifically includes problem representatives as a

clear regulatory priority.

The NASD made a significant resource commitment as it proceeded with
the development of an interim automated system which draws on the Central
Registration Depository (CRD) and the NASD's District Management Information
System (DMIS) to profile and analyze the current registered representative
population. The CRD is a centralized system for all broker-dealer and individual
registration data that is operated by the NASD. It contains registration
information — including disciplinary infoimation - on all 490,000 active
registered representatives. DMIS is an internal NASD regulatory system that
contains, among other things, information about all examinations. District
Business Conduct Committee actions, customer complaints, and terminations for
cause.

The interim system, which is called "Profiled Registered Representatives,"
recognizes that CRD is in the midst of a complete redesign. The new CRD will
provide extensive regulatory data on a specialized, ad hoc reporting basis that is

not available on the current system, which was originally designed simply as a
central registration database. Part of the system redesign incorporates the
conversion of a large volume of textual data in the existing CRD to a relational
database that supports more sophisticated analysis of information for regulatory
use. This redesign will thus permit speedier and more precise identification of
problem representatives and thus allow a faster regulatory response to them. With
the interim system, the NASD has developed a capacity to profile registered
representatives that pose regulatory risks to public investors. This capability is a
central feature of the joint regulatory effort with state and federal agencies and
SROs now underway, and is discussed more fully below. Our profiling system is
now being augmented to detect movements among firms, to discover if problem
representatives move fi'equently to avoid sanctions.

Arbitration Referrals

The SEC Report encouraged the NASD to expand its examination efforts

by focusing additional attention on the review of sales practice allegations made in

arbitration cases. We have long believed that arbitrations can serve as an

important source for identifying sales practice abuses, detecting potential patterns

of fraud and inadequate supervision, and identifying problem representatives. As

a result of these concerns, to best use this important source of regulatory

information, in 1992 the NASD's Regulation and Arbitration staffs began

discussions to significantly increase matters being referred to NASD District

Offices for investigation. We began this new regulatory program December 31,
1993 through action by the NASD's Board of Governors. This action amended the
Code of Arbitration Procedure to permit an arbitrator, once a case is settled or an
award is rendered, to initiate a referral to Regulation for possible violations of
NASD rules or the federal securities laws.

The NASD's Arbitration program has sharpened arbitrator awareness of
their regulatory referral power. Mandatory arbitration training now covers the
disciplinary process, and arbitrators receive the NASD's Disciplinary Procedures
brochure and other literature on their referral powers during orientation.
Beginning each arbitration hearing, the chairman notifies the participants of the
possibility of a regulatory referral if apparent rule violations are disclosed during
the arbitration process. At the conclusion of the arbitration hearing, arbitrators are
queried by the NASD Arbitration staff on any matters that should be referred to
Regulation for investigation.

Based on the twenty arbitration referrals made in just the first seven months
of 1994 under this new program, we believe this program will prove a powerful
tool in detecting problem representatives.

Quarterly Reporting of Customer Complaints

In discussing greater use of customer complaint information the SEC

Report recommended that the NASD adopt a rule similar to NYSE Rule 351,

which requires members to report material events and customer complaint

information. The NASD staff strongly agrees with this recommendation and had

already begun to develop such a rule before the SEC published its Report, as

acknowledged in the SEC Report itself In this regard, a draft rule was discussed

at a meeting of senior district managers on June 15, 1994, and a revised rule was

discussed at August 1 and 5 meetings between NASD and NYSE staffs. Those

two meetings addressed sharing regulatory data, avoidance of regulatory overlap,

and consistency between both rules. A fmal rule proposal has been drafted and

will be considered by the NASD Board this month.

In addition to quarterly reporting of customer complaint information, the
proposed new rule will also require our members to file a report with the NASD

that discloses, among other things, disciplinary actions taken by a member against
any of its associated persons, judgments, awards or settlements involving customer
initiated litigation and arbitration, and data on statutorily disqualified persons.
This is consistent with NYSE Form RE-3 requirements under its Rule 351.

Sanctions for Sales Practice Violations

Over the past several years, the NASD has taken a number of steps to

enhance sanctions for sales practice violations, to emphasize improving hiring

procedures by member firms, and to commit additional resources to sales practice

cases. The District Business Conduct Committees and the Market Surveillance

Committee initiate and issue decisions on an average of about 1,000 disciplinary

actions per year. Over the past several years, these disciplinary committees have

increasingly devoted their resources to time consuming cases that involve complex

and egregious sales practice and customer protection issues. For example, for the

period 1989 to 1993, NASD enforcement disciplinary sanctions have risen in both

fines and restitution: fines increased fi"om $10 million to $33 million, and

restitution ordered paid to customers increased fi^om $1.5 million to almost $11

million. (See attached charts) Further, in 1993 alone, fourteen firms were

expelled, and 18 were suspended. Four hundred and four individuals were barred

fi-om the industry and 228 were suspended.

The NASD has reviewed its sanction policies, practices, and procedures on
sales practice violations. Among other things, we analyzed our NASD Sanction
Guidelines, which the NASD uses in its disciplinary program. Akeady in use for
a number of years, these guidelines were adopted to ensure uniformity of sanctions
for approximately 50 of the most frequent types of violations, many related to
abusive sales practices. Each guideline contains a series of considerations for
sanctions that are uniquely relevant to the conduct. They provide the NASD's

District Business Conduct Committees, the Market Surveillance Committee, and
the National Business Conduct Committee with suggested remedial sanctions
commensurate with the nature and severity of the violation. In 1993 a special
subcommittee of the NBCC conducted an intensive review of the guidelines,
which resulted in a general increase in the level of all sanctions, and a decision to
publish them for the industry and public.

NASD Sanction Guidelines are fully aligned with the recommendations of
the SEC Report. All of the guidelines for sales practice violations consider
recidivism by listing as a key consideration whether the respondent engaged in
prior similar misconduct. Where sales practice abuses are intentional, willful,
egregious, or repeated, our guidelines call for a bar of the individual that, in
keeping with the SEC Report's recommendation, is not tempered by a right to
reapply for association with a NASD member. The NASD is not a proponent of
bars being imposed with a stated period for the person to reapply. In our view, a
bar is a bar — only suspensions should be for a specified time frame. It is thus the
rare NASD disciplinary action where a bar is accompanied by a stated right to
reapply. Where the nature of the misconduct does not warrant a bar, oiu- sanction
guidelines frequently require an extended suspension and the individuals
requalification by examination.

While the NASD has long issued sanctions that require requalification of
individuals, we have not, as recommended in the SEC Report, imposed as a
sanction that a respondent complete financial or other courses or engage in on-the-
job training while on a fixed salary. We support the imposition of these types of
sanctions for less serious sales practice violations.

Hiring Procedures

Our existing rules hold members to high standards when it comes to their

100

obligations and responsibilities for hiring registered representatives with a history
of sales practice abuses. Our Rules of Fair Practice require that a member firm
hiring a representative investigate the character, business reputation, qualifications
and experience in connection with an application for registration. The application
itself (Form U-4) contains extensive background information and disciplinary
history of the individual. In addition, if the individual has been previously
registered the firm must obtain a copy of the previous firm's termination notice
(Form U-5) and any amendments filed by the last member firm employer. A
similar responsibility is placed on the applicant to provide a copy of the Form U-5
and any amendments to the hiring member upon request.

Once a registered representative is hired, clearly delineated supervisory
responsibilities must be discharged by the hiring member. For example, NASD
rules require that each member establish and maintain a system to supervise the
activities of each registered representative reasonably designed to achieve
compliance with securities laws and regulations and NASD rules. These written
procedures must designate a registered principal with authority to carry out the
supervisory responsibilities for each type of the member's business, including
sales activities. Each salesperson must be assigned to a registered representative
or principal specifically designated for supervising the person's activities, and
must at least yearly meet face to face to discuss compliance matters.

101

that person. We have clarified the meaning of our supervision rule in this area by
stating and restating the NASD's long-held position that "normal" supervision is
not sufficient for a problem representative, which requires special supervisory
practices designed to address the particular problems of that individual. As an
example, within the past few weeks alone, 1 have addressed almost 300
individuals attending an NASD Member Compliance seminar in Atlanta, and a
National Regulatory Services seminar in San Francisco where 1 have not only
discussed the many issues emanating from the Large Firm Project Report, but also
the increased supervisory responsibilities and obligations which a member
assumes when it decides to hire a registered representative with a regulatory
history. Failure to take these extraordinary steps can lead to significant regulatory
problems for the member - a message that 1 have personally delivered to our
members on a number of occasions.

In this regard, breakdowns in supervisory procedures and systems carry
severe consequences under NASD Sanction Guidelines. In a typical situation that
does not involve a pattern of multiple violations, fmes generally range from
$5,000 to $25,000 for fums and, separately, for the culpable supervisor, and
individuals are suspended from any securities work. Egregious cases call for
substantially higher fmes, bars, and re-qualification by examination.

In light of the extensive requirements of our Rules of Fair Practice,
supplemented by frequent and consistent clarifications, we believe that our
existing regulatory framework imposes appropriately significant responsibilities
on members in the hiring, retention and oversight of problem salespersons.

ENHANCED COMPLIANCE BY FIRMS AND REGISTERED REPRESENTATIVES
WITH ALL SRO REPORTING REQUIREMENTS

The NASD agrees with the SEC Report that Forms U-4 and U-5 have been

fruitfiil sources for identifying sales practice problems. Form U-4 is used by

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registered representatives to register with regulators, and includes disciplinary
information about the registered representative applicant which must be
supplemented on an ongoing basis. Form U-5 is filed by a fum when it terminates
a registered representative from employment and describes whether the
termination was voluntary or for cause, and whether the representative was the
subject of complaints or other regulatory actions. To fully benefit from these
valuable sources of information we are continuing in our efforts to develop
processes, systems, and programs to better monitor these filings and increase
sanctions against both firms and individuals that do not file reports or that file
them late.

QUALIFIED IMMUNITY FOR FIRMS ON FORM U-5

As 1 mentioned earlier in my testimony, the NASD strongly believes that a

major reform recommended in the SEC Report is that of providing qualified
immunity for securities firms for statements that they make on the Uniform Notice
of Termination, or Form U-5, in fiilfilling their regulatory reporting obligations.
Terminated representatives have claimed to have been libeled by the
characterization of their departure on this form. Regulators, on the other hand, are
concerned that a fear of such litigation has reduced member firm candor in filing
Form U-5s, sharply reducing its usefiihiess as a regulatory tool, especially in
seeking out problem representatives. If the firms do not provide honest answers to
the U-5 questions, regulators do not get accurate information, prospective
employers are not alerted to problems, customers are not protected from problem
representatives, and even the capital of the hiring firm can be put at risk due to
problem representatives.

While some states have protections for such disclosures, the NASD agrees
with and strongly supports the SEC's recommendation that some protection is

103

necessary to encourage finns to report accurately the reasons for an employee's
termination. The NASD endorses the Commission's plan to explore whether such
changes could be addressed through rulemaking, and would also support
legislation if rulemaking is not determined to be the most effective approach to
devise uniform policies on liability and qualified immunity.

TRACKING SYSTEMS

The SEC Report 's reconunendation on tracking systems involves the

regulators' capability to identify and track problem representatives on an integrated
basis, without duplication of other regulators' efforts.

The NASD has a long-standing working relationship with the NYSE,
including the coordination of inspections of problem representatives. Every
customer complaint received by the NASD and each termination for cause
reported on Form U-5 is subjected to a detailed inquiry. As part of that inquiry
the NASD and NYSE routinely coordinate on these special cause examinations to
eliminate regulatory overlap. This coordination protocol has worked well and, in
light of the recommendations in the Large Firm Report, we have re-emphasized to
our District Offices its importance.

The SEC Report also recognizes that the NASD is addressing this tracking
issue through its multi-million dollar revision of the CRD system. As noted in the
SEC Report, the redesigned CRD will be a state-of-the-art, user friendly system
that will provide regulators with the ability to search through hundreds of
thousands of records to identify problem representatives, to flag problem
representatives who may try to re-enter the securities business, and to target firms
and branches for examination more effectively.

The NASD, as discussed previously, has developed an interim

104

identification system for problem representatives drawing on CRD and DMIS, as
well as NYSE Rule 35 1 data. This capability to profile and rank currently
registered representatives is based on a variety of factors which gives us the
flexibility to create reports utilizing information , such as final regulatory actions,
pending regulatory actions, customer complaints, terminations for cause, and
failures to pay arbitration awards, and will include arbitration actions. This
information will be shared with the NYSE to improve focusing of investigatory
efforts, enhance communications regarding examinations and further protect
against unnecessary regulatory duplication

ADDITIONAL DISCLOSURES

Mandated Disclosure of Toll-Free Hotline

The SEC Report recommends that SROs adopt rules that member firms

must disclose to new investors opening accounts the existence of the NASD's toll-
free telephone number, or hotline, and the availability of information on
disciplinary actions against registered representatives The NASD's hotline
provides callers with the disciplinary history of all members and registered
persons. This proposed disclosure of the hotline would be required before
completing any transaction in a new account.

For "penny stocks", the primary market segment where sales practice
abuses have occurred, an SEC permy stock rule requires extensive written
disclosure before initial transactions, including disclosure of the NASD's hotline.
This information is given through a "risk disclosure document." The document
informs customers that they may have rights or remedies available under federal
and state law, and gives the NASD's hotline number, as well as phone numbers
for the North American Securities Administrators Association and the SEC.

Separately from the mandatory disclosure required by the penny stock

105

disclosure rules, the NASD has launched a major effort to familiarize investors
and potential investors with our toll-free service. The NASD recently worked with
the SEC and others to publish a widely distributed brochure titled Invest Wisely.
The brochure helps investors in selecting a broker-dealer and registered
representative, making an initial investment decision, monitoring an investment,
and addressing an investment problem; it also provides the NASD hotline number.
Other publications and annoimcements have also highlighted our Public
Disclosure Program and the NASD's toll-free number, including the brochures
Investor Protection and The NASD Customer Complaint Program.

The NASD has conunitted to the SEC to have its Board of Governors and
relevant committee consider the SEC Report 's recommendation regarding
adoption of a new rule mandating hotline disclosure this fall.

Expansion of CRD Disclosure

The NASD has akeady acted to implement the SEC staffs recommendation

that initiated disciplinary' actions be publicly available. We took this action more

than a year ago in support of and in agreement with the SEC Report's rationale that

earlier disclosure of disciplinary proceedings will more quickly warn investors of

problem representatives.

The GAO Report

While we have not had adequate time to thoroughly review and analyze the

GAO Report regarding actions needed to protect investors from problem
representatives, we do have some preliminary observations and comments
regarding a nimiber of GAO recommendations and proposals.

106

Direct Reporting to CRD

The GAO Report contains a number recommendations that were not

specifically covered in the SEC Report. The first of these is that the CFTC, SEC,
American Stock Exchange and regional stock exchanges are not directly reporting
disciplinary actions to the CRD. CRD staff at the NASD instead obtains such
regulatory information fi-om public documents, bulletins, and other published
reports of disciplinary actions, which are entered into the system.

The NASD is agreeable to providing the capability of direct reporting into
the CRD by the regulators taking the disciplinary actions. We wish to emphasize,
however, that neither the NASD nor the SEC have experienced any deficiencies
with the arrangements where the NASD inputs to CRD all SEC disciplinary
actions announced in the SEC News Digest.

Only Formal Actions Are Required to Be Reported

The GAO Report stated that SRO rules do not require informal disciplinary

actions to be reported to CRD. At the NASD such actions include a letter of
caution, which is a warning letter, and compliance conferences, which is a meeting
between the NASD staff, the firm, and any affected individuals to discuss the
deficiencies noted and address corrective actions.

Informal actions such as letters of caution and compliance conferences are
designed to address only matters that are determined to be less serious and
technical in nature, and never involve serious sales practice abuses or patterns of
misconduct. Thus, the NASD believes that the requirement for such reporting to
CRD would result in the capturing of data that is not indicative of sales practice
abuse or other serious misconduct and would add a large number of minimally
important items to the CRD database. Further, the NASD maintains an electronic
regulatory system that captures the results of all NASD examinations and
investigations, including all informal actions taken.

107

Customer Complaint Information

The GAO Report stated that SROs generally do not collect and report to the

CRD information on customer complaints from individual firms, nor do they
report information on customer complaint disposition. GAO stated that although
most customer complaints do not result in disciplinary actions, they do provide
and allocation of regulator^' resources. GAO also recognized that because some
state regulators disclose all CRD information to investors, including
unsubstantiated customer complaint data in CRD may be controversial because it
may not always indicate wrongdoing by the fum or representative. Therefore, the
GAO states that it may be necessary to maintain separate data bases, one for
regulatory surveillance and one for public disclosure. The NASD strongly
supports the concept that all customer complaint information should be computer
captiued for regulatory or surveillance purposes, and that it must be maintained in
a non-public regulatory data base. Naturally, any customer complaints that require
disclosure on Form U-4 would continue to be reported to CRD.

Moreover, as noted earlier, next week the NASD Board will consider a
proposal which would require broker dealer members to report to the NASD
material items as well as quarterly reporting of statistical complaint information.
This important regulatory intelligence will be captured, maintained, and analyzed
through a NASD regulatory database and utilized as an additional tool in
identifying problem firms and representatives. We believe this initiative by the
NASD is consistent with GAO's recommendations in this area.

Migration of Problem representatives

The GAO Report found that the potential exists for problem securities

brokers to migrate to other sectors of the fmancial industry, such as insurance and
banking. We agree with the GAO that the potential for migration exists, and that

108

actions must be taken to better coordinate with these other financial services
sectors. In this regard, the NASD recognized the need to share NASD
enforcement data with others outside of the securities industry. Thus, earlier this
year we established a national policy for all 14 District Offices across the country
to make referrals to state insurance commissions when serious violations have
been found and sanctions imposed in NASD disciplinary proceedings involving
registered representatives who are also licensed as insurance agents. We have also
had preliminary discussions with four banking regulators to include bank
employee registration and disciplinary history in CRD. Thus, we would certainly
welcome the wider use of CRD by members of related fmancial industries that are
potential employers of problem representatives and we are available to work with
the SEC and state securities regulators in this regard.

Conclusion

We appreciate this opportxmity to provide the Subcommittee with the

NASD's views on problem registered representatives, their impact on investors,
and steps that we have - and will be - taking to address the risks they pose for our
fmancial markets. While the number of problem registered representatives is
small, the problems that they present to securities regulation require the continued
efforts of the SEC, die SROs and state securities regulators working on a
coordinated basis to protect the investing public and to uphold the integrity of the
U.S. securities markets.

109

John E. Pinto ■ Executive Vice President • Regulation • 1735 K Street. NW • Washington, D.C. 20006-1500 ■ (202) 728-8233

August 29, 1994

Mr. Brandon Becker

Director _

Division of Market Regulation

U. S. Secuirties and Exchange Commission

450 5th Street, NW.

Washington, D. C. 20549

Mr William McLucas

Dirertor

Division of Enforcement

U. S. Securities and Exchange Commission

450 5th Street, NW

Washington, D. C. 20549

Gentlemen:

This is in response to your August 4, 1994, letter to Joseph R. Hardiman regarding The
Large Firm Project Report ("Large Firm Report" or "Report"). As a preliminary matter, I would
like to acknowledge the extremely cooperative maimer in which the examinations underlymg the
Report were planned and conducted. This joint regulatory effort involving the National
Association of Securities Dealers, Inc. ("NASD"), the U.S. Securities and Exchange Commission
("SEC" or "Commission"), and the New York Stock Exchange ("NYSE"), on the heels of two
sigmficant jomt penny stock initiatives in 1991 and 1993, the latter of which included 40 states
as well, firmly establishes the benefits and positive results that flow from combinmg the resources
of the securities regulators in cooperative, targeted programs.

The NASD generally agrees with and supports the overall findings and recommendations
of the Large Firm Report. Your August 4 letter focuses on certain of the recommendations
emanatmg from that Report as follows: (1) increased examination efforts and sanctions in sales
practice matters; (2) enhanced compliance by firms and registered representatives with self-
regulatory organization ("SRO") reportmg requirements; (3) tracking systems; and (4) additional
disclosures. A status report is sought on the actions the NASD has taken, or plans to take, to
address these four recommendations. Our response follows in the order presented in your letter

L INCREASED EXAMINATION EFFORTS AND SANCTIONS IN SALES PRACTICE

MATTERS

A. Examination Efforts

1. Arbitranon Refertals

The Report recommendations encourage the NASD to expand its examinanon
" efforts by focusing additional attention on the review of sales pracnce allegations made
in arbitration cases. We agree that arbitrations can serve as an important source for
idennfying sales practices abuses, detecnng potential patterns of fraud and inadequate
supervision, and identifying problem registered representatives. Because we recognized
this as an important source of valuable regulatory information, m late 1 992 the Regulanon

and Arbitration staffs began discussions to develop practices and procedures that would
encourage greater coordination, thus leading to a significant increase in matters being
referred to our District Offices for investiganon and action As a result of these efforts,
Distnct Staff Memorandum 93-22 (See Exhibit 1) formalized the changes to our existing
programs as part of the ongoing effort to develop a more comprehensive regulatory
referral process that is more efficient, effective, and timely This new ininanve was
effected through action by the NASD's Board of Governors ("Board") and resulted in an
amendment to the Code of Arbitranon Procedure which specifically permits an arbitrator,
once a case is settled or an award is rendered, to inmate a referral to a Distnct Office (or
other appropnate Regulation Department) if there is reason to believe there may have
been violations of NASD rules or the federal secunties laws.

To facilitate the success of our arbitranon referral program, the NASD's Arbitration
Department has taken affirmative steps to increase each arbitrator's sensitivity toward their
ability to make regulatory referrals Arbitration trainmg, which is now mandatory for all
new arbitrators, includes informanon and discussion of the disciplinary process.
Additionally, arbitrators are being provided with copies of the NASD's "Disciplinary
Procedures" brochure and a memorandum captioned "Concerning Disciplinary Referrals"
as part of their onentanon These documents descnbe the types of activity which may
be the subject of regulatory referrals Moreover, at the commencement of each arbitranon
hearing, the Chairman of the arbitranon panel provides notificanon to the participants of
the possibility of a regulatory referral if apparent rtile violations are disclosed during the
arbitration process At the conclusion of the arbitranon hearing, arbitrators are quened
by the Arbitration staff as to whether any matters arose that should be referred to
Regulanon for mvesnganon Supplemennng the arbitrators ability to inmate a referral is
the reaffirmanon by the NASD Board of the authority of the Arbitranon staff to make a
regulatory referral at any time

Based on the nearly 20 arbitranon referrals made in just the first 7 months of 1994
under this new program it appears that the program has been a success and will provide
a new dimension and great enhancement to detecting and mvestiganng problem
representatives, as well as to our overall regulatory and enforcement efforts.

2. Quarterly Repomng of Customer Complaints

In the recommendanon that increased emphasis should be given to developing
better tools for identifying sales practice problems at an earlier stage, the SEC staff
focused on the greater use of customer complaint information They specifically
recommended that the NASD adopt a rule similar to NYSE Rule 351 requinng members
to repon customer complaints on a quarterly basis. As the SEC is aware, the NASD staff
strongly agrees with this recommendanon and, as the Report itself states, had already
decided to develop a 351 -type rule for the NASD well pnor to the Commission's release
of Its Large Firm Repon In this regard, a draft rule was discussed with the Distnct
Directors at the Regulation Business Line Meeting on June 15, 1994 Following
consideration of the draft, comments were incorporated into a new version of the proposed
rule. On August 1 and 5, 1994, meetmgs were conducted between representatives of the
NASD and NYSE staffs to address issues relating to shanng of regulatory data, avoidance
of unnecessary regtilatory overlap, and consistency, and we are now in the process of
refraroing our proposed rule, as appropnate, to incorporate the results of those discussions

At this juncture, we are confident that by no later than November of 1994, the
NASD staff will be prepared to propose to appropnate NASD committees and the Board
a customer complaint repomng rule calling for the submission by members of quarterly
statistical data. Additionally, we plan to be in a position before the end of this year to
propose a rule that would require NASD members to repon informanon to the NASD that
IS substantially similar to the data obtained by the NYSE from their members pursuant
to Form RE-3 (which implements a separate provision of Rule 351), such as data
regarding statutonly disqualified persons and internal disciplinary actions. It is presently
contemplated that the new NASD rule will supplement or replace Part V of Schedule C

Ill

of the NASD By-Laws which requires firms to report mtemal disciplinary actions to the
NASD. NASD/NYSE members would be exempt from these new NASD requirements
because they are already subject to a comparable NYSE rule.

B Sanctions

This section of your letter makes three distina requests. First, we are asked to
review and, if necessary, enhance sanctions agamst registered representatives and broker-
dealers who commit sales practice violarions. Second, you request that the NASD inform
you of the status of our review of our rules and By-Laws with regard to ensuring the
existence of adequate broker-dealer hinng procedures, and sanctions for hinng registered
representaoves with a history of sales practice abuses who connnue to commit sales
practice violations. Third, you request information regardmg steps taken or intended to
be taken with respect to the commitment of additional resources to "prosecuting" sales
pracnce cases against problem registered representatives who have violated our rules.

1. Sanctions for Sales Practice Violations

We have fully reviewed our sanction policies, practices, and procedures with
respect to registered representatives and broker-dealers who commit sales practice
violations. Among other things, we analyzed our "NASD Sanction Guidelines" which the
NASD has used in its disciplinary program for several years. These guidelines are used
as starting points in determining sanctions and are designed to ensure uniformity of
sanctions for approximately four dozen of the most frequent types of violanons, many of
which directly or indirectly relate to abusive sales practices Each sancnon guidelme
recites a series of pnncipal considerations in determinmg sanctions that are umquely
relevant to the subject misconduct and provides Distna Business Conduct Committees,
the Market Surveillance Committee, and the National Business Conduct Committee with
suggested remedial sanctions commensurate with the nature and seventy of the violation.

Relative to sales practice violations, our Sanction Guidelines are fully aligned with
the recommendations of the Large Firm Report. Specifically, all of the guidelines for
sales practice violations consider whether the respondent is a recidivist by listing as a key
pnncipal consideranon whether the respondent engaged in prior or other similar
misconduct. Where sales practice abuses are intentional, willful, egregious, or repeated,
our guidelines generally call for a bar of the individual which, in keeping with the
Report's recommendation, is not tempered by a right to reapply for association with a
NASD member. Where the nature of the misconduct does not warrant a bar, a number
of our guidelines frequently establish as an appropriate remedial sanction an extended
suspension and the requirement that an individual re-qualify by exammation.

We have not, as recommended in the Report, usually imposed as a sanction a
requirement that a respondent complete fmancial (or other) courses or engage in on-the-
job trammg while on a fixed salary. Conceptually, we suppori the imposition of these
types of sanctions for less senous sales practice violations and are willing to consider
them under appropnate circumstances. We frequently, however, require re-qualification
and retesting as a sanction in disciplmaiy cases, as well as other undertakings such as the
hiring of an outside consultant. Also, we are quickly moving in the direction of utilizing
trainmg requirements as a remedial measure in connection with disciplinary matters
through our newly proposed continuing education rules applicable to registered
representatives and others. As proposed, the rules would require a registered person who
IS subject to a suspension of any duration or to the imposition of a fine of $5,000 or more
for violations of any provision of any secunties law or reguiaaon to re-enter the
Regulatory Element of the anticipated connnuing educanon program and possibly engage
in NASD directed specialized trammg under the Firm Element of the program

2. Hinng Procedures

Our existing rules and regulahons hold members to high standards when it comes

112

to hiring procedures and sanctions for hiring registered representatives with a history of
sales pracnce abuses who continue to commit sales practice violations In particular.
Article m. Section 27(e) of our Rules of Fair Prictice requires, among other things, that
where an applicant for registration has previously been registered, the member must obtain
a copy of the Form U-5 filed by the most recent previous member employer and any
amendments thereto A commensurate responsibility is placed on the applicant to provide
a copy of the Form U-5 to the member upon request and subsequent amendments must
be promptly provided as well.

Once a registered representative is hired, clearly delineated supervisory
responsibilities must be discharged by the hinng member. For example, our rules require
that each member establish and maintain a system to supervise the acnvities of each
registered representative and associated person that is reasonably designed to achieve
compliance with applicable secunties laws and regulations and with the rules of the
NASD. The procedures, which must be wntten, specifically require the designation of
a registered prmcipal with authonty to carry out the supervisory responsibilities for each
type of business in which the member engages, including sales activines. In this regard,
each salesperson must be assigned to an appropnately registered representative or
pnncipal who is specifically designated as being responsible for supervismg the person's
activities. Each salesperson must at least annually participate m an interview or meeting
under a program conducted by the member at which time compliance matiers relevant to
the activities of the salesperson are addressed.

In addition to our Rules of Fair Practice, the NASD has made clear to its
membership the heightened standards that accompany the hiring of registered
representatives with a history of disciplmary problems or customer complaints. A recent
"NASD Regulatory & Compliance Alert" expressed our strong concern that members
exercise closer supervision over the activities of a registered representative with extensive
disciplinary history to match the higher level of supervisory responsibility assumed when
they hire such a person Furthermore, we have clarified the meamng of our supervision
rule in this area by statmg and restating the NASD's long-held position that "normal"
supervision is not sufficient when a member hires a salesperson with a panem of senous
customer complamts or disciplinary history, or for an existing salesperson who becomes
the subject of such problems. Our often repealed message to the membership is that they
must develop and impose special supervisory practices designed to address the particular
area of concern for the mdividual salesperson Failure to take these extraordinary steps
can often lead to regulatory problems for the member and can have senous ramifications

Breakdowns m supervisory procedures and systems carry severe consequences
In a typical situation that does not involve a pattern of multiple violations, the Sanction
Guidelines call for fines that generally range from $5,000 to $25,000 for firms and,
separately, for the culpable supervisor, and individuals are suspended in all capacities
Egregious cases call for substantially higher fines, bars and re-qualification by
examination.

In light of the extensive requirements of Article in. Section 27, supplemented by
frequent and consistent educational clarifications provided to the membership, as well as
imtial registration and licensing standards that mclude fingerprint and FBI record checks,
we believe that our existing regulatory framework imposes appropnately significant
responsibilities on members in the hiring and retention of salespersons, and with respect
to the oversight of problem salespersons, while giving the NASD the flexibility necessary
to deal effectively with supervisory breakdowns. We do not, therefore, believe that
additional rule-making is necessary.

113

3. Commitment of Additional Resources to Sales Practice Problems

The Regulation Business Line determmed that for 1994, the Distnct Offices would
commit additional exammaiion and enforcement resources in the area of problem
representatives As you may be aware, commencing January 1, 1993, the NASD
implemented a new approach to its examination program that, among other things,
directed its Distnct Offices to develop and submit a wntten Regulatory Plan to me for
approval that idennfied their regulatory and examination pnonnes for the year. In
essence, these Level I firms formed the core of field exammations that were required to
be conducted m 1993, focusing our field resources on those members, branches,
individuals, and issues that the Districts identified in their Plans as pnonties (See DSM
93-1, Exhibit 2).

This examination program was modified for 1994 (See DSM 94-1, Exhibit 3) to
specifically include development and implementation of a Regulatory Plan for each
Distnct Office which provided for the idennfication and intense sales practice inspection
of main offices, branch offices, and individuals associated with such offices who may
pose certam regulatory concerns due to, among other things, past misconduct related to
abusive sales and tradmg practices Also, the Strategic Plan for the Regulation Business
Line for 1994-1996 specifically includes problem representatives as a clear regulatory
pnonty (See Exhibit 4) As a result, this regulatory pnonty is included in District Office
goals and individual Distnct management goals under the NASD's Incentive
Compensation Award program.

Significantly, the NASD recently expended additional funds to enhance its ability
to identify potentially problem representatives The additional resource commitments have
resulted in the development and implementation of an intenm, automated system to
capitalize on the regulatory intelligence that resides in the Central Registranon Depository
("CRD"), the Distnct Management Informanon System ("DMIS"), and, to a lesser extent,
in the NYSE stanstical database on customer complamts, to profile and analyze the
current registered representanve populanon. In order to produce the profiled
representative information we, among other things, hired a contract Microsoft Access
• programmer and enhanced the storage capacity oiT our file server Data downloaded from
CRD on final regulatory acnons and registered representative history was integrated with
DMIS data on customer complaints With the database established, we designed quenes
and reports and analyzed the data to determine appropnate thresholds for identifying a
profiled representative Presently, we are designing a parameter dnven system so that we
can vary the quenes and reports as the defimoon of a profiled representative evolves. We
have also incorporated data from the NYSE 351 database and are presently supplementing
the database with arbitranon actions

The interim nature of the system, entitled "Profiled Registered Representatives,"
recognizes that CRD is in the midst of a complete rewnte and redesign that will include
a capability to provide extensive regulatory data on a specialized, ad hoc reporting basis.
With the intenm system, the NASD has developed a capacity to profile registered
representatives that may pose certam regulatory nsks and threats to pubic mvestors. This
will greatly assist NASD examination and enforcement efforts, and is a central feature of
our joint regulatory effort underway with the states, SEC, and NYSE.

n. ENHANCED COMPLIANCE BY FIRMS AND REGISTERED REPRESENTATIVES
WITH ALL SRC REPORTING REQUIREMENTS

We agree with the SEC staffs recommendation in the Report that Forms U-4 and
U-5 have been fruitful sources for identifying possible sales practice problems. To fully
benefit from these valuable sources of information, we contmue to develop processes.

114

systems, and programs directly related to the Report's recommendations that the NASD
and other SROs monitor required filings and, in cases of untimely or non-reporting,
increase sanctions against both firms and individuals.

Significantly, the ongoing CRD redesign effort exemplifies how we intend in the
future to ensure the nmely collection of Forms U-4 and U-S disclosures, and identify and
respond to persons failing to make full or complete filings. In fact, the very first phase
of the new CRD system, which is scheduled to be operational as a pilot project m the
fall of 1995 and fully implemented in February of 1996, focuses on member filing
functions in the new CRD environment relating to individuals and organizations, and
encompasses full electronic filings by the membership.

As contemplated, the new CRD system will include a tracking capability which
will support an acave compliance program to ensure the nmely reporting of all
mformaQon and updates by firms and individuals. When items are reported, the
redesigned CRD system will track the disclosures and penodically request an updated
status of the maner from the firm and individual.

To address instances where required filings are not made or are not filed m a
timely manner, the NASD is presently developing a focused disciplinary program. We
intend to unlize the new CRD to support this Hisclosure-related disciplinary program
through its identification of late and deficient filers Additionally, we contemplate the
dedication of resources from a central location to ensure uniformity and consistency in
application of the program.

Importantly, and in response to the SEC staffs recommendation regarding
sanctions, we envision enhancements to our Sanction Guidelmes commensurate with the
referenced disciplinary program to ensure the implementation of appropnately remedial
sanctions on a nation-wide basis. The guideline enhancements, once developed, should
serve as a deterrent to members while increasing staff efficiency. While we are still in
the process of considering a number of alternatives on how best to handle this process,
one approach under review is the possible adoption of a Minor Rule Violations Plan
approach to further improve staff efficiency and to better ensure that late and deficient
filers are dealt with expeditiously This is potentially attractive considering that the staff
can initiate the Minor Rule Violation Letter and that the use of this procedure, if accepted
by a respondent, mcludes by agreement the waiver of the respondent's nghts to a hearmg
or to ^peal to the NBCC, the SEC, or the Courts.

in. TRACKING SYSTEMS

The SEC staffs recommendation concenung trackmg systems relates to the
regulators' existmg capability to identify and track problem brokers on an integrated basis.
First, the NASD has a longstanding workmg relationship with the NYSE with respect to
die coordination of not only routine examinations, but, as importantly, special cause
investigations. In this regard, customer complamts received by the NASD and each
termmanon for cause reported on Form U-S is subjected to a detailed inquiry. In
proceeding with our inquires, the NASD routinely communicates with the NYSE
concerning these special cause exammations to coordinate which SRO will assume
responsibility for the investigation in order to ensure that regulatory overlap does not
occur in situations where both SROs may have an interest in the matter, and to satisfy
itself to the degree practicable that appropnate inquires are planned. This cooperative
program has served us well over the years and, in light of the recommendations in the
Large Firm Report, we have re-emphasized to our Distnct Offices the importance of
coordinated effort, with the NYSE in this area. We also plan on discussing this program

115

with senior management at the NYSE to reaffirm the commitment of both the NASL and
NYSE to this coordination in hght of the comments m the Report.

Second, the Report recognizes that the NASD is addressmg this tracking issue
through Its muln-million dollar rewnte of the CRD system. As noted m the Report, the
redesigned CRD will be a state-of-the-art, user friendly system that will provide regulators
with the ability to search through hundreds of thousands of records to identify problem
brokers, to flag problem brokers who have left the industry so that they can be reviewed
should they try to return to the business, and to target firms and branches for examination
m a more effective way.

Third, and as discussed above, the NASD has developed an interim idennfication
methodology for problem representanves drawmg on CRD and DMIS, as well as NYSE
Rule 351 data. More speafically, we now have the capability to profile and rank
currently registered representatives utilizmg a variety of cntena and faaors, such as final
regulatory actions, pendmg regulatory actions, customer complamts, terminations for
cause, and failures to pay arbitration awards.

As mennoned, the interim automated system has been developed to improve the
effectiveness of our own regulatory and exammation programs, and in connection with
a cooperative effort among multiple regulatory authonties focusing on problem
representatives. Thus, the informanon will be shared with the NYSE and, therefore, will
sigmficantly enhance commum cations concerning exammations and investigations, thereby
reducmg unnecessary regulatory duplication and better ensuring that all matters that
should be investigated, are investigated.

IV. ADOmONAL DISCLOSURES

A. Mandated Disclosure of Toil-Free Hot-line

The Report recommends that SROs adopt a rule requinng member firms to
disclose to investors openmg new accounts the existence of the NASD toll-free telephone
number ("hot-lme") and the availability of information concerning disciplinary actions
against registered representanves. As recommended m the Report, this disclosure would
be required pnor to effectmg any transaxmon m a new account but would not be required
to be written.

As you know, with respect to "penny stocks", the pnmary market segment where
sales practice abuses have occurred, SEC Rule 15g-2 reqmres considerable wntten
disclosure pnor to transacnons, including disclosure of the NASD's hot-lme This
informaQonai document set forth in Schedule G (and generally referred to as the "Risk
Disclosure Document"), is the mechanism through which the federally mandated
disclosures are transmitted. It mforms customers who have questions or who appear to
be vicnms of fraud that they may have nghts or remedies available under federal and state
law. The Risk Disclosure Document specifically provides ±e toll-free telephone number
of the NASD, as well as the central number of the North Amencan Secunties
Admmistrators Assoaation ("NASAA") for informanon on the background and
disciplinary history of the firms and salespersons with whom the customer is dealing, and
* the number at which the SEC can be contacted with complamts.

116

Separately from the mandatory disclosure required by the peiuiy stock rules, the
NASD strongly supports initiatives to familiarize investors and potential investors with
Its toll-free service. For example, the NASD recently worked with the SEC and other
regulatory agencies to wnte and publish a brochure entided "Invest Wisely." The
brochure is an aid to investors m selectmg a broker-dealer and registered representative,
making an initial investment decision, monitoring an investment, and addressing an
investment problem Among many things, the brochure descnbes the NASD's toll-free
hot-line and provides the telephone number. Other publications and announcements have
also highlighted our Public Disclosure Program and the NASD's toll-free number. For
example, another brochure published by the NASD entitled "Investor Protection" states
that the public can gain access to records of securities professionals and members through
the NASD's Public Disclosure Program. Another NASD published brochure entitled 'The
NA SD Customer Complaint Program " also highlights our Public Disclosure Program. The
NASD hot-line also receives considerable mention in public speaking forums, as well as
through contacts with pnnt, radio, and television media.

With hot-line disclosure required to be provided to investors who are considenng
an investment in penny stocks, we are already reaching that segment of the public most
in need of the protection that is afforded by receiving direct information of the toil-free
hot-line service. As a result, additional rule-making may be unnecessary Nevertheless,
we intend to present the question of whether the NASD should adopt a new rule
mandating hot-line disclosure to our appropnate committees and ultimately the Board the
Governors.

B. Expansion of CRD Disclosme

The NASD took action that became effective on July 1, 1993, to provide
disclosure of NASD ininated disciplinary actions through its hot-line, which the SEC
Report recommends be done by other SROs as well. We took this action because we
strongly believed that the more information we could place in the public's hands, coupled
with earlier disclosure of disciplinary proceedings, would better serve investors dealing,
or planning to deal, with representatives agamst whom significant sales practice charges
and other disciplinary actions have been brought.

I am pleased to provide you with this status report on the many initiatives taken by the
NASD m support of die Large Firm Report recommendations, as well as our views on some of
the proposals referenced m the Report. Our initiaaves, coupled with those of the SEC, when
balanced agamst the very small number of problem representatives, will clearly serve to protect
the investmg public and uphold the integrity of the United States securities' markets.

into
Executive Vice President
Regulation

cc: Joseph R. Hardiman

117

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Mr. Markey. Thank you very much.

Mr. Markey. Our final witness is Mr. John Perkins. He is the
commissioner of securities for the State of Missouri.

Just so people can understand, in addition to the Securities and
Exchange Commission and the New York Stock Exchange and the
National Association of Securities Dealers, each one of the 50
States also has a securities regulator looking at the securities mar-
ketplace and offering protection to the investors within the bound-
aries of that State. Mr. Perkins is testifying on behalf of the securi-
ties regulators of each one of those 50 States.

Welcome before the subcommittee. Please begin.

STATEMENT OF JOHN R. PERKINS

Mr. Perkins. Thank you, Mr. Chairman.

Mr. Chairman and members of the committee, good morning. On
behalf of the North American Securities Administrators Associa-
tion, I appreciate the opportunity to appear here today. You need
only to look at the members of this panel and the testimony that
you have heard of the people on my left to see the problems that
can result from problem brokers. The misconduct in handling these
peoples' accounts is not an unfamiliar story to State securities reg-
ulators.

Since 1978, the number of enforcement actions at the State level
have increased by 40 percent. The number of licensing actions,
those that would be most directly related to problem brokers have
increased by 20 percent during that time period. Those numbers
don't tell the entire story because many of us also take informal ac-
tions of forcing brokers out of the business, forcing them to with-
draw their registrations in our States on an informal basis that is
not reported anywhere.

For those who would suggest that this is a small problem, I di-
rect you to these individuals and to the lives that have been im-
pacted by it. I would also say that you miss a giant point, and that
is if you look only at numbers you are missing the point. The ero-
sion of public faith in the marketplace cannot be measured by num-
bers alone. This is a question not just of numbers but of perception.

What can be done about this? At the State level many of us have
taken tough actions regarding greater supervisory requirements in
order to force firms to take responsibility for those problem brokers
that they may employ. Other States are placing conditions on bro-
kers licenses, limiting the types of activities they can engage in,
the types of products that we may sell. The States have handled,
I think the number over the last 4 years is over 8,000 licenses have
been asked to be withdrawn at the State level so that they are no
longer licensed in those States.

We have also supported the NASD — there has been a lot of talk
regarding the central depository system and update of that. States
have long recognized the need for improvement in that area. Since
1992, the NASD and NASAA have been in the process of upgrading
that system. I think we would probably all agree that many of the
things that are suggested in the GAO report will be in that up-
grade and that redesign of that system.

My written testimony that you have makes several recommenda-
tions that NASAA has made regarding ways to protect investors,

120

ways to head off potential scandals and retain a high level of inves-
tor confidence in the markets. Rather than discuss all of those rec-
ommendations I would like to highlight two briefly.

The first is a call for the disclosure of CRD information to the
public on an on-line database. Just as EDGAR filings have been
made available through the Internet, so, too, should CRD informa-
tion.

Why is this important? At the State level, we spend a great deal
of time trying to convince investors to protect themselves. We have
limited resources, just as all our enforcement colleagues have, and
the only true protection comes when the investor protects them-
selves, and by having the information available to make an in-
formed decision. We believe that putting out information regarding
brokers and making that available to the individual investors is the
next step in empowering those investors to make their own deci-
sions.

I would envision that in a couple of years an individual who re-
ceives one of those cold calls will be able to go to the public library
or to their own home computer and look up not only the product
being sold via the EDGAR system but would be able to look up in-
formation about the broker, the person whose trust they are going
to be relying upon in making their decisions. I think this is an es-
sential element to ensure greater investor protection in dealing
with problem brokers.

The second area that I think should be explored is the imposition
of a bad broker profile similar to that used by the National Futures
Association. Under that program a special internal oversight re-
sponsibility is placed on firms that hire more than 25 percent of its
sales force from firms that have been closed due to fraud and
abuse. This model puts the burden squarely on the shoulders of
those who hire problem brokers. We believe that that is where the
responsibility should be and the greater efforts should be made at
supervising those individuals by the firms.

Mr. Chairman and members of the committee, NASAA and its
members will continue to do all that we can to enforce the laws.
We will try to educate the public. We hope to work cooperatively
with the subcommittee, the SEC, the NASD and other SRO's, the
industry and investors to bring about needed changes in this area.

Thank you.

[The prepared statement of John R. Perkins follows:]

121

NORTH AMERICAN SECLRITIES ADMINISTRATORS ASSOCIATION. INC.

One Massachusclls A\enue. NV\.. Suite JIO

Washinelon. DC. 20001

2017J7-0900

Tdecopwr: 202783-3571

NASAA

STATEMENT OF JOHN R. PERKINS

COMMISSIONER OF SECURITIES

OFFICE OF THE MISSOURI SECRETARY OF STATE

on behalf of the
NORTH AMERICAN SECURITIES ADMINISTRATORS ASSOCIATION

Mr. Chairman and Members of the Subcommittee:

My name is John Perkins. I am Commissioner of Securities in the Missouri Secretary of
State's Office and a member of the North American Securities Administrators Association
(NASAA). I also serve as chair of NASAA's Problem Broker Action Group, a committee
appointed in late 1993 to examine and respond to the problems raised by the continued
employment of unscrupulous "rogue" stockbrokers. In the U.S., NASAA is the national
voice of the 50 state securities agencies responsible for investor protection and the
efficient functioning of the capital markets at the grassroots level. On behalf of NASAA,
I appreciate the opportunity to appear before you today to discuss the important investor
protection issues that arise out of the presence within the securities industry of recidivist
rogue brokers with histories of sales practice abuses, customer complaints, arbitrations,
lawsuits or other significant disciplinary problems.

I.
INTRODUCTION

Mr. Chairman and Members of the Subcommittee, as you know, state securities agencies
devote the bulk of their attention and energies to those regulatory and enforcement issues
that most directly affect small investors. What state securities regulators have learned
from the expenences of these small investors is that the continued employment in the
securities industry of even a relatively small number of rogue brokers represents a real
and direct threat to the financial well-being of significant number of consumers and to
public confidence in the capital markets more generally.

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The concern here should be not only the impact on victims, but also the loss of the
general public's faith in the marketplace. It is in the loss of confidence in the marketplace
where fraud and abuse may exact its highest toll. It is not just that another firm has gone
wrong or that a few "cowboys" in a branch office have run amuck. To suggest that there
are relatively few rogue brokers and that this therefore is a minor problem misses the
point: this is an issue of impressions, not numbers. What the recent Wall Street scandals
have demonstrated is that we need to be just as tough, probing and relentless in our
scrutiny of these big firms as we are of the more suspicious characters that come to our
attention. True, we may find fewer problems, but we may also be able to nip potential
confidence-losing scandals in the bud at an early stage.

NASAA, for a number of years now, has expressed its doubts about a system that lets
some large firms operate almost on a regulatory "honor system." In comments submitted
in November 1987 to the Regulatory Review Task Force of the National Association of
Securities Dealers (NASD),' NASAA expressed concern that the branch offices of larger
brokerage firms were not being examined for sales practices. The comment letter cited
"increasing problems of abusive sales practices" by registered representatives and
encouraged the NASD to devote more attention to the problem. Among the more
familiar sales practice abuses uncovered by state regulators: the use of high-pressure
sales tactics; selling securities that were not suitable for a customer in light of his or her
financial situation or investment objectives; excessive trading to generate commissions
for the broker; unauthorized trading; misrepresentations; and conversion of funds.

That rogue brokers are permitted to remain in the securities industry becomes even more
troubling in view of the fact that growing numbers of small investors are now looking to
market professionals to help steer them in their financial dealings. In these days of lower
interest rates, more and more savers have taken their money out of bank accounts or
certificates of deposit and plunked it into the stock market in the hopes of earning better
returns. In addition, many more workers now are faced with making decisions about how
to invest defined-contribution and salf-directed pension plans. These individuals, many
of whom have had little or no prior investment experience, are entering the markets at a
time in which we are experiencing "financial instrument overload," where even the most
sophisticated among us have been thrust into a new and complex world of products for
which we have no background to make the proper judgments. There is so much choice
in the financial world today that many consumers find themselves utterly confused about
where to put their savings and, as a result, often turn to others to make those decisions
for them.

' See . November 23. 1987, letter from then-NASAA president James C Meyer to Mr. A, A. Sommer,
chairman, NASD Regulatory Review Task Force.

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It is in this context that we consider the issue of rogue brokers. This issue has exploded
on the national scene over the course of the last two years or so, sparked initially by a
major series written by Scot Paltrow of the Los Angeles Times .^ Shortly thereafter, the
Securities and Exchange Commission (SEC) undertook its Large Firm Study,' which was
released this past May. And, it is NASAA's understanding that the General Accounting
Office (GAO), the bipartisan research arm of Congress, will be releasing its study on
problem brokers during this hearing. Despite the recent surge of interest in the topic, the
problem is not entirely new. In fact, this Subcommittee is well acquainted with the issue
of problem brokers as a result of your probe during 1989 and 1990 of widespread fraud
and abuse in the penny stock market. Among the key issues identified as contributing
to the fraud and corruption in that marketplace was the domination of the it by repeat
offenders of state and federal securities laws."

Today, there is a growing sensitivity to the fact that the concerns about recidivist rogue
brokers with histories of sales practice abuses, customer complaints, arbitrations, lawsuits
or ottier significant disciplinary problems are not necessarily unique to penny stock firms
and brokers. Indeed, the evidence seems to suggest that even the biggest and most
respected Wall Street firms can have problems. One lesson to emerge from some of the
more celebrated enforcement actions of the last few years is that, while the temptation
sometimes is to devote substantial efforts to fighting the out-and-out con artists, an
equally pressing problem deserving of regulatory and enforcement resources may be
found in the area of fraud and abuse inflicted by brokers who operate out of some of the
most prestigious brokerage firms. Indeed, the Los Angeles Times series charged that a
number of Wall Street's biggest firms have knowingly kept on brokers with long records
of cheating customers because they are big producers and the firms have little incentive
to weed them out.

Two recent examples illustrate how the confidence of investors in some of Wall Street's
top firms can be undermined when those firms engage in widespread wrongdoing. These
cases further demonstrate the direct and significant relevance of the issue of rogue
brokers in the lives of small investors.

^ This five-part series authored by Scot Paltrow and printed in the Los Angeles Times , included: "Brokers
Who Break the Rules" and "Household Names No Guarantee of Safety" (July 1. 1992); "A Wall Street Case
Study in Abuse, Light Punishment," (July 2, 1992); The Hot Line That Isn't" (July 3, 1992); and "A Bad Sign"
(July 4, 1992); and Tip for Stock Investors; Beware of Watchdogs" (July 5. 1992).

' The Large Finn Project: A Review of Hiring. Retention and Supervisory Practices . Division of Market
Regulation and Division of Enforcement, U.S. Securities and Exchange Commission, May 1994.

' In response to the scourge of penny stock fraud and abuse, Congress adopted the "Securities
Enforcement Remedies and Penny Stock Act." (Public Law 101-429 was signed into law on October 15,
1990.) NASAA was pleased to play an active role in helping to shape the substance of that Act, which
granted new authority to the Securities and Excfiange Commission and the self-regulatory organizations to,
among other things, help keep chronic securities law violators out of the business.

124

Last October, Prudential Securities Incorporated,' one of the largest securities firms on
Wall Street, was rocked by revelations of massive misconduct in its handling of customer
accounts. In this case, the Securities and Exchange Commission and state regulators
alleged that the firm committed a wide range of violations of state and federal securities
laws. Between 1980 and 1990, an estimated 320,000 investors nationwide placed their
savings in more than 700 Prudential limited partnerships, including real estate and energy
development deals. In numerous instances, Prudential misrepresented speculative, illiquid
limited partnerships as safe, income producing investments, suitable for safety conscious
and conservative investors. As a result, Prudential sold limited partnerships to a
significant number of investors for whom the investments were not suitable in light of the
individual's financial condition or investment objectives.

Under an unprecedented "global" settlement reached by the SEC, securities regulators
in 49 states, and the NASD, Prudential agreed to establish an open-ended $330 million
claims fund for defrauded investors who suffered losses as a result of massive
misconduct in Prudential's sale of limited partnership deals from 1980 to 1990. The firm
also agreed to pay $41 million in fines to the SEC, the NASD and state securities
regulators. In addition, Prudential was specifically required to implement new policies and
procedures designed to prohibit excessive trading in customer accounts, sales of
unsuitable securities, the hiring and retention of registered representatives with significant
disciplinary histories and customer complaints, and to review mutual fund transactions to
prevent sales practice abuses.

The SEC in February 1993 imposed stiff sanctions against Paine Webber,* another of
Wall Street's largest firms, charging the firm with direct theft of customer funds, trading
in the accounts of customers known to be dead, making trades that customers never
wanted, excessively trading accounts simply to generate commissions, lying to customers
about the value of their accounts, fraudulently filling out of customer account documents
and selling unregistered securities. One year earlier, the New York Stock Exchange
(NYSE) fined the firm $900,000 -- at the time the second largest fine ever imposed by the
exchange -- for alleged wrongdoing in nine offices from coast to coast.

Importantly, both these incidents resulted not just from misconduct on the part of
individual stockbrokers, but also from supervisors failing to enforce securities rules or the

' See. SEC Litiqation Rei-ase No. 13840. October 21, 1993. Securities and Exchan~° C nmission v
hrudentia' '^■r- ■-- '■'-' -J, Untied States District Ckjurt for the District of Columbia. Civil Action No
93 Civ. 2164. p 5

' Scot Pattrow, "Brokerage Punished for Alleged Misconduct," Los Angeles Times . Washington edition,
February 19. 1993. p B5.

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firms' own internal regulations. More recently, we have learned that Kidder Peabody's top
government bond trader allegedly conducted up to $350 million in bogus trades before
being caught in April of this year. And before this, we had Salomon Brothers, Drexel and
E.F. Hutton, just to name a few.

While much of the focus of the debate about rogue brokers has appropriately centered
on the extent to which these individuals are employed by large, Wall Street firms,^ there
also is the issue of problem brokers migrating from large firms to ever smaller and smaller
firms, in these instances, the large firms may be doing their job by letting a wayward
broker go, but that broker later finds a home at a smaller firm, perhaps a regional
brokerage. And, once he or she is asked to leave that firm, another home is found in yet
an even smaller firm. For these smaller firms, they may see an opportunity to get a real
"player," a big producer. Not only is there potentially a problem with this broker being in
the business at all, but with the smaller and smaller firms you have probably even less
capability than in the larger firms to adequately supervise the activities of that broker. A
related problem for which there is anecdotal evidence of at the state level and which we
understand is touched in the GAO's analysis, is the movement of problem brokers from
the securities industry to other financial institutions. These issues are worthy of further
consideration and regulatory attention.

It should be emphasized that the vast majority of stock brokers are honest, hard-working
and well-trained professionals who take seriously their responsibilities. However, the
damage inflicted by those who are prepared to defraud the market and investors can be
tremendous and takes its toll not only on the individuals who are victimized, but on public
confidence in the markets more generally. The continued strength and stability of our
nation's securities markets depend in large measure on investor confidence in the fairness
and efficiency of these markets. NASAA commends this Subcommittee for once again
demonstrating its commitment to protecting the rights and interests of small investors by
focusing national attention on the issue of rogue brokers, an issue that has a direct and
significant impact on the lives of these investors.

For our part, state securities regulators have sought to heighten the oversight and
scrutiny of brokers affiliated not only with the traditionally troublesome firms, but also of
those who are employed by the larger, more established firms. In addition, state
securities regulators have taken a number of steps to educate and warn consumers about
how best to protect themselves from overreaching brokers.

' For example, the SEC's large firm project looked exclusively at brokers employed by nine of Wall
Street's largest firms.

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II.

STATE EFFORTS AGAINST PROBLEM BROKERS

Overseeing the multi-trillion dollar investment marketplace in the United States is an
enormous task that directly affects the financial well-being of millions of Americans and
requires the close attention of the federal and 50 state governments. While the federal
Securities and Exchange Commission traditionally has committed its resources to broad,
market-wide regulatory activities, ° state securities agencies devote the bulk of their efforts
to those regulatory and enforcement issues that most directly affect small investors. State
securities agencies have responded to the marketplace changes of the last several years
by dramatically increasing their regulatory and enforcement efforts.

Stepped-Up Enforcement Actions

NASAA is pleased to report that total state enforcement actions jumped almost 40
percent, from 2,538 in 1988 (a busy year due to the fall-out from the Black Monday"
market correction of the previous year), to 3,490 in 1992, the most recent year for which
NASAA survey data is available. Licensing orders, the state enforcement category most
likely to be directly linked to problem brokers, rose 20 percent over the four period, from
670 in 1988 to 804 in 1992. Criminal actions initiated by state securities agencies jumped
167 percent, with criminal convictions attained rising by even more dramatic 176 percent.
As impressive as these numbers are, they tell only part of the story. One of the best
things to happen for small investors in recent years is that a growing number of states
have resolved to lower the boom on problem brokers by screening them out in the front-
end licensing process. For a number of these cases, the impact for the states is not
recorded as a formal action, since problem brokers often choose to withdraw from the
licensing process, rather than have an order imposed against them.

Front-End Screening of Problem Brokers

The threat to small investors does not begin and end with fraudulent schemes, since even
legitimate investment programs made available by reputable securities firms can be
subverted through misconduct on the part of habitual violators of state and federal
securities laws and rules. A typical sales practice violation by a "problem broker" might
work like this: An elderly widow in need of steady income and preservation of capital is
convinced by a broker to move her life savings out of government-insured certificates of
deposit and in to clearly unsuitable, speculative and illiquid limited partnerships. It is not

' Recently, under the leadership of Chairman Arthur Levitt, the Commission has taken a more aggressive
rde in addressing issues that bear directly on the rights and interests of small investors NASAA and its
members welcome Chairman Levitt's efforts in this area and expect to continue to work cooperatively with
the SEC to strengthen the protection of small investors.

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that the investment product -- limited partnerships -- was itself fraudulent or abusive. The
abuse takes place in that the investment product clearly was unsuitable for someone in
the financial situation and with the investment objectives of the elderly widow. To head
off such abuses, a growing number of state securities agencies are carefully scrutinizing
the track record of individuals seeking licenses to do business in their states. Consider
the following:

o In Florida, using new authority granted to keep bad actors out of the
business, the securities division of the Florida Comptroller's Office in the five
year span between 1985 and 1990 denied licenses to more than 500 stock
brokers who had been approved for business by the NASD. The state's
laws were beefed up beginning in the mid-1980s in response to penny
stock schemes and boiler rooms that preyed on the state's large retiree
population. Florida's laws are exceptionally strong in that the securities
division is allowed to disqualify brokers based even on pending actions by
other regulators.

The securities bureau of the New Jersey Department of Law and Public
Safety has intensified its efforts to monitor and track the activities of brokers
who attempt to move from firms that have been identified as "problem"
operations to other brokerages. Most recently, the bureau denied the
application of a broker seeking to move fi'om the shuttered Hibbard Brown
to Smith Barney, one of Wall Street's top firms. As part of the licensing
process, the securities bureau discussed with the broker his customer
dealings while at Hibbard. Although the broker told securities bureau
officials that he always dealt fairly with investors and that he did not mislead
them in any way as to the risks associated with the particular stocks, his
customers painted a different picture. Several customers who had been the
subject of unsolicited cold calls placed by the broker while he was
employed by Hibbard told the bureau about the lack of disclosure about
risk factors, unauthorized trades, and other violations of the securities laws.
As a result, the securities bureau found that denying the application for a
license was in the public interest and necessary for the protection of
investors.

o The securities commission of the Missouri Secretary of State's Office also
has taken a more aggressive approach to closely scrutinizing the record of
any broker seeking to move from one firm to another. In addition,
firms that have been identified as having unusually high numbers of
complaints against their registered representatives are now being required

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to include on the customers' monthly account statements the phone
number of the state securities commission. The firm must notify customers
on the statement that they may call the securities commission if they have
complaints or concerns about the handling of their account.

Enhanced Supervisory Requirements

Since some problem brokers already are licensed before their first acts of misconduct
become apparent, more and more states are imposing tough, additional supervisory
requirements in order to force firms and their branch offices to take direct responsibility
early on for the activities of potential problem brokers. The securities division of the
Connecticut Department of Banking, for example, issues eight-10 letters a week putting
securities firms on notice that a particular broker will warrant extra supervisory attention.
The division holds up the licensing of the individual pending the receipt of the following
information from the firm: (1) identification of who it is that will be directly responsible for
supervising the broker; (2) a statement acknowledging that the firm and the supervisor
have reviewed the broker's application, including disciplinary history; (3) a statement that
the firm will insure compliance with any and all state, federal and other regulatory rules,
regulations and statutes; (4) the address of the office where the broker will be conducting
business, if it is different from that of the supervisor; and (5) an undertaking by the firm
providing that it will immediately notify the securities division of any investment-related
complaints from a Connecticut resident against the broker, of any action taken by the firm
against the broker, and that, upon request, the firm will provide to the division copies of
all relevant documents relating to the broker's disciplinary record.

Overhaul of the Central Registration Depository

While the states already have demonstrated an aggressive approach to weeding out
potential and actual problem brokers, their ability to do even more to track and monitor
the activities of such individuals will be made possible as the result of the planned multi-
million dollar overhaul of the Central Registration Depository (CRD), a computer system
jointly operated by the National Association of Securities Dealers and the North American
Securities Administrators Association to facilitate the licensing of individual brokers and
firms. Today, the CRD database contains registration and disciplinary files on
approximately 5,500 brokerage firms and 460,000 active individual stockbrokers.

Though the current version of the CRD is obviously antiquated and offers only limited
ability to make use of licensing files, it should be recognized that this system is already
being upgraded to make it a state-of-the-art regulatory and public information tool. It is

129

envisioned that the new CRD will give states and other regulators the ability to design
their own customized systems for a variety of purposes, such as tracking the status of
all brokers who have left a brokerage firm shut down due to fraud. When the CRD came
on line in 1981, it was a revolutionary tool for licensing and other regulatory purposes.
Even with its limitations, the CRD is the envy of other state officials, including insurance
commissioners and tax administrators, who still have not achieved what NASAA and the
NASD put in place 13 years ago.

Taking advantage of emerging computer technology, the CRD was established in 1981
in an effort to streamline and make more efficient the process by which state securities
agencies license individual stockbrokers and brokerage firms. Previously, the states
employed a disparate paper-based licensing system that required stockbrokers to fill out
applications and take "pencil and paper" exams in each of the states in which they
intended to do business. For example, prior to 1981, a broker interested in soliciting
business from residents spread out over the New England region would have had to
complete six different applications, take six exams and pay a fee in each of six states.

With the advent of the CRD system, that same stockbroker now fills out one application,
takes one computerized exam and writes one check to cover the total fees. The
completed application, the results of the licensing exam, and the state registration fee are
sent electronically via the CRD system to each of the six New England states in which the
broker is applying to be licensed. As this example illustrates, the CRD system has
dramatically reduced the costs associated with state licensing and has greatly simplified
procedures for industry compliance and state administration of the licensing process.

The rules of the states and the self-regulatory organizations require that broker-dealers
and their registered representatives disclose certain relevant information during the initial
licensing and registration process. Applicants must disclose information relating to
criminal convictions, civil litigation, and administrative proceedings, if relevant, as well as
prior employment history. After being granted a license to do business, the broker-
dealer and their registered representatives are required to report if they have been the
subject of regulatory or disciplinary actions, customer complaints or other specifically
identified activities or occurrences. The information is reported on Form U-4, the Uniform
Application for Securities Industry Registration. The information contained on these forms
is entered into the CRD database and has served over the years as perhaps one of the
most helpful sources of information for the identification of possible sales practice
problems.

The CRD databases have been organized primarily to support the state mission of
licensing of individual stockbrokers and brokerage firms. The system captures substantial

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disciplinary history about registrants and draws from several sources for its data, including
state securities regulators, the SEC, the NASD, the New York Stock Exchange (NYSE),
the American Stock Exchange (AM EX), and FBI rap sheets returned from fingerprint
submissions. Individual registrants and their employing brokerage firms also are required
to fully disclose all disciplinary history; a failure to do so may serve as separate grounds
for state licensing actions.

Because the CRD system originally was designed to serve primarily as a licensing
mechanism for state securities agencies and self-regulatory organizations, it necessarily
has certain limitations and restrictions on its use. The states and the NASD have
recognized the CRD's shortcoming^ and in 1992 embarked on a major, multi-million dollar
overhaul of the system. When com|Jleted sometime during 1995, the state-of-the-art, user
friendly system should provide regulators with the ability to search through hundreds of
thousands of records to identify potential problem brokers, and to closely monitor the
activities of selected brokers so that they do not have an opportunity to develop into full
blown problem brokers. In essence, the function of the CRD will be transformed from a
pure licensing tool to a regulatory aid and public disclosure system.

Key changes contemplated by the CRD overhaul include:

O Dramatically improved capabilities to monitor and track the activities

of selected brokers and firms. Perhaps most significant from the
perspective of state regulators is that once the redesign is complete, states
will be able to manipulate the data contained in the system based on their
own needs. Currently, there is no opportunity for regulators to generate
specific tracking reports or other information. Under the redesign plan,
regulatory users will be able to select or "profile" the information they wish
to review. In this way, the user will be able to customize the data presented
-- both the nature of the information and the order in which it is presented
- to further streamline and tailor the regulatory review process. The
reconfigured system will enable regulators to review an applicant's record
immediately after filing, and to set up their local systems to flag filings to
alert them to disclosures of public information of particular interest. This will
allow regulators to create profiles of applicants that will always receive
special or heightened review.

Enhanced clarity in the presentation of the information. There is
agreement among all CRD users that, in the redesign of the system,
disciplinary information should be reorganized and presented in such a

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manner that properly categorizes the type and nature of the information
being conveyed. Data redundancy will be eliminated as filers will use
existing CRD data as a starting point for making a filing. Only new or
updated information will be delivered to the CRD, with Information that is
already complete and accurate being confirmed, rather than being
resubmitted. All information relating to a particular type of matter will be
grouped so that multiple disclosures relating to a particular type of matter
(i.e., criminal information, sanctions by different types of regulators, financial
information, customer complaints) will be viewed in the same area of the
record. The information will be further categorized to show whether the
action is pending or has been adjudicated or dismissed.

o Significant improvements to the system's use as a "public information
tool." Although originally intended to serve strictly as an internal licensing
tool for state securities agencies and industry self-regulatory organizations,
the CRD database now serves as a primary source of Information for
investors to learn about the disciplinary and employment history of
stockbrokers. Now that it is well understood that the information about a
broker's background and disciplinary record contained In the CRD system
is of real value to investors, great care is being taken to improve the clarity
and presentation of that data so that it will be of maximum use to investors.

State securities regulators, individually and collectively through NASAA, are committed to
providing investors with the information they need to make informed decisions in their
selection of a broker or brokerage firm. Indeed, it was state securities regulators who first
recognized the potential of the CRD system to serve as a "early warning system" for
investors. As a result, NASAA and many of its members began in the mid-to-late 1980s
to aggressively publicize the fact that investors could call their state securities
agencies to determine the employment and disciplinary history of individual
stockbrokers.'

' Testifying before this Subcommtttee in September 1989. then-NASAA president John Baldwin
explained the Importance of publicly disclosing the disciplinary history of brokers and firms by using the
examp>le of one major penny stock brokerage firm:

Perhaps some people would be more reluctant to tun) ttieir money over to a penny stock
brokerage firm if they knew beforehand that the firm, for instance, has been the subject
of at least 35 regulatory actions in 29 states since 1979, including fines, license denials,
cease and desist orders, injunctions, suspensions/revocations, and probationary and
conditional registration, as well as the subject of a number of NASD and SEC actions.

(Penny Stock Market Fraud . Hearings Before the Subcommittee on Telecommunications
and Finance of the Committee on Energy and Commerce, House of Representatives, One
Hundred First Congress, First Session, Serial No. 101-80, p. 138.)

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The Penny Stock Reform Act required the NASD to establish a toll-free number for the
purpose of providing investors with access to a stockbroker's disciplinary history. One
year later, the NASD unveiled its toll-free phone service (1-800-289-9999) for investors to
request a background search of securities brokers and firms. Today, investors may call
either their state securities agency or the NASD to access background data on a
particular stockbroker or firm. Fifteen state securities agencies'" have established their
own toll-free numbers for state residents to call to learn about the background and
disciplinary information of brokers and firms. NASAA and the individual states will
continue to use every opportunity available to them, including the news media, speaking
engagements, and public statements to alert consumers to this service. It is the hope of
NASAA and its members that, as a result, informed investors will avoid unscrupulous
operators and thus protect their hard-earned funds.

NASAA and State-Level Investor Education Initiatives

A pillar of NASAA's efforts to protect individual investors is an aggressive and innovative
investor education program. Because state securities regulators serve as the front line
of defense for small investors, we generally are the first to spot emerging trends and
potential trouble spots early on. When confronted with new data suggesting a developing
concern for investors, state securities regulators, through NASAA, move quickly to alert
the public to the dangers posed by the particular scheme.

For example, it was the state securities regulators who moved out with the first warning
to investors about investment scam "potholes" on the information superhighway. In a
"NASAA Investor Bulletin" released this past June, NASAA warned that unwary investors
are in danger today of "being taken for a ride on the information superhighway." The
concern: a dramatic increase in illicit investment schemes flourishing on commercial
bulletin boards (such as Prodigy, America Online and CompuServe) and the informal web
of computer networks that make up the Internet. In conjunction with the release of the
Investor Bulletin, NASAA also announced that the Missouri Securities Division and the
New Jersey Bureau of Securities were taking the first regulatory actions in the U.S.
against online investment schemes. At the same time, NASAA expressed a hope that
cyberspace can realize its enormous potential to empower investors, helping them
become much sawier consumers.

'° These 15 states are: Rorida, Illinois. Mississippi. Missouri, Montana. Nevada, New Hampshire, New
Mexico, North Carolina. North Dakota. Pennsylvania, Utah, Virginia, Washington and Wisconsin.

133

Over the past several months, NASAA has issued Investor Bulletins on topics ranging
from mutual funds sold at banks, how older Americans can avoid investment fraud and
abuse, wireless cable fraud, and CD alternatives.

NASAA also has recognized that in instances where investors in large numbers may be
in need of assistance, such as the "Black Monday" stock market correction in 1987, and
more recently in the wake of the announcement of the Prudential settlement and claims
fund, these individuals benefit from a centralized source of information. In both these
instances, NASAA established a temporary toll-free hotline for investors to call to get
needed information. On October 21, 1993, NASAA established a toll-free hotline to
provide investors with information about the Prudential settlement and how to make a
claim on the fund. More than 7,500 investors flooded the settlement hotline with calls
during its first 72 hours of operation and more than 42,000 callers were assisted during
the four weeks the hotline was operational. Previously, on November 9, 1987, NASAA
unveiled a hotline to handle complaints of broker misconduct in relation to the "Black
Monday" stock market correction. The hotline took in more than 15,000 calls during the
first three months of its operation.

The Investor Protection Trust

Recognizing that the budgets of most state securities agencies are stretched thin carrying
out the regulatory and enforcement mandates of those agencies, state securities
regulators have turned to creative approaches to funding the extremely important
investor education initiatives NASAA members believe are critical to the protection of small
investors.

Most significant among the state efforts in this regard is the "Investor Protection Trust,"
organized in late 1992 in the wake of the multistate settlement with Salomon Brothers for
self-confessed misconduct in the Treasury markets. The Trust was created with the
explicit intention that it would help to meet the investor protection and investor education
needs of state securities agencies. Five state securities regulators serve as trustees and
oversee the operations of the Trust.

The first major project undertaken by the Trust was a television and radio public service
advertisement (PSA) package warning consumers about the threat of investment fraud
and how to avoid it. The PSAs were customized for local usage and included the phone
number of the local state securities agency. Airing of the spots first occurred during the
months of June and July of this year and received excellent pick-up across the nation.
The preliminary numbers showed that the television PSAs were aired on commercial

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television more than 6,499 times in 129 markets in 40 states. The radio PSAs aired
approximately 53,751 times in 285 markets located in 43 states. This combined 60,000
airing of the PSAs, at an advertising worth of more than three million dollars, simply would
not have been possible to attain if the states had to rely on their own budgets to carry out
such activities.

The Investor Protection Trust has a solid core of planned investor education activities for
the coming months and years. Given the subject of this hearing. Subcommittee Members
may be interested to know that next on the drawing board for the Trust is a 25 minute
video on "Investor Rights and Remedies: A Guide To Arbitration And Avoiding Problems
With Brokers," to be narrated by Court TV dean of correspondents Fred Graham, the
former Supreme Court reporter for CBS News. Projects for the Trust were identified by
surveying state securities regulators to zero in on the areas in investor education about
which the greatest number of state securities regulators expressed the greatest need.

Not only does the Trust have the wherewithal not enjoyed by the individual states to
undertake such projects, but there is a considerable economy of scale that can be
achieved by carrying these projects out on a multistate basis.

ill.

RECOMMENDATIONS FOR ACTION

Mr. Chairman and Members of the Subcommittee, the solution to the rogue broker
problem will require regulatory action, enhanced supervision and oversight by the firms
themselves, and education of individual investors. We must work together - policy
makers, industry representatives, regulators and officials from self-regulators -- to find new
and more effective ways to deter, detect and discipline abusive brokers. No one
becomes a rogue broker overnight. It happens over time if the abuses are allowed to go
unchecked. We should create disincentives to the industry -- both in terms of finances
and reputation - for hiring and retaining these individuals. Likewise, by doing more to
expose the backgrounds of wayward brokers, over time we should succeed in reducing
their appeal to investors.

NASAA commends Chairman Levitt and the SEC for their recent initiatives focusing on the
issue of rogue brokers. We hope to work cooperatively with this Subcommittee, the
Commission and others to bring about needed changes in this area. NASAA also wants
to recognize the firms that have stepped up the monitoring and supervision of their
brokers. The recommendations offered here today are a recognition that we all can do
more to better protect investors, to head off potential scandals, and to help maintain a
high level of investor confidence in the integrity of the financial markets.

135

Broker Files Should Be Directly Available to the Public

As discussed previously, the Central Registration Depository (CRD) licensing system for
brokers and brokerage firms is now being overhauled so that it will be a more useful tool
for regulators and the investing public. NASAA recommends the broker disciplinary data
in the redesigned CRD system be made directly accessible to the public, much as
paperless filings made to the SEC's EDGAR system are now available via the Internet.
Direct and uncensored public access to CRD disciplinary files would mean speedier
access to critical information for investors and also would dramatically turn up the heat
on problem brokers. More than six million U.S. households now have access to
commercial online services and the Internet and that number is likely to double in the next
few years. The fact that EDGAR on the Internet has come to be used so extensively
suggests to us that the next logical step in empowering small investors is to put the CRD
online for the public.

Already, EDGAR data can be tapped into through some Internet access providers by a
few simple keystrokes. We envision a day a year or two ft'om today when an investor will
go to his or her computer at home or a terminal in a public library and download both the
EDGAR filings about a potential investment and the CRD disciplinary files that will indicate
whether or not they have been approached by a problem broker. We are unaware of any
technological obstacle or legitimate public policy concern that should be permitted to
stand in the way of eventually putting CRD disciplinary data online for the public. If we
assume that the public can understand the legal mumbo-jumbo contained in the 10-Qs
and 10-Ks available on EDGAR, then deciphering revamped CRD files will be child's play.

Mr. Chairman, you were Instrumental in seeing to it that the EDGAR information was
made available on Internet. This was accomplished despite the many hurdles involved
in the cost of purchasing information that already had been sold by the government to
a vendor service. We will face no such obstacles in the case of CRD information, and as
a result, it is NASAA's expectation that the cost of making the information available on an
online basis would be minimal. And, for those who are less familiar with "cyberspace,"
be assured that the information would be provided on an "as read" basis to protect
against any potential tampering of the records.

NASAA would not be recommending that this information be made directly available to
the public if we were not in the process of completely overhauling the CRD system,
particularly with respect to the way in which the information about brokers is captured and
presented. NASAA is not insensitive to the due process concerns often raised by the
industry about unproven complaints or allegations that may make their way into the

136

database. Currently, state securities regulators, NASD officials, SEC representatives, and
industry members are meeting to try and hammer out final agreements on the information
to be collected and disseminated via the CRD system. Whatever the outcome of these
discussions, it is contemplated that the information will be presented in a dramatically
more comprehensible fashion and with greater clarity. For example, the information about
regulatory proceedings, customer complaints, and judicial actions will be clearly captioned
as to whether they are pending or have been adjudicated or dismissed. When discussing
this issue in the past with consumer group representatives, NASAA has been assured that
these organizations would do all they could to educate their members about how to
evaluate and interpret that information, if it were available. Lil<ewise, NASAA and the
states will do everything possible to make sure investors understand the information with
which they are presented.

Finally, the SEC has recommended that the SROs adopt rules requiring member firms to
disclose to investors when opening new accounts and prior to effecting any transactions,
the availability of information about the background and disciplinary history of the broker.
You will recall that NASAA first recommended this type of approach in testimony before
the Subcommittee in 1987," however we took it one step further and recommended that
the broker and the firm be required actually to provide this information, rather than merely
suggest its availability. NASAA is pleased to see that others now recognize the validity
of such an approach and we look forward to working cooperatively to effect such change.
If it is determined to simply notify the investor of the availability of the information, NASAA
would suggest that the investors be told not only of the availability of the information
through the NASD's hotline, but also that they may call their state securities agency.

NFA-Style "Bad Broker Profile" Needed

When Hibbard Brown, the New York-based penny stock firm, had its business shut down
in July, 1994, some of its brokers quickly found new homes at large, established Wall
Street firms and at smaller brokerage houses across the country. Although these
individual brokers may not have had any disciplinary history, it should give regulators and
the industry pause when the background and training of these individuals is considered.
It is NASAA's position that firms that hire from brokerages that have been shut down by
regulators should be required to put enhanced supervisory procedures in place to ensure
that these brokers are dealing properly with customers.

" Statement of James C. Meyer, president. NASAA, before tfie Subcommittee on Telecommunications
and Finance, Committee on Energy and Commerce, US. House of Representatives, December 16, 1987.

137

NASAA recommends that Congress, the SEC, the states, and the NASD explore the
imposition of a "bad broker profile " similar to the system recently put in place by National
Futures Association (NFA), the industry wide self-regulatory organization for the
commodities marketplace. The NFA rule, referred to as the "telemarketing profile," was
put in place in January 1993 and is credited by NFA with reducing by almost 50 percent
(from 22 to 12) the number of commodities firms where 25 percent or more of the sales
force consists of brokers previously employed at problem firms.

Special internal oversight responsibilities are imposed on every NFA member firm that
draws 25 percent or more of its sales force from firms that have been closed for fraud
and abuse. Ttie primary supervision tool required by NFA is a requirement that all
telephone sales solicitations of new customers must be tape recorded. The taping must
continue for one year and the tapes have to be saved for at least six months. NFA
officials have the right to inspect the taping systems and actual tapes on demand.
Targeted firms failing to satisfy the taping requirements are subject to NFA disciplinary
sanctions, including suspensions, fines up to $250,000 per violation, and expulsion from
the industry.

The attractive feature of the NFA system Is that It recognizes the fact that problem brokers
who stay in the industry move from firm to firm. The NFA model also puts the burden
squarely on the shoulders of the firms to keep their ranks as clean as possible, which
most likely would result in problem brokers experiencing much more difficulty when
seeking new work. This precisely as It should be; brokerage firms should start thinking
twice before embracing rogue brokers. Furthermore, the profile rule recognizes that even
potentially "clean" brokers may require additional supervision and monitoring if they
received their training from a so-called problem firm.

Several states already have moved on an informal basis to more closely scrutinize brokers
migrating from problem firms to other brokerages. It may be time to implement an
across-the-board rule of this kind. While the NFA approach is offered here today as a
model, NASAA recognizes that it likely will have to be adapted to recognize the different
circumstances involved in the securities marketplace.

Enhanced Supervisory Responsibilities and Tougher Sanctions

The SEC, in its report on the large firm project, recommended that brokerage firms be
more aggressive in scrutinizing the past history of registered representatives and establish

policies and procedures designed to prevent and ensure that brokers who have a history
of customer complaints are more closely supervised. If the firms do not take on this
responsibility on their own, they should expect to have it imposed by regulators, if the

138

trend from the states is any indication. As discussed previously, state securities
regulators increasingly are requiring stepped-up supervision by firms over potentially
problem brokers. It is expected that the revamped CRD system will provide the states
and the self-regulatory organizations with a far more effective tool to monitor the activities
of selected brokers and to move quickly in the event that problems arise.

The SEC also has recommended tougher sanctions when brokers engage in serious
sales practice violations and for recidivists, including "more permanent" bars imposed
against chronic offenders. Again, NASAA strongly agrees with this recommendation. In
fact, in testimony submitted to this Subcommittee in conjunction with the 1989 hearings
on penny stock fraud and abuse, NASAA suggested that the permanent ban in the
securities world should made more effective than its counterpart in major league baseball,
where ballplayers who are allegedly "permanently" barred in some instances are allowed
to apply for reinstatement after just one year.

A final point on this subject stems the issue of stays that may be granted when regulatory
or self-regulatory organizations shut down a brokerage firm. Under current practice, a
stay of the regulatory order may be imposed while the decision is under appeal. NASAA
would recommend that the administrative procedures clearly state that the bar will be
honored, despite an appeal, unless an administrative law judge determines that the SRO
or regulators clearly have misapplied the law. One of the most notorious and abusive
penny stock firms was allowed to continue in business long after regulators took action
by exploiting these types of loopholes. While NASAA is mindful of the due process
considerations that must be observed in such proceedings, the Association believes that
protections can be built into the process to ensure its fairness. After all, it is not as
though a bar on a firm or on a broker is entered into lightly or even frequently.

Tighter Reporting Requirements

A number of issues have arisen in connection with the responsibility of brokers and firms
to accurately and in a timely manner file all reports mandated by government regulators
and self-regulatory organizations. The SEC's Directors of the Divisions of Enforcement
and Market Regulation have accurately pointed out that the Forms U-4 and U-5 (Uniform
Notice of Termination) form the backbone of the system used for identifying and
monitoring trouble spots. As a result, the SEC has called for enhanced compliance by
the firms and brokers with these filing requirements. NASAA agrees and would suggest
that, if necessary, the penalties for failing to file these forms accurately and on time should
be increased.

There also seems to be growing support for some kind of qualified immunity for firms in

139

terms of their reporting on Form U-5. Firms are required to disclose on this form whether
a termination is voluntary or not, and whether the broker is the subject of customer
complaints or an investigation. Firms have complained that they are subject to liability If
they report accurately, while brokers have complained that they have been libeled by
statements made on the form regarding the characterization of their termination. Because
Improved disclosure on these forms could substantially assist regulators in policing for
serious sales practice violations, NASAA recommends that this issue be resolved. A
concern of NASAA's is that there are indications that some firms file customer complaint
amendments for a former broker but not a current broker.

For example, a former Dean Witter branch manager won a million dollar arbitration against
the firm for what the manager alleged were false filings on the U-5.'^ That branch
manager claimed -- and the arbitrators agreed -- that the firm demoted and defamed him
after he tried to stop employees from forging customers's signatures. After the
employees complained about the branch manager, hew was demoted and later fired.
The U-5 filed by the firm stated that the manager was dismissed because he was
suspected of fraud. The arbitrators upheld the manager's objection that the statement
was false and defamatory.

Similarly, some states have seen evidence that some firms are only reporting customer
complaints or disciplinary problems at the point In time in which the broker is switching
firms. As a result of these types of cases, It is NASAA's view that any grant of qualified
immunity must be coupled with tougher enforcement of filing requirements. If you give
a firm immunity without some kind of additional regulation, you are effectively giving them
the ability to pick and choose about whom they report complaints. Immunity is only part
of the equation.

Industry "Continuing" Education

After more than four years of debate, the industry announced on August 15, 1994, a
program intended to improve the skills of brokers, traders, and other financial
professionals in an effort to raise the level of professionalism and service provided to
investors. This two-part program will include a regulatory component and a firm
component. The regulatory component will be required of all professionals who have
worked in the industry 10 years or less. These individuals will have to take part In a
computer-based training session in their second, fifth and 10th years as licensed
professionals. Under the firm component, all brokers, regardless of how long they have
been in the business, will have to review on an annual basis the various financial products

'^ Scot Paltrow, "Dean Witter Faces Probe, Judgement," Los Anoeles Times. October 2, 1993, p. B7.

140

that their firm sells. It is NASAA's view that this education program has the potential to
be a truly positive development and should move forw^ard.

Meaningful Remedies for Defrauded Investors

Any talk of problem brokers naturally leads to a discussion of whether the remedies for
defrauded investors are adequate. Without getting into subjects that rightfully could
consume additional full hearings, NASAA respectfully recommends that when Congress
returns next year, this Subcommittee take a fresh look at recent developments in
securities industry arbitration to ensure that investors are being well served in these
forums. In addition, NASAA continues to oppose H.R. 417, the "Securities Private
Enforcement Reform Act, " which we believe would severely undermine the effectiveness
of private securities actions.

IV.
CONCLUSION

Mr. Chairman and Members of the Subcommittee, you are to be commended for focusing
attention on the important investor protection issues that arise out of the presence within
the securities industry of recidivist rogue brokers with histories of sales practice abuses,
customer complaints, arbitrations, lawsuits or other significant disciplinary problems. The
issue of rogue brokers affects the lives of small investors in a very real and direct way.
In addition, the continued presence of these individuals in the securities industry has the
potential to shake even further the confidence of the public in our financial markets, as
incidents of wrongdoing (or even widespread scandals) unfold and become known.
NASAA and its individual members will continue to do all we can to screen out such
individuals and to educate the public about investing. The Association also expects to
work in close cooperation with this Subcommittee, the SEC, the NASD, the other SROs
and the industry to bring about needed changes in this area.

Thank you.

141

Mr. Markey. Thank you very much.

Now we will turn to questions from the subcommittee members
to the witnesses, and the Chair will recognize himself first for a se-
ries of questions.

Let me first note, if I could, that the vast majority of transactions
now, in terms of volume, are institutional — that is, very large so-
phisticated institutions dealing with very sophisticated products.
There is much less need for protection for those institutional trans-
actions than there is for Mrs. Murray or Mr. Steenstra, who is
making a different set of decisions — that is they are being sold by
a retail broker a particular product. This is a very good stock, Mrs.
Murray. You should buy this. And here are two or three or four
other stocks that are very good, and I guarantee they are going to
be going up in value over the next year. I am putting my own
grandmother into these stocks, so I wouldn't steer you wrong. That
is a different set of issues from the institutional traders, who are
basically dealing with very sophisticated purchases of these prod-
ucts on the other end of the deal.

So that when we are looking at the number of arbitration cases
compared to number of trades, it can sometimes misrepresent the
overall state of the securities industry in 1994 if we don't exclude
those large institutional trades where there are sophisticated pur-
chasers and sellers, for the most part, on both sides of every single
trade.

We are concerned here with the industry, the way it existed 25
years or 30 years ago and still exists in the lives of Mr. Steenstra,
Mrs. Murray and millions of others in America where they are just
transacting with an individual broker on individual stocks. Those
are the problems that we are primarily focusing upon and we think
that there are still significant problems out there.

As Mr. Steenstra said 2 percent of the brokers misleading 2 per-
cent of Americans in their purchase of stocks becomes a significant
problem potentially for tens of thousands or hundreds of thousands
of Americans. So we are trying to find a way to ensure that the
bad guys, those that have abused the process, abused investors, are
in fact disciplined in a way which makes it unlikely that they will
repeat their activity but also sends a strong message to the other
98 percent that they shouldn't be tempted to engage in that kind
of activity, because the punishment is swift and sure for those that
violate investors' trust. I guess that is the context in which this
hearing is being conducted. And in a way, we not only protect in-
vestors but the other 98 percent of the brokers who are good peo-
ple, good, solid, honest men and women who are making a living
trying to sell stocks to individuals, both to the benefit of the broker
but also for the individuals so their wealth will increase.

Let me turn to you first, Mrs. Murray, if I could. You prevailed
in your claims against Mr. Swirsky and Prudential, and the Na-
tional Association of Securities Dealers Arbitration Panel reached
a very strong conclusion that Mr. Swirsky and Prudential behaved
improperly in the handling of your money. Now, in light of that,
what is your reaction to the fact that there has been no subsequent
enforcement action taken against Mr. Swirsky or his former super-
visors at the firm and that Mr. Swirsky is still in the securities

142

business without any enforcement action having been taken
against him to date?

Mrs, Murray. I am appalled by that fact.

Mr. Markey. Expand, please.

Mrs. Murray. I think that a person who has a position of trust
should be trustworthy, and I don't believe that he was.

Mr. Markey. Well, how confident can you be then as you would
consider making further investments in the marketplace, that the
next broker you would deal with might just be another Mr. Swirsky
who has never been disciplined?

Mrs. Murray. I don't know the answer to that one, sir.

Mr. Markey. Would you feel confident about getting back into
the marketplace?

Mrs. Murray. No. I don't feel that I have enough knowledge of
the market. I didn't do any of this myself. It was my husband's
doing in the first place and he had Mr. Swirsky, and I just went
along with him, and I kept saying whatever you say is fine, but I
do want more income.

Mr. Markey. Are you talking to your husband or Mr. Swirsky
when you say, whatever you want to do?

Mrs. Murray. Mr. Swirsky. He called and told me what he want-
ed me to do, he kept assuring me that more income would be forth-
coming. It never did. It just went down.

Mr. Markey. What were the words that he would use to convince
you that more income would come in? What would he say to you,
for example?

Ms. Murray. Just that he believed a certain company, such as
Data Switch, was a growing company and that it would be produc-
ing more income for me. So I said, well, if that is what you believe,
I accept it.

Mr. Markey. And you trusted him because your husband had
trusted him?

Mrs. Murray. Correct.

Mr. Markey. How many years did this go on before you began
to question whether or not your money was being properly in-
vested, whether it was safe, whether it would be there for you in
your retirement years?

Mrs. Murray. It was about 5 years, sir.

Mr. Markey. About 5 years. Why did it take so long?

Mrs. Murray. I think because, although I realized I wasn't get-
ting the required income, I didn't know where to turn. I had trust-
ed him. My mother before my husband had a broker whom she
trusted and relied on his word as his bond. And I just had been
misled and didn't know where to go. My tax preparer was the one
who alerted me to the fact that something should be done.

Mr. Markey. So even to this day, then, you feel that there hasn't
been a proper set of sanctions or disincentives given to Mr.
Swirsky?

Mrs. Murray. I certainly do.

Mr. Markey. If others are dealing with him now, what would
your Latin message to them be?

Mrs. Murray. Caveat emptor.

Mr. Markey. Let me move to you, Mr. Steenstra.

143

You estimate that your sister-in-law lost $97,000 as a result of
Mr. Bandyk's activities, but I see that you ultimately settled for
$47,000, not $97,000, due to concerns about arbitration costs. As I
indicated earlier, it was not until May of this year that the SEC
brought a complaint against Mr. Bandyk. How do you feel about
the fact that it took 3 years from the point at which your sister-
in-law settled the complaint with Mr. Bandyk for the SEC to bring
charges against Mr. Bandyk?

Mr. Steenstra. I think that is really the key to this thing, that
if the action is much more swifter and quicker it is going to keep
other people from hurting. I think we were quite amazed that it
was just about 3 or 4 months ago an article appeared in the local
paper that his license was revoked. Nancy filed a complaint and got
attorneys involved in June of 1990 and we found out that he had
left a trail of these kinds of things in the previous 8 years that he
had been in the stock broker business.

Mr. Markey. Meaning there were other investors complaining
about the activities of this broker?

Mr. Steenstra. That is correct. What happened is that the com-
pany that Nancy was with was also Pru-Bache at the time, they
immediately became involved and tried to settle so it wouldn't go
beyond their own agency. Then I find out that it wasn't until the
broker filed bankruptcy so he would not be liable for any claims
that the brokerage firm would lay on him, consequently it became
of notice to the State regulators.

Mr. Markey. Do you feel, having studied your own personal case
and now learning a lot more about Mr. Bandyk's track record and
the number of complaints which had been brought against him by
others as well, that his supervisors had a responsibility to ensure
that he was not acting in a way that would endanger the savings,
the investment of people like you or any other person that was
dealing with Mr. Bandyk?

Mr. Steenstra. Very much so. I think that it is the supervisors'
and the individual firm's responsibility to screen out those kinds of
people, to set up systems to screen it out. In Nancy's case they no-
ticed that

Mr. Markey. Nancy, being your sister-in-law?

Mr. Steenstra. That is correct. Her account was turned over
about two times in the earlier few years, it went up to five times
in 1 year, and the following year, it was seven times. There ought
to be a system that points up that failure on the part of the agency,
I think, to screen that kind of a broker.

Mr. Markey. The agency, but also the firm.

Mr. Steenstra. That is what I mean, the firm.

Mr. Markey. Do you believe that charges should be brought
against the firm itself if they knew about this and the supervisors
inside of that firm allowed the activity to continue even though
they knew the multiple complaints that were being brought by
many investors who were dealing with the same broker?

Mr. Steenstra. I would think so. Personally, I feel that the firm
should be fined for situations like this.

Mr. Markey. That is helpful to us.

Let's turn to you, Mr. Pinto, if we could, so that we can deal with
the issues of the adequacy of enforcement protections which are

144

given to individual investors, the amount of information that they
are given, the track records of brokers who are problems within the
industry but potentially large generators of revenues for the firms
that they are employed by. I guess that is the dilemma for a lot
of these firms.

On the one hand, these brokers may be crossing the line endan-
gering the savings and investments of individuals, but on the other
hand, for a supervisor as they look at this individual, they are
bringing a lot of revenue into our firm, look at the commissions,
how much money it means to the firm. So there is a tension that
exists, the supervisor, the Exchange, as it looks at the individual
and the firm has to make some tough calls. It seems to me in lis-
tening to the previous two cases that they are pretty clear cases,
that there should have been an additional step taken to foreclose
the likelihood that there would be a repetition.

Why hasn't the NASD filed actions against Mr. Swirsky in light
of the findings of the NASD arbitrators in Mrs. Murray's arbitra-
tion case that there was a reckless disregard of the claimant's
rights and open disregard for the claimant's money, in the words
of the NASD arbitrator himself?

Mr. Pinto. Let me first address your opening comments. I don't
know that either of these individuals was related to the large pro-
ducers in the firms. I think the study that was done on the joint
investigations with the NASD New York Stock Exchange and us
showed that in fact there was no correlation between large produc-
ers and customer complaints.

With regard to specifically the situation that Mrs. Murray ref-
erenced, certainly I can understand her concerns and frustrations.
I am delighted that the NASD arbitration decision provided her
with full restitution of her monies.

Chairman Levitt in responding to a similar question said, and I
would concur, that there are times that investigations take longer
than you would like them to take.

I looked into this, and there is a little dispute as to when the in-
vestigation was initiated. According to our records, we began re-
viewing it in 1992 as a result of a termination for cause. You have
to understand, as we do an investigation we don't only examine the
one complaint for a particular customer. We will go in and conduct
an investigation, we will expand that investigation to encompass
other accounts of the particular representative.

If it appears that it is more pen^asive than an individual, we will
go beyond and look at the activity of the branch or office and we
always include a review for supervision. In this case, there were
over a dozen accounts that we reviewed. Once that matter was
completed, we conducted a review of activities of Mr. Swirsky at
the other firm and looked at in excess of 50 of his accounts to en-
sure that what we believe had transpired at his other firm hadn't
carried over to the new employer.

Did it take longer than I would like? Certainly. In looking at
where we are today, the matter is completed as far as the inves-
tigation. There has been a preliminary review by our Business Con-
duct Committee.

While I am not in a position as a staff member to say what will
emanate from the committee's review, based on what we see as a

145

result of the review, which happens to be unsuitable activity rel-
ative to investment objectives and the way the account was han-
dled, I would anticipate that a formal disciplinary action will be
filed against Mr. Swirsky, and I also anticipate, having reviewed
the information, that there is a strong likelihood that there will be
a disciplinary action involving the failure to supervise on the part
of that particular office.

Mr. Markey. The issue is this. I don't want to determine who
should be judged innocent, guilty, who should be sanctioned or not
sanctioned. My concern is that Mrs. Murray's harm occurred 4
years ago in terms of the resolution of her case. There is an indi-
vidual that had comments and a firm that had comments made
about it by the NASD arbitrators, that contended that the claim-
ant's rights had an open, reckless, disregard for their interest, that
Prudential's supervision of Mr. Swirsky was nearly absent, that the
firm was interested primarily in the substantial fees produced by
respondent Swirsky in this account, all of these conclusions 4 years
ago by the NASD.

We just get back to the question of justice delayed being justice
denied, both for Mrs. Murray and for Mr. Swirsky. It hangs out
there for 4 years as a cloud over him as well without some kind
of final resolution.

But from Mrs. Murray's perspective, she is saying caveat emptor
for 4 years to all who may be dealing with him because there has
not been a final resolution of this issue in terms of how the NASD
wants to restrict or limit in light of what happened in Mrs.
Murray's case.

That is the dilemma. I don't know how you should finally resolve
it. I don't want to recommend how you should finally resolve it. But
I do think it should have been resolved long ago, if only for the clo-
sure of an issue which casts a light upon the integrity of the mar-
ketplace.

So in light of the recommendations which you are considering. in
terms of reform of your procedures at NASD, could you tell the
subcommittee what you would give us as assurances in terms of fu-
ture handling of cases like Mrs. Murray's in terms of swift dispatch
of them, regardless of what the final disposition may be?

Mr. Pinto. I certainly would have liked to have seen this case
move along a lot more rapidly than it has. As you are well aware,
there is a large step between allegations and being able to substan-
tiate those in a disciplinary proceeding where you need to be able
to have documentation and evidence of the violation. One of the
things that has been a tremendous enhancement is something
mentioned in my remarks, is the fact that we have greatly en-
hanced the coordination between our arbitration department and
arbitration decisions that emanate, and the regulatory aspects of
the NASD both through better coordination, and more particularly,
changes in our rules, which were recently approved by the SEC,
clearly provide the capabilities of our arbitration panelists to make
referrals for regulatory investigation once a decision or a settle-
ment has been finalized in an arbitration case, and also reiterate
the authority of the arbitration staff to make referrals to the NASD
regulatory staff at any point in time during an arbitration.

146

I have always viewed the arbitration decisions as an area that
could greatly enhance the regulatory data that we utilize in focus-
ing our regulatory efforts. I think that is a major improvement.

Mr. Markey. We are not 4 years from the point at which Mrs.
Murray made an allegation. We are 4 years from the point at
which the NASD Arbitration Panel made a decision with regard to
the conduct in question. I think I would distinguish that from being
an allegation, which is what Mrs. Murray does, to something which
is far more conclusive on that individual issue, although not conclu-
sory with regard to what should happen to the individual broker
subsequent beyond reimbursement to Mrs. Murray. That is the
problem.

There is essentially already a process in place at NASD that has
led nowhere over the 4-year period that has transpired since the
decision. That is of concern to us because other investors are still
dealing with him without having the knowledge that Mrs. Murray
has about a conclusion which has been reached by the NASD about
him preliminarily and in an individual case, but perhaps more
tightly reining in his activities in general, subsequent to a further
reevaluation. So that is the dilemma I have.

Let me move on. On page 11 of your prepared testimony, you in-
dicate that in 1993, you changed your rules to permit an arbitrator,
once a case is settled or an award is rendered, to initiate a referral
to regulation for possible violations of NASD rules or the Federal
securities laws. Does that mean that arbitrators are required to
make such a referral in cases such as Mrs. Murray's where the de-
cision has been in favor of the investor, or does the arbitrator have
full discretion whether or not to make a referral?

Mr. Pinto. Since the time of Mrs. Murray's case, there have been
a number of initiatives with regard to the arbitration process and
how it interrelates with regulation. One thing that has been lack-
ing or not, as emphasized as it has been in the recent past over
the last year or so, is in the area of arbitration education. Edu-
cation of the arbitrators themselves can make them clearly aware
of their responsibilities if, in fact, during the arbitration process
they hear about conduct that they believe is violative of NASD
rules.

Now there is a statement that is read prior to each arbitration
hearing to make arbitrators aware of that responsibility. At the
end of the arbitration hearing, they are questioned by the arbitra-
tion staff to determine whether any issues came up during the ar-
bitration that seemed to require referral to a regulatory arm of the
NASD.

So, yes, I think the panelists that are hearing the arbitration
cases today are far more attuned to their responsibility — I don't say
it is discretion, it is a responsibility, we are telling them they have
to make referrals for regulatory follow-up and potential dis-
cipline

Mr. Markey. Just so I can more closely define what discretionary
powers of the arbitrator or of the staff working on a particular arbi-
tration may be, you are saying that in Mrs. Murray's case, when
an NASD arbitration panel rules in her favor, that it is still — even
after your 1993 regulations or processes have been put on the
books — it is still within the discretion of the arbitrator who made

147

the decision in Mrs. Murray's case as to whether or not there
should be a forwarding of the case on to an enforcement wing of
the NASD; so that as they are evaluating the sensitivity of the
broker at that time, their evaluation of his or her reaction to the
situation, they can determine whether or not they need to take fur-
ther action or they can recommend what counseling or reeduca-
tion — what is the substitute, in other words, for a referral to en-
forcement?

Mr. Pinto. There is a decision, someone has to make a decision.
They are reviewing the facts of each arbitration. Not every one of
the arbitration cases involve violations of securities rules.

When they are hearing the facts that are developed, they are re-
viewing whatever information has been submitted by the parties
that are subject to the arbitration, they make a decision based on
what they are hearing about whether there seems to be conduct
that violates securities laws.

Mr. Markey. In Mrs. Murray's case, was there a violation of se-
curities laws?

Mr. Pinto. Based upon the review that was done subsequently,
in my view, yes. And if at the time we had the same process in
place that we have now, that referral would have been made, I am
very confident of that, because the facts of the case seem to be fair-
ly straightforward. We would have gotten the referral sooner in the
process, and perhaps we were brought into the investigation with-
out that coordination between arbitration and regulation. The deci-
sion has to be made by the arbitration panelists about whether
there is a reason to make a referral. They do 5,000 cases a year
and not all rise to the level

Mr. Markey. Do you believe there should be an automatic refer-
ral if there is a violation of securities laws, a violation of a SRO
rule, should there not be an automatic referral?

I am not saying that at the enforcement that they have to take
action but at least to review it in order to make sure there has
been a full discussion of the issues that are raised by a decision
based upon a securities law violation.

Mr. Pinto. In concept, that is the purpose behind the arrange-
ment.

Mr. Markey. Give me an example, then, of where you think
there might be a securities law violation or an NASD rule violation,
but where there shouldn't be a referral, where there shouldn't be
a follow-up examination?

Mr. Pinto. I am not certain that there would be very many situ-
ations. There may be some situations, Mr. Chairman, where the
substance of the arbitration award has nothing to do with the regu-
latory side, and there might have been technical infractions, minor
rule violations that were not serious or substantive, where perhaps
the need to take regulatory action is not there. But where there is
a violation where the substance of the arbitration proceeding in-
volves sales practice-type situations, suitability, unauthorized trad-
ing, conversions, any of the serious sales practice abuses that we
are talking about today, I can't think of any instance where I would
not like to have a regulatory referral to follow up.

Mr. Markey. Thank you.

The gentleman from Texas.

148

Mr. Fields. I will be fairly brief. I have to catch a plane back
to Houston.

Let me ask you Mr. Lackritz, Mr, Pinto, Mr. Kwalwasser, even
though studies have found in the worst case scenario that 2 percent
of the brokers have had a single disciplinary action, I know that
none of you want an association with a broker-dealer that has had
the effect on people like obviously the person that had affect on
Mrs. Murray and Mr. Steenstra's sister-in-law.

As I understand, each of you have addressed the problem within
your own system and that you are enhancing your system to ferret
out and discipline in a quick manner, those who have broken the
laws or have acted in a fraudulent manner.

Could you summarize the enhancements that you are making to
your system to address this particular problem?

Mr. Lackritz. Sure. Thank you for the opportunity to describe
that. First of all, let me just begin with the premise, we don't want
bad brokers in the securities industry. It is not in our interest. It
is not in the consumer's interest, it is not in the public interest. So
we share with the subcommittee, the self-regulators and the SEC
the desire to rid our industry as completely as we possibly can of
any bad brokers.

I think it is important to keep the problem in perspective though,
and I think that is why the numbers, the data help to do that in
terms of identifying what I think is a very tiny fraction.

We are trying to do better in keeping that tiny fraction down.
First, we are investing millions of dollars in enhanced compliance
systems and supervisory systems in the firms. A number of the
firms have already invested literally millions of dollars.

In terms of training new brokers, one of our firms spends
$50,000 to train every new broker that has been brought in. An-
other firm just reported that they spent $40 million to train 1,200
new brokers that have been brought in.

In addition to that training, we now have a mandatory continu-
ing education requirement that is going into effect over the course
of the next year that has both a regulatory component and a firm
component, and in that, it requires every professional in the busi-
ness to get that kind of training and continuing education, to keep
current with regulatory developments and to keep current with
new developments with respect to products and services.

Moreover, there are improvements that could be made with re-
spect to reporting and disclosure of information, which I have out-
lined in a little more detail in my written testimony, that involve
helping to rebuild and improve the central registration depository.

We support the new effort by the NASD to set in motion a sys-
tem like the Rule 351 system that the New York Stock Exchange
has in place for reporting of customer complaints, and in an effort
to make more of that material and more of that information avail-
able to regulators, to improve their examination process, and to im-
prove their audit process.

Now, have we got a perfect system? No. Obviously we don't have
a perfect system and the evidence of that are the individuals that
are testifying here today and the other cases that are out there.
But are we doing — we think we are doing a good job. We are trying

149

to do a better job and we are trying to improve the performance
that we have had so far,

Mr. Pinto. Thank you. I think some of the areas that Mr.
Lackritz mentioned, certainly the continuing education where the
NASD has been very proactive over the years in trying to develop
ongoing education for the securities industry, is important.

I think one of the major things that is extremely valuable in this
whole process has been mentioned many, many times, but it can't
be overemphasized and that is the complete redesign of the CRD
system.

The criticism of the system is from the point of view of what it
was originally designed to do and that was just a registration sys-
tem. It does what it was designed to do. However, the needs that
v/e have for the information in there have far outgrown the system.

We are redesigning it so that it will become a very active surveil-
lance and regulatory tool for members and for regulators to use,
not only in being able to more timely identify problem reps, firms,
branches, but to be able to focus the investigative efforts that we
have and be able to target those firms and be able to address is-
sues a lot sooner in the investigative process than we are today.

And we are also looking, Mark mentioned the Rule 351. We
think that is going to be a valuable tool. We will be getting mate-
rial event reporting as well as customer complaint statistics under
this new rule that we will be going to our board with. I think we
are also making a major initiative to see how we can better utilize
technology in order to help us do a more effective examination as
we go and conduct field inspections of our members.

Mr. KwALWASSER. I would like to start off by saying that sales
practices are not new to the New York Stock Exchange and it is
not since May of 1994 that the Exchange has started to implement
the process of examining for abusive sales practices, and in fact, if
you look at the SEC's report, most of the recommendations are that
other SRO's conform to rules which the Exchange has had for sev-
eral years.

That being said, we do think that it is important to continue to
upgrade our systems and our rules. We have added additional sales
practice examiners. We have increased the number of examinations
that we do in the sales practice area. We continue to spend sub-
stantial resources in upgrading automation of those areas.

We have determined not only to look at all complaints, but we
have given them a weighting so that when a — any salesperson com-
plaints reach a certain weighting so that we don't say all com-
plaints are the same, but when serious complaints come in, we will
go out and do an immediate examination of that person rather
than wait until he comes up in our examination process.

I might also say that the 2 percent number that has been given
out, and that was in the GAO report I think, had the GAO's eye
on the wrong ball. We are not really interested, at least the New
York Stock Exchange and I, are not really interested in people who
have had disciplinary incidents in the past and are no longer vio-
lating customers' rights. We are interested in sales people who are
abusing customers today, whether they had any prior disciplinary
history or not.

150

The point of all of our sales practice, examinations, whether it
is the firm's compliance procedures or the SRO's' oversight, should
be to prevent sales people from abusing customers, and we think
that that is what we do and that is where we ought to keep all of
our resources.

Mr. Fields. Mr. Perkins made the point that even though the
statistical evidence shows that we are talking about a small per-
centage of broker-dealers, even that small percentage does affect
the credibility and affects the overall image of the industry, and I
know you — or I would assume you agree with that point.

Chairman Levitt came before us earlier and talked about what
his vision is and what he would like to accomplish, and increasing
the investor protection, and he talked about enforcement, informa-
tion, access to information and then supervision, and it seems to
me that when you talk about enforcement and you talk about su-
pervision, you basically get to the point of needing good information
and then you get to the question of who has access to that informa-
tion, and the question I wanted to ask you was in regard to infor-
mation, and particularly in regard to the CRD, and Mr. Pinto, you
said just a moment ago that there needs to be a complete redesign
of the CRD, and if I remember what you said earlier in vour testi-
mony, and the same to you, Mr. Lackntz, you actually talked about
a bifurcated system where you would have one stream of informa-
tion going to regulators and one stream of information going to the
investing public, and I was going to ask you to expound on that if
you could, and if you could add to that how that is affected by the
open records statutes of various States.

Mr. Perkins, I might ask you to join in after they have responded
to that point.

Mr. Lackritz. With respect to the information that goes into that
system, because it has to be made available to the public, we think
that the only information that should be in the system that is
available to the public are completed disciplinary actions or re-
solved complaints, not mere allegations.

If you make all the allegations that go into the system available
on a broad basis, then you have run the risk of really hurting and
destroying the reputation of lots of people, in fact, who have not
been found to have done anything wrong.

But nevertheless, that kind of customer complaint information
ought to be available to regulators so they, in fact, have adequate
use of that information for targeting investigations and targeting
examinations. But we would strongly oppose making mere com-
plaints available to the public as opposed to completed action.

Mr. Fields. Let me just ask you to also respond to the open
records part of that, that if that is made available to a regulator,
as I understand the open records statutes of some States, if it is
made available to Mr. Perkins, that in essence is going to be made
available to the public and consequently does that need to be dealt
with by the SEC or would it take some type of Federal preemption
coming from a statute?

Mr. Lackritz. I suspect it would take Federal preemption com-
ing from the statute, or the States would have to deal with it spe-
cifically and adjust those open records statutes or it would require
some preemptive legislative action.

151

Mr. Pinto. Yes, I am not certain about the State laws as to
whether the open records and pubUc disclosure requirements would
pertain to information that is obtained for purely regulatory pur-
poses from a separate database in the same vein as it would in a
system that they are actively participating. That is something that
we would certainly have to look into because there is no question
about the importance of the data.

That is the point I was trying to make. It is very important infor-
mation. Whether these are unsubstantiated or undocumented
claims where it might not be in the issue of due process or fair to
publicly disclose all of this information, it certainly is valuable reg-
ulatory data that we need to see as we look to where to target our
resources and to have a feel for, you know, what particular
branches or firms or reps are getting a preponderance of customer
complaints.

You have to put it in perspective. We probably average about
4,000 customer complaints a year, and we get about 3,500 or so ter-
minations for cause. I know the New York Stock Exchange gets a
large number. So there is a lot of data that is coming in and you
really need to be able to take that and use it in the most effective
way to help fme-tune your surveillance and regulatory programs,
but to publicly disseminate every one of those unsubstantiated cus-
tomer complaints — I don't see that helping disclosure, and I don't
see it fitting with issues dealing with due process and privacy, and
I certainly don't see it improving the regulatory process.

Mr. Perkins. When you start dealing with this issue of disclo-
sure of information, I, since the days that I was the chairman of
the CRD committee in NASAA, have urged a format be adopted on
CRD to inform people as to what this information means.

I mean, anyone who has looked at the CRD system at the
present time sees a hodgepodge of information. The redesign will
go a long ways towards trying to address those types of concerns.
This is extremely important information. It is important from a
regulatory standpoint certainly. I mean, we take action based upon
those types of filings.

Somehow or another we have to together arrive at a solution
however that deals with the problems that these individuals have
because if we create a bifurcated system, my question to you is,
how soon will it be when one of these people have a problem, and
I was asked — I mean, we encourage, one of the things, we have got
a toll free number at the NASD. We are trying to get greater
consumer responsibility, I think was the phraseology you used re-
garding this, consumer responsibility to check out these types of of-
ferings, to check out the people who they are dealing with.

What happens when Mrs. Murray calls my office and says, I
would like to check out Mr. Perkins, and I go to the CRD system
or the public — whatever the public area is and I say, well, Mrs.
Murray, I don't have any information. There are no complaints
here, but I know in my database over here there are 15 customer
complaints pending against this person that she is dealing with.

My question is: how long will it be before I am back in front of
you or back in front of my legislature with my State asking me,
Mr. Perkins, why did you let Mrs. Murray get ripped off by some-
body who you knew had 15 customer complaints? That is the prob-

152

lem. Somewhere you have to draw some lines, and I agree. I agree
with Mark that the unsubstantiated single complaint, you don't
want that being made public.

However, at some point in time, you need to be able to tell the
public that, yes, this person is a problem. I mean, we have gone
through a long discussion here of how long it took for there to be
regulatory action regarding their complaints.

What was supposed to be done during that time period? During
that time period, if you called the NASD and were only given ac-
tions that had been completed, you would never have known that
all those complaints existed. It would never have come to light.

Somehow we have to try to arrive at some happy medium in
there in which we deal with the public's right to know. We base
our whole system upon full disclosure. I mean, a company whose
securities are being sold has to disclose all sorts of information in
a prospectus. They have to disclose things like whether the presi-
dent of the company may have a heart condition if they are a key
player in the company's history. That is clearly a very detailed type
of information. That is the basis for our whole system of disclosure.

Mr. Fields. Let me just say very quickly, as a layman, I don't
think I can sit up here and tell you what necessarily should be dis-
closed or not disclosed. I feel like Chairman Levitt, Chairman Mar-
key, and I think the panel that is before us, that the more informa-
tion, good information that the public has, the better off the system
is, the better off the investing public is, but it seems to me that
there is a distinction between an unsubstantiated allegation and
something that has been initiated as an adjudicatory proceeding.

I see a distinction there, and I would hope that reasonable minds
could get together and come up with a response that gives the reg-
ulators and the investing public the best possible information, and
I want to ask one last question. I am going to have to run to catch
that plane.

Chairman Levitt also talked about a specific thing when he
talked about information. He talked about the concept of qualified
immunity in that dismissal form. Just very quickly, do you think
that helps or hurts? A quick response, Mr. Lackritz.

Mr. Lackritz. That would help considerably. We think that there
ought to be full immunity for disclosures made on U-5 broker ter-
mination forms in order to encourage firms to be as forthcoming as
possible and to get as full information as possible to the self-regu-
latory organizations and the public because of the pending threat
of litigation, defamation, and that sort of thing, exercises sort of a
chilling effect on that information and in order to encourage the
full disclosure, we think immunity is appropriate. Qualified immu-
nity goes part of the way, but we would favor full immunity.

Mr. Markey. Would the gentleman yield just briefly?

Mr. Fields. Yes.

Mr. Markey. Just so we can put it on the record. Is there any
evidence of any successful suit ever having been brought because
of a statement, a truthful statement made by a securities firm with
regard to the conditions surrounding the dismissal of a broker?

Mr. Lackritz. Yes, there have been a number of them, and I will
endeavor to get of details of those and

153

Mr. Markey. Could you provide those for the record. I think that
would be helpful for us to examine. Thank the gentleman.

Mr. Fields. Mr. Pinto, did you want to

Mr. Pinto. Just very briefly. We think that qualified immunity
is an essential, critical action that is necessary and support it ei-
ther through SEC rulemaking or legislation. I think it is a very,
very important issue.

Mr. KwALWASSER. We agree on that. I would echo what John
said.

Mr. Fields. Mr. Chairman, thank you very much.

Mr. Markey. I thank the gentleman, and we will, at this point,
bring the hearing to a conclusion. I would like to say that I think
that both Mr. Fields and I and the other subcommittee members
are very pleased to hear about the new initiatives at the regulatory
level, both the New York Stock Exchange and NASD, and at the
SEC level. Each, I think, helps to build more confidence that there
are changes in the wind that can give more protection to investors.

It is very important that there is improved compliance, that
there are more protections to curb abusive sales practices and to
strengthen enforcement. We want to continue to work with the
SRO's, with the SEC, and with the securities industry at large and
the State regulators to guarantee that there is a set of safeguards
that is built in to give immediate protection for the potential victim
as the broker moves in on them, but to also give warning to subse-
quent investors after some decision has been made with regard to
a violation of a confidence, a trust, or a securities law itself. And
I don't think we have quite arrived at that point yet where there
is a full speedy transmission of that information into the hands of
unwary investors, but I think we are making some real steps to-
wards effectuating that end.

I want to thank you, Mrs. Murray, you, Mr. Steenstra. I know
it is sometimes a difficult thing to come forward and to tell your
own story, but you are helping the subcommittee and, I think, help-
ing others to understand the nature of the problem and to bring
about some real solutions which, while that can't ever bring you
back and make you whole again — ^because we can't relive the
past — can help to protect thousands of others in the future to make
sure that they are not victimized the way you were.

So we thank each of the witnesses for their testimony and with
that, this hearing is concluded.

[Whereupon, at 12:50 p.m., the hearing was adjourned.]

[The following information was received for the record.]

154

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON DC 20549

October 28, 1994

The Honorable Edward J. Markey

Chairman

Subcommittee on Telecommunications and Finance

U.S. House of Representauves

Washington, DC. 200515

Dear Chairman Markey:

This is in response to your letter dated September 28, 1994, in which you express
coiKcm about deficiencies in the information mamtauied on the Central Registration Depository
("CRD"), the computerized registration and licensmg database maintained by the National
Association of Secunties Dealers, Inc. ("NASD"). Additionally, your letter requests that the
Commission respond to a series of questions regarding issues related to the entry of information
on the CRD and disclosure of relevant disciplinary iMormation to public investors through the
toll-free 800 service administered by the NASD. I asked Brandon Becker, Director. Division
of Market Regulation, to prepare a memorandum responding to the specific inquines contained
in your letter.

I hope that the enclosed memorandum addresses all of your questions. If you have any
further questions, please contact Brandon Becker, Director, Division of Market Regulation, at
202/942-0090, or Mark Fitterman, Associate Director, Division of Market Regulation, at
202/942-4160.

Sincerely

Arthur Levin
EiKiosures

155

MEMORANDUM

TO: Chainnan Levin

FROM: Brandon Becker. Director ^^^

Division of Market Regulation

RE: Letter from Chairman Markey on the NASD Hotline

DATE: October 28. 1994

This memorandiiin has t)een prepared in response to Chainnan Markey 's letter, dated
September 28, 1994, in which he expressed concern about deficiencies in the information
mamtained on the Central Registration Depository ("CRD"), the computerized registration and
licensmg database maintamed by the Natioiial Association of Securities Dealers, Inc. ("NASD").
Specifically, the letter suggests that significant disciplinary information about a registeral
salesperson is sometimes not being made available on the CRD database in a timely fasiuon and
that certain information that is maintained on the CRD is not being disseminated to public
investors who call the toll-free 800 number service (the "NASD Hotline") implemented by the
NASD foUowmg enactment of the Penny Stock Reform Act of 1990 ("the Act"). Chainnan
Markey cites information received from the NASD Hotline regarding two salespersons whose
activities were discussed by witnesses at his recent oversight hearmg, Mr. Gerald R. Swirsky
and Mr. Thomas F. Bandyk, as examples of inaccuracies or omissions that concern the
Subcommittee. Additionally, his letter requests that the Commission respond to a series of
questions regarding the issues discussed below.

1 . Explain why the NASD is not providing investors who call the Hotline with information
about settlements of complaints involving abusive sales practices, whether the
Commission believes that such information should be provided to investors, and if so,
what steps are being taken to assure that the NASD makes this information available.

The NASD's Public Disclosure Program was implemented to provide members of the
public with access to information that would help them determine whether to conduct business
with an NASD member or the member's associated persons. In October 1991, the NASD
enhanced its Public Disclosure Program with the introduction of the NASD Hotline (1-800-
289-9999) which reported: (1) past and present employment history of associated persons of
NASD members; (2) all final disciplinary actions -' taken by federal, state, or self-regulatory
organizations ("SROs") against NASD members and their associated persons that relate to
securities or coimnodities transactions; and (3) all criminal convictions reported on Form U-
4 or Form BD. On July 1, 1993, the Commission approved an NASD rule change to permit
the NASD to release certain additional information contained in the CRD system regarding the
disciplinary history of its members and their associated persons through the NASD Hotline.
The rule change expanded the scope of the information that is reportable through the NASD
Hotline to include: (1) pending formal disciplinary proceedings initiated by f^ral or state

The term disciplinary action as used by the NASD includes, but is not limited to, the
information provided in response to questions 7 B, C, D, E, aiKl F on Form BD; and
questions 22 C, D. E, F, and G on Fonn U-4.

156

securities agencies and SROs.^ as well as pending and final disciplinary actions taken by foreign
governments or foreign regulatory authorities; (2) criminal indictments or informations; (3) civil
judgments; and (4) arbitration decisions in securities and commodities disputes involving public
customers. -'

Pursuant to the rule change, the NASD discloses final arbitration decisions involving
public customers that are reported on Form U-4 or that are available through the NASD's
existing arbitration database. However, to facilitate the prompt availability of all arbitration
awards for dissemmation to the public, the Division of Market Regulation ("Division")
requested that each SRO admimstering an arbitration program routinely provide to the NASD,
for inclusion m the CRD, arbitration awards involving public customers that are decided in its
particular forum. *

The NASD currently does not disclose settlements of arbitration claims; their policy
calls for disclosure when there is an award purst:ant to a decision of the arbitrators. According
to the NASD, disclosure of settlements in arbitration cases is not made because such disclosure
could inhibit the ability or willingness of the panics to reach a settlement, and because there
may be many valid business reasons, other than an admission of wrongdoing, to settle a dispute.
Furthermore, settlement of an arbitration claim does not result in a finding of any violation.
Nevertheless, the NASD has informed us that it has presented Chairman Markey's concerns
regarding Messrs. Swirsky and Bandyk to its Membership Committee, and that the Committee
was disturbed by the number of settled disputes and the amounts involved in the Bandyk case.
At a meeting held on October 24, 1994, the Membership Comminee asked their Regulatory
Subcommittee to study the NASD's existing policy regarding disclosure of settlements. The
Division previously has asked the NASD to consider the need to disclose settlements reported
on Form U-4 - and will contmue to discuss this issue with the NASD pending review by the
NASD's Subcommittee.

One of the recommendations in the Large Firm Report involved the issue of public
disclosure, by the SROs, of the filing of charges agamst member firms and their
associated persons when actions are initiated. The NASD and NYSE already have
instimted procedures to disclose pending actions. The Divisions of Market Regulation
and Enforcement sent a letter requesting that the remaining SROs institute similar
procedures. See, e.g.. letter from Brandon Becker. Director. Division of Market
Regulation, and William McLucas, Director. Division of Enforcement, to Homer J
Livingston, Jr. , President and Chief Executive Officer, Chicago Stock Exchange (August
4, 1994). The SROs generally responded that they have instituted procedures to disclose
pending disciplinary proceedings to the CRD system.

Securities Exchange Act Release No. 32568 (July 1, 1993), 58 FR 36723.

See , e.g.. Letter from Brandon Becker. Director, Division of Market Regulation, to
Homer Livingston. President and Chief Executive Officer, Chicago Stock Exchange, Inc.
(September 13, 1993).

See Letter from Katherine A. England, Assistant Director. Division of Market
Regulation to T. Grant Callery, Vice President and General Counsel. National
Association of Securities Dealers, Inc. (June 10. 1993).

157

2. Whca are the Commission's \iews on the GAO's recommendations for reporting to the
CRD information abotu customer complaints and informal SRO disciplinary actions.

The Division, in a comment letter on GAO's draft report, agreed that it is important to
enter all relevant disciplinary information into the CRD system and. furthermore, agreed that
it is valuable to collect and monitor information regarding customer complaints and their
disposition for regulatory purposes. However, the inclusion of information related to
unsubstantiated complaints in reports provided by the NASD Hotline to the public raises
substantial fairness and privacy issues. We currently are discussing the issues mvolved in
reporting customer complaints to the CRD with representatives of the North American Secunties
Administrators Association. Inc. ("NASAA"). the SROs. and the industry. We hope to arrive
at a solution that will meet the regulatory, examination, and enforcement needs of the regulators
and provide adequate information to consiraiers while at the same time affording fairness to
salespersons. We will keep the Subcommittee informed regarding our progress on this
important and complex issue.

We do not agree with the recommendation that informal actions such as staff interviews
or letters of caution be reponed to the CRD. The Division understands that very few sales
practice violations result in informal disciplinary actions. Moreover, such actions are not
necessarily probative of serious problems and may serve to clutter the system and make it
more difficult to identify problem brokers. The NASAA membership recently approved
changes in Form U-4 that would eliminate "minor rule violation ' fmes from disclosure. These
so-called "traffic tickets" had been deleted from Form BD some time ago without any negative
effect on enforcement.

3. Explain the reasons for the gaps in the disciplinary information available with respect
to Messrs. Bandyk and Swirsky. and the Commission 's views on whether they may be
indicative of a more pervasive problem affecting the accuracy and completeness of this
information.

The Division requested that the NASD provide a response (see attached copy of NASD
letter) relative to the specific concerns raised in Chairman Markey's letter. The response
addresses the differences between informal restnctjve agreements negotiated between a state
and an mdividual, and "disciplinary actions" covered by the NASD's disclostire policy. Because
the negotiated restrictive agreements are not disciplinary acuons. they are not reportable. This
apparently was the case with regard to informauon on Mr. Swu^ky that was not reported to the
CRD.

While the civil complaiiu against Thomas F Bandyk resulted in an injunction, a
technical defect in the court's order resulted in a delay of the issuance of the Commission's
normal litigation release. - The staff is in the process of requesting authorization from the
Commission to go back to court to correct the defea in the order. Once the order has been
corrected, the litigation release will be issued. The Bsoiing action against Mr. Bandyk was
disseminated on the CRD within one week of publicauoo m the SEC News Digest. Thus, no

Issuance of a litigation release is reported in the SEC News Digest. Pursuant to a
longstanding arrangemeiu, NASD staff enten information on SEC actions as reported
in the SEC News Digest into CRD on behalf of the SEC.

Rfi-47fi n - Qt^ - fi

158

reportable information was inaccurate or omitted. The Division, therefore, does not believe this
is indicative of a pervasive problem.

4. Comment on whether the GAO 's recommendations for direct reporting by the SEC. the
Commodities Futures Trading Commission ("CFTC"), the American Stock Exchange
("Amex"), and the regional exchanges, of disciplinary action to the CRD. should be
adopted.

The SEC has had a longstanding arrangement whereby Commission disciplinary actions,
as announced in the SEC's News Digest, are reported to CRD by NASD staff. This
arrangement has worked well in the past, and, absent some evidence that this informal
arrangement is not working, we see no need to change the current arrangement. Nevertheless,
we intend to explore the issue of direct reporting with the NASD in conjunction with the
redesign of the CRD system to ensure that the arrangement continues to work satisfactorily.

The Amex, the Chicago Board Options Exchange, and the NYSE submit disciplinary
actions directly to the CRD in an electronic format through the submission of a Form U-6 -
Moreover, the CFTC manually submits their orders to the NASD for inclusion ui the CRD
system. The remaining regioioi exchanges,^ however, do not submit either a Form U-6 or a
manual bulletin to the NASD. We will discuss with the regional exchanges the issue of direa
reporting to the CRD.

5. Anatyze the impact of the Act's grant of immunity to the NASD for inaccurate information
on the quality of the information being disseminated to investors, including the
Commission s recommendations with respect to whether this immunity should be qualified
or withdrawn.

The Act provides the NASD with immunity from liability regarding actions taken or
omitted in good faith pursuant to Section 15A(i) of the Act. The NASD does not disclose
settlements in arbitration decisions because such settlements are not considered "disciplinary
actions." Similarly, informal restrictive agreements negotiated between the states and
individuals also are not considered disciplinary actions. The grant of immunity applies to
information which the NASD discloses. The Division docs not believe that the grant o(
immunity had any effect whatsoever on the information pertaining to Messrs. Bandy k and
Swirsky and does not recommend that the immunity be qualified or withdrawn.

Form U-6 is a uniform form for reporting, to the Commission and the NASD,
disciplinary actions involving broker-dealers and associated persons. State and fedenJ
law enforcement and regulatory agencies, securities and commodities exchanges, and
SROs in the United States and foreign countries use this form. It is designed for the
reponing of a broad range of actions such as indictments, criminal convictiont.
temporary and permanent injunctions, fines, liquidations, and censures.

Boston Stock Exchange, Chicago Stock Exchange, Cincinnati Stock Exchange, Pacific
Stock Exchange, and Philadelphia Stock Exchange.

159

Caaaimt n Cicrfr (bI Caaatra

SUBCOMMITTEE ON TELECOMMUNICATIONS AND FINANCt

■uttngtoiu 9C 20515-«U9

September 28, 1994

The Honorable Charles A. Bowsher
Comptroller General of the United States
General Accounting Office
Washington, D.C. 20548

Dear Mr. Bowsher

I am writing to request that the General Accounting Office (GAO) undertake a survey
of the effectiveness of the National Association of Secunties Dealer's (NASD) toll-free 800
number, which provides the investing public with information about the disciplinary history
of member firms and their brokers.

As required by the Penny Stock Reform Act of 1990 ("the Act"), on October 1, 199! .
the NASD established a toll-free telephone number (800-289-9999) to provide investors with
information regarding the disciplinary history of securities firms and their brokers. While
the Act did not specify the scope of the disciplinary actions which should be disclosed to
investors who call the NASD Hotline* the House Energy and Commerce Committee report
accompanying the bill cleariy staled that "the Committee expects that the Commission, the
state regulalon, and registered securities associations will consult with one another and try lo
develop a common approach to this issue, one which fulfills the informational needs of
customers and assures the maximum level of investor protection."

As you will recall, in a July 17, 1992, letter, the Subcommittee asked the GAO to
examine whether or not the Committee's expectations in this matter were being met. This
request was prompted by press reports (See "The Hot Line That Isn't," The Los Aneeles
Times. July 3, 1992) which reported serious shortcomings on the nature and adequacy of \im
information reported on the NASD Hotline. In response to the Subcommittee's request. th«
GAO included an examination of the adequacy of the information in the NASD Hotline in <M
Penny Stock report mandated under Section 510 of the Act (See Penny Stocks: Reeulatonf
Artityn to Reduce Potential for Fraud and Abuse. GAO/GGD-93-59. February 1993). As
part of this study, the GAO reported that in January 1993 the NASD decided to expand th«
infbnnatioa made available through the Hotline to include civil judgments involving secuno«
matters; pending formal disciplinary proceedings initiated by the SEC, NASD, other self-
regulatoiy organizations (SROs), and the states; criminal indictments and related informano*.
and arbittation decisions.

160

The Honorable Charies A. Bowsher
September 28. 1994
Page 2

Despite these welcome reforms, the Subcommittee has continued to hear reports of
significant deficiencies in the NASD Hotline and the CRD. In response, on May 6, 1993,
the Subcommittee asked the GAO to review the nature and adequacy of efforts by the SEC
and the self-regulatory organizations to curb abusive sales practices m the securities
industry — including the efficacy of the CRD in tracidng brokers with disciplinary records.
At its September 14, 1994, oversight hearing on efforts to curb sales practice abuses and the
presence of unscrupulous 'rogue brokers' in the securities industry, the Subcommittee
received testimony from the GAO, the SEC, the states, and the SROs on shortcomings in the
ability of regulators to make use of the CRD for surveillance and enforcement purposes, and
about ongoing efforts to upgrade the information available over the CRD and enhance its
utility as a regulatory tool.

During the September 14th hearing, the Subcommittee also received testimony from
Mrs. Mary E. Murray, a 7S-year old retired Framingham high school Latin teacher, now
living in Falmouth, Massachusetts, who brought a suitability and churning arbitration
complaint against her broker, Mr. Gerald R. Swirsky, in November 1990. Mrs. Murray was
awarded nearly S420,000 in damages (including SSO,000 in punitive damages) by an NASD
arbitration panel in August of 1991. In addition, the Subcommittee received testimony from
Mr. Earl J. Steenstra regarding his late sister-in-law, Mrs. Nancy M. Friedrich, a widowed
clerk from Kentwood, Michigan who filed an arbitration complaint against her broker, Mr.
Thomas F. Bandyk, in September of 1990, alleging that he had churned her account to
generate commission income and soldier into unsuitable and risky securities during a period
when she was undergoing treatment for cancer. In May of 1991, Mrs. Friedrich settled her
claim for $47,000 (about half of what she claimed to have lost).

In conjunction with the September 14th hearing, the Subcommittee staff obtained
copies of the CRD disciplinary reporu for the two stockbrokers whose activities were
discussed during the hearing {See Enclosures 1 and 2). In addition, the Subcommittee staff
called the NASD Hotline to request information regarding the disciplinary histories of the
two brokers in question (See Enclosures 3 and 4). The information received in response to
this request is quite disturbing to the Subcommittee, insomuch as it suggests that significant
disciplinary information about a broker is sometimes not being made available on the CRD
database in a timely fashion and that certain information that u available on the CRD is not
being disseminated to public investors who call the NASD Hotline.

For example, the NASD states in a September 10, 1994, letter to the Subcommittee
staff that NASD disclosure policy provides for the release of 'final and/or pending
disciplinary action(s), if any, taken by self-regulatory or federal or state securities agencies
that relate to securities or commodides activities. ' However, the summary information the
NASD actually provided for Mr. Swirsky failed to mention three separate actions taken by
state securities regulators against him. These include a 1993 action by the State of

161

The Honorable Charles A. Bowsher
September 28, 1994
Page 3

Massachusetts which placed limitations on Mr. Swirsky's trading activities, including barring
him for two years from any discretionary trading in customer accounts, and restricting him
from acting as a principal, officer, director, supervisor, or manager of the securities firm at
which he is employed. As pan of the same action, the State of Massachusetts also required
his employer to adopt measures aimed at assuring heightened supervision of Mr. Swirsky's
trading activities to aven the potential for further violations by mandatmg that his employers
review and initial all of his new account forms and his trade tickets. In addition, Mr.
Swirsky's NASD Hotline Report neglects to indicate that Mr. Swirsky was suspended from
selling securities in the State of Massachusetts for 60 days in 1993 as punishment for having
sold securities in the State while he was not registered. Mr. Swirsky's NASD Hotline
Repon also omits any mention of the fact that he has had restrictions placed on his
registration in the State of Florida which bar him from serving in a principal, supervisory, or
managerial capacity in connection with his employment in the securities industry.

While the NASD's September 10, 1994. letter states that NASD disclosure policy
provides for "civil judgements and NASD arbitration decisions involving securities and
commodities matters," information about financial settlements reached in civil litigation or
arbitrations does not appear to be included in the information disseminated to the public
through the NASD Hotline. Mr. Swirsky's NASD Hotline Report, for example, does not
include a description of two fmancial settlements reached in sales practice abuse arbitration
complaints that were filed by some of Mr. Swirsky's customers, including a 5107,000
settlement of a suitability and churning case filed by Mrs. Ruth C. Howard in 1992 and a
$50,000 settlement of a sales practice abuse case filed by Ms. Haime L. Bohm in 1988.

The Subcommittee staffs review of Mr. Bandyk's disciplinary records also reveals a
number of significant inaccuracies or omissions. For example. Mr. Bandyk's CRD records
fail to include any mention of the fact that a federal coun has granted a request by the SEC
that Mr. Bandyk be pennanently enjoined from further violations of the federal securities
laws, a fact which the SEC staff has indicated would statutorily disqualify him from serving
in the securities industry. When, prior to the September 14th hearing, the Subcommittee
staff asked the SEC staff to account for this omission, they were unable to provide a
satisfactory explanation.

Moreover, the Subcommittee staff found that information regarding the court's action
also was not being provided to investors who call the NASD Hotline to inquire about Mr.
Bandyk's disciplinary history. The NASD operator who received the staffs call for Mr.
Bandyk's records - following the September 14th hearing -- said that she could not say
whether Mr. Bandyk had any disciplinary history, as his records were in the process of being
corrected and updated. She indicated that if he had any disciplinary history, the NASD
would mail records to the staff. However, when the NASD subsequently mailed Mr.
Bandyk's disciplinary records, these records inaccurately described the aforementioned

162

The Honorable Charles A. Bowsher
September 28, 1994
Page 4

federal court action as a "pending SEC action" when, in fact, the court already has approved
the SEC's request for a permanent injunction and other relief.

Mr. Bandyk's NASD Hotline report does list three pending or completed disciplinary
actions, consisting of the SEC injunction, an order from the State of Michigan revoking Mr.
Bandyk's registration in the state, and a $69,000 NASD arbitration award decided against
Mr. Bandyk in 1991. Incredibly, however, the NASD Hotline repon fails to make any
mention of thineen financial settlements worth a total of nearly $750,000 that resulted from
other investor arbitration complaints filed against Mr. Bandyk. These include:

* a $47,000 settlement of the sales practice abuse arbitration case filed by the
late Nancy Friedrich in 1990. which was the subject of Mr. Earl Steenstra's
testimony at the Subcomminee's September 14th hearing;

* a $116,000 arbitration claim filed by Prudential which was halted when Mr.
Bandyk filed for personal bankruptcy;

* a $160,000 settlement reached with respect to a sales practice abuse
arbitration complaint filed against Mr. Bandyk in 1991 by Mr. and Mrs.
Richard and Joyce Sessler;

* a 397,000 settlement of a sales practice abuse arbitration complaint filed
against Mr. Bandyk in 1989 by Mr. and Mrs. Paul and Nancy Keck;

* a $20,000 settlement of a sales practice abuse arbitration case filed against
Mr. Bandyk by Ms. Viola Dancz in 1991;

* a $8,500 senlement of a sales practice abuse arbitration case filed against
Mr. Bandyk by Mr. William Connolly in 1991;

* a $10,000 settlement of a sales practice abuse arbitration case filed against
Mr. Bandyk by Ms. Charlone Geelhoed in 1990;

* a $20,000 settlement of a sales practice abuse arbitration case filed against
Mr. Bandyk by Mr. and Mrs. John and Patrina Czyzio in 1990;

* a $153,054 settlement of a sales practice abuse arbitration case filed against
Mr. Bandyk by Mr. Franklin Shears in 1991;

* a $24,000 settlement of a sales practice abuse arbitration case filed against
Mr. Bandyk by Mr. and Mrs. Kenneth and Joyce Mast in 1991;

163

The Honorable Charles A. Bowsher

September 28, 1994

Pages

* a $35,00G settlement of an unauthorized trading complaint filed against Mr.
Bandyk by Mr. Judd Hammond in 1978;

* a $25,000 settlement of a churning and suitability arbitration complaint filed
against Mr. Bandyk by Mr. and Mrs. William and Mary Powell in 1988; and,

* a S9,300 settlement of a sales practice abuse arbitration case filed by Mr.
and Mrs. Mark and Helen Telego in 1988.

While it is impossible to determine whether the inaccuracies and/or omissions in the
disciplinary information relating to these two individuals are broadly reflective of the current
state of the CRD and the NASD Hotline, it is quite disturbmg to see so many omissions or
inaccuracies in the disciplinary records of the two brokers whose disciplinary histories were
discussed during the September 14, 1994, hearing. The Subcommittee is particularly
concerned about the NASD's apparent failure to inform mvestors who call the Hotline
whether their broker has settled arbitration complaints or civil libgation alleging sales
practice violations. The failure to include information about such settlements may give
investors a misleading impression that their broker has had few or no serious disciplinary
problems, when in fact the broker may have engaged in abusive sales practices that generated
numerous customer complaints and led to sizable financial settlements in favor of the
customer.

In light of these concerns, the Subcommittee retiuests that the GAO conduct a survey
of the effectiveness of the NASD Hotline that addresses the following questions:

1) How accessible is the toll-free number to investors?

2) How accurate and complete is information provided to callers?

3) How useful is the information provided?

4) what methods are used to inform investors of the existence of the number?

Based on this survey, the Subcommittee requests that you provide the Subcommittee
with a written report containing your findings and recommendations.

Thank you for your assistance in this matter. The Subcommittee requests that a
response be provided no later than January 31, 1993. As previously discussed with the GAO
staff, the Subcommittee requests that the audit work be done without informing the NASD,
in order to ensure that responses are as they would be to public callers. The Subcommittee
also asks that you direct the GAO staff to meet with the Subcommittee staff to discuss this

164

The Honorable Charles A. Bowsher
September 28. 1994
Page 6

request, GAO's methodology for conducting the requested survey, and discuss related
matters. Should you have any questions about this matter, please have your staff contact Mr.
Jeffrey S. Duncan or Ms. Gayatri N. Bhalla of the Subcommittee staff at (202) 226-2424.

Sincerely,

dufuj- 9 m^iJ^

Edward J. Markey
Chairman

Enclosures

165

Enclosure 1

query

CRD 441405 - SWIRSKY. GERALD ROBERT
027-28-0864 - 24 GRISCOM ROAD
DOB 2/18/39 - SUDBURY. MA 01776

1 1 /92- Date- TUCKER ANTHONY INCORPORATED (#8371

- > wof ks

CRD 441405 - SWIRSKY, GERALD ROBERT
027-28-0864 - Bom OD 2/18/39

1 1/92- Date- TUCKER ANTHONY INCORPORATED (#837)
6/84-11/92- PRUDENTIAL SECURITIES INCORPORATED (#7471)
6/84- 3/91- PRUDENTIAL-BACHE SECURITIES INC. (#7471)
3/81- 6/84- L. F. ROTHSCHILD. UNTERBERG. TOWBIN (#501)
• 4/77- 3/81- BEAR. STEARNS & CO. (#79)
11/76-11/76- SHEARSON HAYDEN STONE INC. (#7295)
5/75- 4/77- REYNOLDS SECURITIES, INC. (#712)
5/75- 4/77- REYNOLDS SECURrTIES. INC. (#712)
11/74-11/76- SHEARSON HAYDEN STONE INC. (#6774)
7/74- 7/75- THOMSON MCKINNON SECURITIES INC. (#829)
11/70- 5/75- W E. HUTTON & CO. (#861)
6/69-11/74- HAYDEN STONE INC. (#6567)

Do you want to see employment detail?

->disc

CRD 441405 - SWIRSKY. GERALD ROBERT

027-28-0864 - Bom on 2/18/39

OCC.# INODENT TYPE(S) ACTION SOURCE DATE OF ACTION ITEM #

X. Y4

SSO

11/16/93

22E5

X. Y4

SSO

2/17/93

22E4

22H1

10/09/92

22H1,22H2

X, Y4

ARB

8/26/91

22H1.22I

22H1

5/11/88

22H1

4/16/91

22H1,22I

Certification records exist for this Individual

Enter OCC. # and Incident type to view incident

or hit RETURN to view all SRR information

CRD 441405 - SWIRSKY, GERALD ROBERT

027-28-0864 - STATUS X. ACTION SSO. ON 11/16/93. SOURCE FL, PROVISO

- OCCURRENCE: 6. INC10ENT. X, COMPOSITE

- UPDATED: 1 1 /29/93 BY: SIMMONS

166

2
3

5
6

8
9
10
11
12

3
4
5
6
7
8
9
10

1 Action Codes: SSO

2 Action Date: 11/16/93

3. Proviso. Not Provioed

4. Previously Reported No

4a Occurrence Numoer, Not Provided

5 Initiated bv: FLORIDA DIVISION OF SECURITIES AND INVESTOR
PROTECTION, BUREAU OF REGISTRATIONS

Ca. Dock9t/Case#: 93.447.DOS

6b. Coun Name /Location: Not Provided

7. Allegations: ON n-i6-93. THE STATE OF FLORIDA APPROVED
SUBJECT INDIVIDUAL AS AN ASSOCIATED PERSON OF TUCKER ANTHONY

a. Results: TERMS OF THE AGREEMENT PROVIDE. BUT ARE NOT
UMITED TO. THE FOLLOWING: SWlflSKY AGREES NOT TO ACT IN ANY
PRINCIPAL SUPERVISORY. OR MANAGERIAL CAPACITY IN CONNECTION
WITH HIS EMPLOYMENT IN THE SECURITIES INDUSTRY. SUCH CONDmONS
WILL REMAIN IN EFFECT THROUGHOUT THE REGISTRATION WITH THIS
FIRM OR UNTIL REUEF IS OTHERWISE SOUGHT AND GRANTED. CONTACT
FLORIDA AGENT REGISTRATION SECTION FOR FURTHER INFORMATION.

9. Subject Wanted tor Prosacution: No
• 10. Summary: CONTACT: PAMELA EPnNG/904 488-9805

Enter onotrier OCC. * and incident type to view Incident,
F ta-view the histoncai filings tor this Incident type,
S to return to the Summary screen
or hit RETURN to view the next composite incident
>l

THAT IS ALL OF THE SRR INFORMATION FOR THIS INCIDENT TYPE.

Enter another OCC. # and incident type to view incident.
F to view the nisloncai filings lor this Incident type,
S to return to the Summary screen
or hit RETURN to view the nexi occurrence

CRD 441405 - SWIRSKY, GERALD ROBERT

027-28-0864 - STATUS X. ACTION SSO. ON 2/17/93. SOURCE MA. PROVISO

OCCURRENCE. 5. INODENT. X. COMPOSITE

UPDATED. 2/19/93 BY: SIMMONS

1
2
3

4
5
6
7
8
9
10
11
12

1 Action Codes: SSO

2. Action Date; 2/17/93

3. Proviso: Not Provided

4 Previously fleponed: No

4a. Occurrence Number Not Provided

5. Initiated by MASSACHUSETTS SECURITIES DIVISION

6a. Docket /Cas«#: DOCKET NO. R -93-023

6b. Court Name/Location: Not Provided

7 Allegationa: ON OR ABOUT DECEMBER 10. 1992 GERALD ROBERT
SWIRSKY CSWIRSKY^ RLED WITH THE DIVISION THROUGH THE CRD AN
APPUCATION SEEKING REGISTRATION IN MASSACHUSETTS AS AN-AGENT

167

2
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12

1
2
3

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5
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7
8

OF TUCKER ANTHONY. SWIRSKY HAD PRP/!0'JSLY BEEN REGISTERED IN
MASS AS AN AGENT WITH PRUDENTIAL SECURITIES FROM JULY 24. 1984
UNTIL NOVEMBER 13, 1992. IN HIS APPLICATION SWIRSKY DISCLOSED
CUSTOMER COMPLAINTS BY THREE INVESTORS CALIMING UNSUITABLE
TRADES. EXCESSIVE TRADES. FAILURE TO DISCLOSE RISK AND
EXCESSIVE COMMISSIONS.

8 Results; ON FEBRUARY 17 1993 THE DIVISION ISSUED AN ORDER
APPROVING REGISTRATION UPON CONDITIONS IN RESPECT TO SWIRSKTS
PENDING AGENT APPLICATION AFTER HE CONSENTED TO UNDERTAKINGS
AND REPRESENTATIONS.

9. Subject Wanted for Prosecution: No

10. Summary: ON FEBRUARY 17, 1993 THE MASSACHUSETTS

SECURITIES DIVISION APPROVED THE REGISTRATION OF GERALD ROBERT
SWIRSKY AS AN AGENT WITH TUCKER ANTHONY BASED ON AN UNDERTAKING
AND REPRESENTATION BY SWIRKSY AND TUCKER ANTHONY INCROPORATED.
FOR A PERIOD OF TWO YEARS FROM THE DATE OF ENTRY OF THE ORDER.
TUCKER ANTHONY SHALL REQUIRE THE BRANCH MANAGER TO REVIEW AND
INITIAL ALL OF SWIRSKY'S NEW ACCOUNT FORMS AND TRADE TICKETS ON
A DAILY BASIS. FOR A PERIOD OF TWO YEARS FROM THE DATE OF ENTTRY
OF THE ORDEH. TUCKER ANTHONY SHALL ON A QUARTERLY BASIS.
RANDOMLY SELECT FIVE PERCENT OF SWIRSKTS ACTIVE CUSTOMERS AND
VERIFY, EITHER BY LETTER OR TELEPHONE CONTACT. THE CUSTOMER'S
SATISFACTION WITH SWIRSKTS SERVICES. FOR TWO YEARS TUCKER
AJ^HONY SHALL NOT PERMIT SWIRKSY TO POSSESS OR EXERCISE ANY

TYPE OF DISCRETIONARY CONTROL OR ALrTHORITY OVER ANY CUSTOMER
ACCOU^f^ for two years tucker ANTHONY shall not PERMIT SWIRSKY
TO ACT AS AN OFRCER. DIRECTOR. OWNER. CONTROL PERSON.
SUPERVISOR. MANAGER OR PRINCIPAL FOR TUCKER ANTHONY OR ANY
AFRUATE OF TUCKER ANTHONY WHICH IS A REGISTERED BROKER-DEALER
IN MASSACHUSETTS. FOR TWO YEARS, TUCKER ANTHONY SHALL NOTIFY
THE DIVISION OF ITS RECEIPT OF ANY AND ALL ORAL OR WRnTEN
CUSTOMER COMPLAINTS AGAINST SWIRSKY WITHIN RVE BUSINESS DAYS.
FOR TWO YEARS TUCKER ANTHONY SHALL NOTIFY THE DIVISION IN
WRITING OF ANY PROCEEDING INSTITUTED AGAINST SWIRSKY BY ANY
SECURITIES REGULATORY AGENCY, SELF-REGULATORY ORaANIZATlON OR
COMMODITIES EXCHANGE NO LATER THAN THE END OF THE FIFTH

BUSINESS DAY AFTER ITS RECEIPT.

THAT IS ALL OF THE SRR INFORMATION FOR THIS INCIDEm TYPE

Enter another OCC. # and incident type to view incident.

S to return to the Summary screen

or hit RETURN to view the next composite incident

- >

CRD 441405 - SWIRSKY. GERALD ROBERT

027-28-0864 - STATUS Y. ACTION 22E4. ON 3/26/93. SOURCE U4. PROVISO

- OCCURRENCE; 5. INODENT; Y4. COMPOSITE

- UPDATED: 11/09/93 BY: PlBHARTl

168

2 ' Questions. 22E4

2 I Update: rps

1. 3 Initiatfirt by MASSACHUSETTS SECURITIES DIVISION

5 ^ Type ot Evem/Procee<Jing: ADMINISTRATIVE

5 ■ 5 Dale IriitiaieO: P/17/93

7 - 6. Docket , 'Case* • 93-023

8 ■ 7 Allegations ACCEPTING CUSTOMER ORDERS WHILE TRANSFER OF

9 REGISTRATION WAS PENDING AND NOT YET FINALIZED

10 • 8a. Current Status: CLOSED

11 - 8b. Status Dale: AUGUST/SEPTEMBER 1993

12 - 8c. Results: INVESTMENT EXECUTIVE RECEIVED A 60-OAY

More?

CRD 441405 - SWIRSKY GERALD ROBERT

027-28'0864 - STATUS Y. ACTION 22E4. ON 3/26/93. SOURCE U4. PROVISO

OCCURRENCE. 5. INCIDENT Y4. COMPOSITE

UPDATED: n/09/93BY PiBHARTI

SUSPENSION

9. Summary ALL TRADES AT ISSUE WERE ON BEHALF OF
PRE EXISTING CUENTS OF INVESTMENT EXECUTIVE AND CERTAIN OF THE
TRADES HAD BEEN DISCUSSED WITH CUENTS WHILE INVESTMENT
EXECUTIVE WAS WITH PRIOR FIRM AND FULLY REGISTERED.

1
2
3
4

5
6="

7
8
9
10 - 10. Attacnments: Not Appiicatjie

(9>1 1/9/93. AMENDED PAGE 3 RECD FROM TUCKER >NTHONY INCORPORATcD
WITH -YES* 22E5 IS SIGNATURE DERCIENT

THAT IS ALL THE INCIDENT TYPES FOR THIS OCCURRENCE.

Enter anotner OCC. # arxl i/x:ident type to view incldem.
F to view the hlstoncal llllngs tor this mcKJent type.
S to return to tne Summary screen
or hit RETURN to v\ew the next occurrence

CRD 441405 ■ SWIRSKY, GERALD ROBERT

027-28-0864 - STATUS Y. ACTION 22H1. ON 10/09/92. SOURCE U4. PROVISO

- OCCURRENCE; 4, INODENT; Y4, COMPOSITE

- UPDATED: 10/09/92 BY: SAULSBUR

2 • 1. Questions: 22H1 22H2

3 - 2. Update: No

4 - 3. Initiated bv: CUSOTMER RUTH C HOWARD

5 ■ 4 Type 0( Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date Initiated: APRIL 1. 1992

7 ■ 6. Docket/Ca3e#: NONE

8 • 7 Allegations: CUSTOMER RUTH C HOWARD ALLEGED

9 UNSUITABILITY EXCESSIVE TRADING. AND DAMAGES OF $115,000.00 +

10 - ARISING FORM THE PRUCHASE OF SPECULATIVE INVESTMENTS IN HER

169

n -ACCOUNT

12 - 8a Current Status. SETTLED

2 - 8C. Results: WITHOUT ADMITTING LIABILITY CASE WAS SETTLED

3 - FOR $107,00000

4 - 9. Summary: Not Provided

5 - 10. Attachments: Not Applicable

THAT IS ALL THE INCIDENT TYPES FOR THIS OCCURRENCE.

Enter another OCC. # and Incident type to view incident.
F to view the historical filings for this Incident type.
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CRD 441406 - SWIRSKY, GERALD ROBERT

027-28-0864 - STATUS X. ACTION ARB. ON 8/26/91. SOURCE NA. PROVISO
^ - OCCURRENCE; 3. INQDENT: X. COMPOSITE
- UPDATED: 8/02/93 BY: CHERRY

2 - 1 . Type of Event: ARBITRATION

3 - 2. Update: NO

4 - 3 Arbitration Forum: NASD

5 - 4 Case Name: mary FI l7ARrrH mi iRRAY VS GERALD R. SWIRSKY AND

6 - PRUDENTIAL- BACHE SECURITIES. INC.

7 - 5. Case Served Date: 0i/24/i99i

8 - 8. Ca3e#: 90-03198

9 - 7a Allegations: CHURNING, SUITABIUTY; ACCOUNT

10 - RELATED-NEQUQENCE:

11 - 7b. Type of Securities: MUTUAL FUNDS: COMMON STOCK

12 - 7c. Relief Asked: ACTUAL/COMPENSATORY DAMAGES. ASKED AMOUNT

1 ■ $100,000.00; ACTUAL/COMPENSATORY DAMAGES. ASKED AMOUNT SO.OO;

2 - PUNITIVE /EXEMPLARY DAMAGES. ASKED AMOUNT $0.00: OTHER COSTS.

3 - ASKED AMOUNT $000: ATTORNEY'S FEES, ASKED AMOUNT $0.00:

4 - INTEREST. ASKED AMOUNT $0 00

5 - 8a. Current Status: AWARD AGAINST PARTY

6 - 8b. Status Date: 08/26/1991

7 - 8& Relief Awarded: ACTUAL/COMPENSATORY DAMAGES, REUEF HAS

8 - BEEN AWARDED (PARTIAL OR FULL), AWARD AMOUNT $125,000.00

9 - JOINTLY AND SEVERALLY; ACTUAL/COMPENSATORY DAMAGES. REUEF HAS

10 ■ BEEN AWARDED (PARTIAL OR FULL). AWARD AMOUNT $145,000.00

1 1 - JOINTLY AND SEVERALLY; PUNITIVE /EXEMPLARY DAMAGES. REUEF HAS

12 - BEEN AWARDED (PARTIAL OR FUUJ. AWARD AMOUNT $50,000.00 JOINTLY

170

AND SEVERALLY. OTHER COSTS REUEF HAS BEEN AWARDED (PARTIAL OR
FULL). AWARD AMOUNT 59.4G0 00 JOINTLY AND SD/ERALLY. ATTORNEY'S
FEES. BEUEF HAS BEEN AWARDED (PARTIAL OR FULL). AWARD AMOUNT
S80.000 00 JOINTLY AND SEVERALLY, INTEREST, R£UEF HAS BEEN
AWARDED (PARTIAL OR FULL). AWARD AMOUNT $10,000 00 JOINTLY AND
SEVERALLY

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CRD Ml 405 - SWIRSKY, GERALD ROBERT

027-28-0864 - STATUS Y, ACTION 22H1 ON 4/1b791. SOURCE U4. PROVISO

OCCURRENCE: 3. INQDENT. Y4, COMPOSITE

UPDATED. 10/17/91 BY: D4MAS0N

1 Questions; 22H1 221

2. Update: No

n. Initiated by. MARY ELIZABETH MURRAY

•I Type of Event/Proceeding- ARBITRATJON - NASD '^'

5. Date Initiated: ON OR ABOUT n/9/90

6. Docket/CasB# Not Provided

7 Allegations- CUEt^ ALLEGES EXCESSIVE AND UNSUITABLE
TRADING WITH ALLEGED DAMAGES ESTIMATED AT $100,000. CUENT DID
NOT SPECIFY WHAT TYPE OF SECURITIES WERE INVOLVED

fla. Current Status: PENDING

8b. Status Date: Not Provided

8c Results- Not Provided
9 Summary: Not Provided
10. Attachments: Not Provided

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CRD 441 40G ■ SWIRSKY. GERALD ROBERT

027-28-0864 - STATUS Y. ACTION 22H1, ON 5/11/88, SOURCE U4. PROVISO

. OCCURRENCE: 2. INQDENT; Y4, COMPOSITE

- UPDATED: 12/11/92 BY- SHEPARD

171

2 - 1 Questions: 22H1

3 - P. Update- No

4 ■ 3 Initiated by; HANNE LNORE BOHM

5 ■ 4 Type 01 Event/PrncReamg CUSTOMER COMPUVINT

6 • 5. Date Initiated: 1/4/88

7 - 6 Doci<et/Case# N/A

8 - 7 Allegations: UNSECURED DEBIT BAUNCE & FAILURE TO DISCLOSE

9 - RISK

10 - 8a. Current Status: CLOSED

11 - Bb. Status Date; 4/14/88

12 - 8c, Results: SETTLED FOR $50,000 00

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2 - 10. Attachments: Not Applicable

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CRD 441405 - SWIRSKY, GERALD ROBERT

027-28-0864 - STATUS Y, ACTION 22H1. ON 5/11/88, SOURCE U4. PROVISO
• OCCURRENCE; 2. INCIDENT; Y4. FIUNG: 1

1 - OTHER RELATED ITEM 22H2. AMENDED PAGE 3 RECEIVED FROM

2 - PRUDENTIAL-BACHE SECURITIES. INC. HANNELMORE BOHM RLED AN ORAL

3 - COMPLAINT CONCERNING THE HANDUNG OF HER ACCOUNT AND THE

4 - UNSECURED DEBIT BALANCE CREATED AS A RESULT OF MARGIN

5 - UQUIDATIONS. THE THRUST OF THE COMPLAINT WAS THE FAILURE TO

6 - DISCLOSE THE RISKS OF LEVERAGE AND INVESTMENTS INCONSISTENT WITH

7 - OBJECTIVES. CLAIM WAS SETTLED FOR $50,000.00 ACCOUNT EXECUTIVE

8 - TO COr^RIBUTE 50%. ""7/5/88 REQUESTED AMENDED PAGE 3 DISCLOSES

9 - COMPLAINT WAS RLED JANUARY 4. 1988 IN MIDDLESEX COUNTY WITH THE

10 - FIRM OF LF. ROTTSCHILD. •"••{8/20/88. REQ'D CORRESPONDENCE

1 1 - (2028 22288) REC'D FROM PRUDENTIAL-BACHE SECURITIES INC.

12 - DISCLOSES. THE DATE OF THE SETTLEMENTT WAS APRIL 14. 1988.

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172

CRD 4ai405 • SWIRSKY GERALD ROBERT

027-28-0864 - STATUS Y ACTION 22H1 ON 4/i6/9i SOURCE U4. PROVISO
OCCURRENCE. 1. INCIDENT. Y4 COMPOSITE
. UPDATED 10/17/91 BY- D4MAS0N

2
3

5
6
7
8
9
10
11
12

1 Quesiions: 22H1 22H2

2 Update: Yea

3 Initiated by: MARY EUZABETH MURRAY

4 Type ol EvRnt/PfOceeOing: ARBITRATION

5. Date Initiated: JANUARY 1991

6. 00CKei/Case#: NASD #9003198

7 Allegations: CUSTOMER ALLEGED THAT THE BROKER RECOMMENDED
UNSUITABLE INVESTMENTS. PARTlCULARILY IN DATA SWITCH CORP
RESULTING IN LOSSES TO THE CUENT AND EXCESSIVE COMMISSIONS TO
THE BROKER. ACTUAL LOSSES WERE $125,000.00. ALLEGED DAMAGES
REQUESTED WERE S380.000 00 COMPENSATORY. $200,000.00 PUNITIVE.

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CRD 441405 - SWIRSKY GERALD ROBERT

027-28-0864 ■ STATUS Y. ACTION 22H1, ON 4/16/91. SOURCE U4, PROVISO

OCCURRENCE: i INQDENT. Y4. COMPOSITE

UPDATED. 10/17/91 BY 04MAS0N

1
2
3
4

5
6
7
8
9
10
11
12

Ba. Current Status: ARBITRATION AWARD GIVEN

Bb. Status Date; AUGUST 1991

8c. Results: ARBITRTION AWARD WAS RENDERED IN THE FOLLOWING
MANNER. PSI AND GERALD SWIRSKY ARE JOINTLY AND SEVERALLY UABLE
TO THE CLAIMANT FOR COMPENSATORY DAMAGES TOTALLING S369.460.00.
PSI IS UABLE TO THE CLAJMANT FOR PUNITIVE DAMAGES IN THE SUM
OF $50,000.00.

9 Siimmarr THE CLAIMANT ALLEGED UNSUITABIUTY OF INVESTMENS
AND EXCESSIVE TRADING IN THE ACCOUNT. THE BROKER P^INTAINED
THAT ALL THE INVESTMENTS RECOMMENDED WERE MADE TO MEET THE
INVESTMENT OBJECTIVES OF THE CLIENT. ALL TRADES WERE AUTHORIZED
BY THE CLIENT WHO RECEIVED CONRRMATIONS ANO MOhfTHLY STATEMENTS

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CRD 441405 - SWIRSKY. GERALD ROBERT

027-28-0864 • STATUS Y ACTION 22H1. ON 4/16/91. SOURCE U4, PROVISO

. OCCURRENCE. 1. INCIDENT Y4, COMPOSITE

■ UPDATED: 10/17/91 BY: D4MAS0N

1 - REFLECTING ALL TRADE ACTIVITY

2 10 Attacrimems: Not Applicable

THAT IS ALL OF THE OCCURRENCES

173

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- .•• school

CRD 441405 - SWIRSKY, GERALD ROBERT
027-28-0864 - Born on 2/18/39

Education ■ 8ABS0N COLLEGE
9/56- 6/59 - BUSINESS, graduated with BS/BA

Education - NEWTON HIGH SCHOOL
9/53- 6/56 - COLLEGE PREP, graduated with DIPLOMA

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CRD 441405 - SWIRSKY, GERALD ROBERT
027-28-0864 • Bom on 2/18/39

Institution - BABSON COLLEGE

SEPT 56 • UNKNOWN
To JUNE 59 - WELLESLEY. MA
Curriculum - BUSINESS, graduated with BS/BA

CRD 441405 - SWIRSKY. GERALD ROBERT
027-28-0864 - Bom on 2/18/39

Institution - NEWTON HIGH SCHOOL

SEPT 53 - UNKNOWN
To JUNE 56 - NEWTON, MA
Curriculum COLLEGE PREP, graduated with DIPLOMA

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CRD 441405 - SWIRSKY. GERALD ROBERT
027-28-0864 Bom on 2/18/39

APR. 69 - 24 GRISCOM ROAD
To Present • SUDBURY. MA 01776

Edit Result - As of 1 1 ■?9 AM on 4/21 /82 this record was ok.

174

Enclosure 2

/lu,.sf/I./^'^

CRD 817433 - BANOYK. THOMAS FRANK
381-40-9380 - 300 HONEY CREEK NE
12/21/42 -ADA. Ml 49301

8/90-10/93- G. R. PHELPS & CO.. INC. (#173)

7/90- Date- CONNECTICUT MUTUAL UFE INS. COMPANY

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CRD 817433 - BANDYK, THOMAS FRANK
381-40-9380 - Bom on 12/21/42

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - Bom on 12/21/42

175

CCC.^ NCIDENTTYPEfS) -CTION SOURCE DATE OF ACTION "HM #

REV

n/02/93

-^4 Y5

22H1

7/20/93

13B1

-^4

DHS

11/04/92

"^4. Y5

22H1

11/11/92

22H1.13B1

■<'4. Y5

22H1

11/16/92

22H1.13B1.13B2

y4. Y5

22H1

4/29/92
138^

22H1.22H2.13B1,

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CRD 817433 - BANDYK. THO^MS FRANK
381-40-9380 - Bom on 12/21/42

OCC.# iNaDENTTYPE(S) ACHON SOURCE DATE OF ACTION ITEM #

13 Y4. Y5 22H1 U4 4/29/92 22H1.1381

12 Y4. YS 22H1 U4 4/29/92 22H1.22H2.13B1

T1 Y4. Y5 22H1 U4 4/29/92 22H1.1381

10 Y4. Y5 22H1 U4 4/29/92 22H2.13B2

9 Y4, Y5 22H1 U4 4/29/92 22H1.1381

3 X. Y4. Y5 ARB NA 11/25/91 22H1.13B1

7 Y4 22H1 U4 4/29/92 22H1,

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CRD 817433 - BANDYK. THOMAS FRANK
381 --10-9380 - Bom on 12/21/42

OCC.# INCIDENT TYPE(S) ACTION SOURCE DATE OF ACTION ITEM #

7 Y5 1381 US 1/11/91 13B1

6 Y4. Y5 22H1 U4 4/29/92 22H2,13B1

5 Y4 278 U4 1/29/85 22N1

4 Y4 27A U4 1/29/85 22H1

3 Y4, YS 22H1 U4 4/08/89 22H1.22H2

176

2 Y4. Y5 22H1 'J4 4/24/89 221

1 V4 22F2 U4 4/24/89 22F2.

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CRD 817433 - BANDYK, THOf^S FRANK

381-40-9380 - STATUS X, ACTION REV. ON 11/02/93. SOURCE Ml. PROVISO

- OCCURRENCE; 19. INCIDENT: X. COMPOSITE

- UPDATED: 12/22/93 BY: CRAZE

2 - 1 . Action Codes: REV

3 - 2. Action Dale: 11/02/93

4 - 3. Proviao: Not Provided

"S - 4. PrevKxaly Reported: No

6 - 4a. Occurrence Number Not Provided

7 - 5. Initiated by: STATE OF MICHIGAN, CORPORATION AND

8 - SECURmES BUREAU. GS/LE

9 - 6a. Doci<et/Case#: SA1192

ttr - 6b. Court Name/Location: Not Provided

11 - 7, Allegations: N

12 - 8. Results: ON OR ABOUT 10/25/93 THE BUREAU ISSUED A CONSENT

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS X. ACTION REV, ON 11/02/93. SOURCE Ml. PROVISO

- OCCURRENCE; 19. INCIDENT: X. COMPOSITE

- UPDATED: 12/22/93 BY: CRAZE

1 - ORDER TO REVOKE AND DENY EXEMPTIONS TO REVOKE AGENT

2 - REGISTRATION TO CEASE AND DESIST AND IMPOSE SANCTIONS PURSUANT

3 - TO THE MICHIGAN UNIFORM SECURITIES ACT FOR VIOLATING SECTION

4 - 204(a)(1)(O) UNAUTHORIZED TRADING AND SECTION 204 (a)(1)(B)

5 - VIOLATED OR FAILED TO COMPLY WITH THE ACT. RULES OR AN ORDER.

6 - 9. Subject Warned for Prosecution: No

7 - 10. Summary: SEE ABOVE CONTACT; GERRY SHEPAflO (517) 334-6209

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177

CRD 317433 - BANDYK. THOMAS FRANK

381-40-9380 • STATUS Y ACTION 22H1. ON 7/20/93. SOURCE U4. PROVISO

■ OCCURRENCE. 18. INCIDENT; Y4. COMPOSITE

- UPDATED. 9/07/93 BY: SAULSBUR

2 1 Questions: Not Provioed

3 ■ 2. Uodate: Yes

4 - 3. Inrtiatea by: CUSTOMER - CHARLES VOLXERS

5 4 Type of Event/Proceeaing: ?

6 - 5. Date inittatad: Not Provided

7 - 6. DocJcBt/Case#: MR. VOLKERS WAS UPSET WITH PERFORMANCE OF
3 ■ GLOBAL MARINE BONDS - MOST OF ASSETS WITH ME WAS GOV MUTAL

9 - FUNDS.

10 - 7 Aileganons: MR. VOLKERS WAS UPSET WITH PERFORMANCE OF

1 1 ■ GLOBAL MAfllNE BONDS - MOST OF ASSETS WITH ME WAS GOV MLTTAL

12 - FUNDS.

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y, ACTION 22H1. ON 7/20/93. SOURCE U4. PROVISO

- OCCURRENCE; 18, INODENT: Y4, COMPOSITE

- UPDATED; 9/07/33 BY: SAULSBUR

1^ - 8a. Current Status: I HAVE NO RECORD OR COMMUNICATION FROM

2 - RRMS.

3 - 8b. Status Date: Not Provided

4 - 8a Results: NOTHING. THIS COMPLAINT COMES UP EVERY YEAR OR

5 - SO. THE COMPUMNT THAT I HEARD HE WAS UNHAPPY WITH BONDS -

6 - WRITE NOTE TO NEW RRM WHEN I TRANSFERRED - I DONT KNOW IF

7 ■ COMPLAINT WAS SENfT TO HUTTON • WHILE THERE

a • 9. Summary I HAVE NOT CONTACTED CUENT IN MORE THAN 4 YEARS.

9 • CUENT BOUGHT HUTTON GOV BOND FUNDS AND GLOBAL MARINE BONDS.

10 ■ RECOMMEND BY RRM. I DO NOT HAVE ANY RECORDS OF TRANSACTIONS.

1 1 • LAST CONTACT. I HAD WITH CUENT WAS WHEN I CHANGED RRMS AND

12 ASK IF HE WOULD UKE TO TRANSFER SET - HE SAID NO. THERE

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 22H1. ON 7/20/93. SOURCE U4. PROVISO

- OCCURRENCE; 18. INQDENT: Y4. COMPOSITE

• UPDATED; 9/07/93 BY: SAULSBUR

1 - MEMBERS OF VOLKERS FAMILY BOUGHT GLOBAL BONDS - COMPLAINT MORE

2 - THAN 4 YEARS AGO WAS BOUGHT BY FRIEND. «»»«««« 9/7/93<

3 - REQ'D AMENDED PG. 3 REC'D FROM G. R. PHELPS & CO.. INC. WITH

4 - QUESTIONS 22N1 ANSWERED "YES" AND QUESTION 22K ANSWERED

5 - •NO."*''^

6 -10. Attacrunems: Not Appllcatile

178

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CRD 817433 - BANDYK. THOMAS FRANK

381^»0-9380 - STATUS Y, ACTION 13B1. ON 5/03/93. SOURCE U5. PROVISO

- OCCURRENCE 18. INCIDENT: Y5. COMPOSITE

- UPDATED: 5/03/93 BY: SAULSBUR

2 - 1. Questioru: 1381

3 - 2. Update: No

4 - 3. Inrttoted by: CHARLES VOLKER

5 - 4. Type of Ever«/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date Initlatad: 03/1 1 /93

7 - 6. Docket/Ca8e#: N/A

8 - 7. Allegations: UNAUTHORIZED TRADES. CHURNING. SUITABIUTY:

9 - ALLEGED DAMAGES OF S3&0OG.0O.

10 - 8a. Current Status: PENDING

11 -8b. Status Data: CURRENT

12 - 8c. Results: PENDING

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CRD 817433 - BANDYK. THOMAS FRANK

381^W-9380 - STATUS Y. ACTION 13B1. ON 5/03/93. SOURCE US. PROVISO

- OCCURRENCE; 18. INODENT: Y5. COMPOSITE

- UPDATED: 5/03/93 BY: SAULSBUR

1 - 9. Summary: NO OPTIONS OR COMMODITIES. CONTACT PERSON

2 - THERESE OBRINGER (313) 540-0578

3 10. Attachments: Not App4icaC}le

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CRD 817433 - BANDYK, THOMAS FRANK

381-40-9380 - STATUS Y. ACTION DHS. ON 11/04/92. SOURCE U4. PROVISO

- OCCURRENCE: 17. INCIDENT: Y4, COMPOSITE

- UPDATED: 12/01/92 BY: SAULSBUR

2 - 1 . Quastions: Not Provided

3 - 2. Update: No

4 - 3. Initiated by: THOMAS BANDYK

179

3 - -i Type Of Event/Proceeaing: FlUNG CHAPTER 7 BANKRUPTCY

6 • 5. Date inmatea: EXPECTED DATE FE3.2. ;992

7 • 6. DocKet/Case#: N/A

3 . 7 Allegauons: i HAVE A CLAIM AGAINSTME FOR 115.595.70.

9 . AMOUNT IS FOR A PROMISSORY NOTE PLUST INTERST AS AN RESULT OF

10 ■ TERMINATION FROM PRUDENTIAL BACHE CN 6-4-1990. NASD CASE

11 ■ #91-00106

12 ■ 3a. Current Status; STOPPED AR8RITATI0N

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CRD 817433 • SANDYK. THOMAS FRANK

381-40-9380 - STATUS Y, ACTION DHS. ON 11/04/92. SOURCE U4. PROVISO

■ OCCURRENCE; 17. INCIDENT: Y4. COMPOSITE

- UPDATED. 12/01/92 BY: SAULSBUR

2 - 8b. Status Data: Not Provided

3 ■ 8c. Results: N/A

4 - 9. Summary: I SIGNED AT WILL CONTRACT "//ITH PRUDENTIAL WHEN

5 - PRUDENTIAL TOOK OVER THOMAS MCKJNNON. I WAS GIVEN UP FRONT

6 - MONEY TO TRANSFER MY CLBNTS TO PRUDENTIAL UPON MY TEMR

7 - INSnON PRUDENTIAL MGR. REQUESTED PAYMENT OF MONEY VS MY LAST
a - PAYCHECK. 6 MONTHS U^TER PRUDENTIAL STARTED ARBITRATION. I

9 - TRIED TO GO THROUGH ARBITRATION PROCESS. I COULD NOT AFFORD THE

10 - LEGAL FEES TO CONTINUE IT WAS RECOMMENDED BY COURSEL TO RLED
1 T' - CHAPTER 7 BANKRUPTCY. PRUDENTIAL AT THAT POINT WOULD STOP

12 - PROCESS. MY ATTORNEY HAS RLED COUNTER CLAIM. HE COULD NOT GISS

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CRD 817433 - BANDYK, THOMAS FRANK

381^W3-9380 ■ STATUS Y. ACTION DHS. ON 11/04/92. SOURCE U4. PROVISO

- OCCURRENCE 17. INODENT: Y4, COMPOSITE

- UPDATED. 12/01/92 BY: SAULSBUR

1 - ADEQUATE DISCOVERY TO CONTINUE. FELT BANKRUPTCY COUNT WOULD BE

2 . ..•^.~..— ..,2/1/92 < REQ'D AMENDED PG. 3 REC'D FROM G. R.

3 - PHELPS & CO.. INC. WITH QUESTION 22L ANSWERED

4 -YES.

6 - 10. Attacnments: COPY OF THE NOTICE OF STAY INDICATING THE

7 - CASE NUMBER OF THE BANKRUPTCY IS 92-80639""— "—

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180

CRD 817433 - BANOYK. THOMAS FRANK

381-40-9380 - STATUS Y, ACTION 22H1. ON 11/11/92. SOURCE U4. PROVISO

■ OCCURRENCE; 16. INCIDENT: ¥4 COMPOSITE

- UPDATED: 11/11/92 BY: SAULSBUR

2 - 1. Questions: 22H1

3 - 2. Update: Yes

4 - 3. Initiated by: TOERING ELECTRIC CO.

5 - 4 Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date Initiated: 5-92

7 - 6. Docket/CasaHi*: N/A

8 - 7. AJIegations: UNSUITABLE INVESTMENT LOSSES.

9 - 8a. Current Status: PENDING

10 - 8b. Status Date: CURRENTT

11 - 8c. Results: PENDING 1 HAVE RECEIVED NOTHING FROM CUEhiT OR

12 - SOLD AS OF THIS DATE 10-20-9Z

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CRD 817433 - BANOYK, THOMAS FRANK

381-40-9380 - STATUS Y, ACTION 22H1, ON 11/11 /9Z SOURCE U4. PROVISO

- OCCURRENCE; 18. INaOENT: Y4. COMPOSfTE

- UPDATED; 11/11/92 BY: SAULSBUR

1_ - 9. Summary: I DO NOT HAVE RECORDS OF TOERING SET. DAVE BOUGHT

T - INVESTMENT FOR INCOME FOR CORP SETS. EXCESS CASH FOR BUSINESS

3 - PURPOSES. RECOMMENDED TRUSTS RECOMMENDED BY RRM. CUENT

4 - RECEIVED ALL CONRRMATION NO COMPLAJNTS FROM CUENT WHILE AT

5 - SCH. ACCOUNT REVIEWED BY MGR. AND SLH NO PROBLEMS. CLAJM IS 3

6 - YRS. AFTER LEAVING SHL I DO NOT KNOW WHAT HAPPENDED AFTER DAVE

7 - STARTED PROCESS OF TRANSFER ACCOUNT OT ME ST. THOMASON THEN

8 - CANCELLED TRANSFER. WHEN RECONTACTED BY SLH. BROKERS.

9 - 10. Attachments: Not Appticatile

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 1381. ON 7/17/92. SOURCE U5. PROVISO

- OCCURRENCE; 16. INQDENT: Y5. COMPOSITE

- UPDATED: 8/31/92 BY: TRUMBLE

2 - 1. Questions: 13B1 13B2

3 - 2. Update: Yes

4 - 3. Initiated by: TOERING ELECTRIC CO.

5 - 4. Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date initiated: S/92

7 - 6. Docket/Case#: N/A

181

3 ■ 7 Allegauons: UNSUITABLE INVESTMENT RECOMMENDATIONS. LOSSES

9 ■ OF S560.000.

•0 -83. Current Status: CLOSED

;i - 8b. Status Date: 6/16/92

12 • 8c. Results: SETTLEMENT OF SIOO.OOO THOMAS BANDYK DID NOT

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CRD 317433 • BANDYK. THOMAS FRANK

381-10-9380 - STATUS Y. ACTION 13B1. ON 7/17/9i SOURCE U5. PROVISO

- OCCURRENCE. 16. INCIDENT: Y5. COMPOSITE

- UPDATED; 8/31/92 BY: TRUMBLE

1 - CONTRIBUTE TOWARD SETTLEMENT

2 - 9. Summary: OPTIONS AND COMMODmES NOT INVOLVED. FOR FURTHER

3 - INFORMATION CONTACT THERESE OBRINGER 313 540 0578

4 10. Attacnmertts: Not Applicable

THAT IS ALL THE INODENT TYPES FOR THIS OCCURRENCE.

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CHD 817433 - BANDYK, THOMAS FRANK

381-40-9380 - STATUS Y, ACTION 22H1, ON 11/16/9Z SOURCE U4. PROVISO

- OCCURRENCE; 15. INCIDENT: Y4, COMPOSITE

- UPDATED; 1 1 /1 6/92 BY: SAULSBUR '

2 -1 Questions: 22H1

3 - 2. Update: Yea

4 ■ 3. Initiated by. RICHARD & JOYCE SESSLER

5 - 4 Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date Initiated: 4-91

7 - 6. DocKet/Caso#- NONE

8 - 7 Allegations: FAILURE TO FOLLOW INVESTMENT OBJECTTVES.

9 - FAILURE TO DISCLOSE LOSSES. EXCESSIVE TRADING.

10 . aa. CurTBfTt Status: CLOSED

11 - 8b. Status Date: 5-3-92

12 • 8c. Results: PARTIES (SLH) AGREED TO SETTLE THS COMPlAiNT

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 22H1, ON 11/16/92. SOURCE U4. PROVISO

- OCCURRENCE; 15. INCIDENT: Y4. COMPOSITE

- UPDATED: 11/16/92 BY: SAULSBUR

1 - FOR SI 60.000. TOM BANDYK DID NOT CONTRIBUTE TOWARDS SETTLEMENT.

182

2 - 9. Summarv: OBJECTIVES SET BY SESSLER AND CPA. WANTED TAX

3 ■ ADVANTAGES.WArjTED SHORT TERM PROFITS TO COVER LOSSES. CUENTS

4 - RECEIVED CONRRMATION ON AN TRADES-RECEIVE MONTHLY STATEMENTS.

5 • REVIEWED WITH CUENTS AND CPS ACTIVITY REVIEWED BY SLH AND

6 ■ MANAGER LEROY LUCAS. THERE WAS NOT ONE COMPLAINT BY CPA OR

7 - SESSLER WHILE I WAS HANDUNG THE ACCOUNT. THEY WANTED

8 - PROFITS-THERE WAS A HOT NEW ISSUE MARKET- WHICH ENDED WITH OCT

9 - 19. 1987. BOUGHT SILVER SCREEN UMITED PARTNERSHIP-SIGN FORMS,

10 - CUSTODIAN ACTS-SAFE INVESTMENTS. HAD MORE THAN ONE

11 - ACCOUNT-HANDLED AS TO THEIR OBJECTIVES. RECEIVE FIRM STATEMENTS

12 - DID NOT FAIL TO DISCLOSE STATEMENTS. CLAIM 2 YEARS AFTER I

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y, ACTION 22H1, ON 11/16/9i SOURCE U4. PROVISO

- OCCURRENCE: 15. INQDENT: Y4. COMPOSITE

- UPDATED: 11/16/92 BY: SAULSBUR

1 - LEFT. THEY STARTED TRANSFER TO MY NEW RRM THEN STOPPED. 1 HAD

2 - NO PROBLEMS WITH SESSLER'S WHILE AT SHEARSON.

3 - 10. Attachments: Not AppllcaUe

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CRD 817433 - BANDYK. THOMAS FRANK

381^-9380 - STATUS Y. ACTION 1381. ON 6/29/9Z SOURCE U5. PROVISO

- OCCURRENCE; 15. INODENT: Y5. COMPOSITE

- UPDATED: 6/29/92 BY: MORAWSW

2 - 1. Questions: 1381 13B2

3 - 2. Update: No

4 - 3. Initiated by: RICHARD AND JOYCE SESSLER

5 - 4. Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date Initiated: 4/91

7 - 6. Doci(et/Ca8e#: NONE

8 - 7. Allegations: CHURNING. FAILURE TO FOLLOW INVESTMENT

9 - OBJECTIVES. FAILURE TO DISCLOSE LOSSES. ALLEGED DAMAGES

10 - $459,433.41 COMPENSATORY

11 •8a. Cun«nt Status: CLOSED

12 - 8b. Status Date: 5/3/92

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y, ACTION 1381. ON 6/29/92. SOURCE U5. PROVISO
- OCCURRENCE: 15, INODENT: Y5. COMPOSITE

183

UPDATED: 6/29/92 BY MORAWSKI

3c. Results: THE PARTIES AGREED TO SETTLED THIS CCMPUMNT FOR
3160.000. THOMAS BANDYK DID NOT CONTRIBUTE TOWARD SETTLEMENT

9. Summarv: OPTIONS AND COMMODITIES NOT INVOLVED FOR FURTHER
■ NFORMATION CONTACT MANUEL OJEDA (312)648-3035

10. Attacnments: Not Aopiicatjie

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CRD 817433 - BANDYK. THOMAS FRANK

381-10-9380 - STATUS Y. ACTION 22H1. ON 4/29/92, SOURCE U4. PROVISO

- OCCURRENCE; 14, INODENT: Y4. COMPOSITE

- UPDATED; 4/29/92 BY: BREWERW

2 - 1. Questions: 22H1 22H2

3 - 2. Update: No

4 - 3. Inidated by: PAUL AND NANCY KECK

5 - 4 Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date initlatad: 1 1 /89

'T' - 6. Docket/Case#: Not Provided

8 ■ 7 Allegations: UNSUITABLE UNAUTHORIZED

9 ■ 8a. Currem Status: SETTLED

10 - 3tx Status Date: Not Provided

11 8c Results: SLH PAID OFF RECKS - DID NOT WANT UST OF

12 - CUENTS TO BE MADE KNOWN WHO BOUGHT 1-1- RECOMMENDATION WHICH

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CRD 817433 - BANDYK. THOMAS FRANK

381-10-9380 - STATUS Y. ACTION 22H1. ON 4/29/92. SOURCE U4. PROVISO

- OCCURRENCE- 14, INQDENT: Y4. COMPOSITE

- UPDATED. 4/29/92 BY: BREWERW

1 • WENT BANKRUPTCY.

2 - 9. Summarr I TALK TO PAUL ON ALL TRADES. WAS SUTABLE FOR

3 - PAUL ■ BUSITESS MAN - BOUGHT & SOLD REAL ESTATE INVESTMENT -

4 - RECEIVE PflOPESTUS ON INVESTMENT - GOT K-1 ON INVESTMENT -

5 ■ HIGHLY RECOMMEND BY EF HUTTON. WENT DOWN IN VALUE EEC SUSE OF

6 - CRASH • HAD MANY OPPORTUNTIES TO SELL OUT - SOLD OUT LONG AFTER

7 - I LEFT RRM - RRM HAD BIG POSITION IN INVESTMENT. I BOUGHT FOR

8 ■ MY OWN ACCOUNT PLUS BROTHER'S AND DAUGHTERS COLLEGE SET NO

9 ■ PROBLEM WITH CUENT WHILE AT SLH.

10 10. Attacnments: Not Appjjcat^le

184

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y. ACTON 1381. ON 12/10/91. SOURCE U5. PROVISO

- OCCURRENCE; 14. INCIDENT: Y5, COMPOSITE

- UPDATED: 12/10/91 BY: NGUYENL

2 - 1. Questions: 13B1 1382

3 - 2. Update: No

4 - 3. Initiated by: PAUL AND NANCY KECK

5 - 4. Type of Event/Proceeding: CUSTOMER COMPL^JNT/NYSE

6 - ARBrTRATlON

7 - 5. Date Initiated: 11/14/89

8 - 6. Docket/Case#: NONE

9 - 7. Allegations: CUVJMA^f^S ALLEGED BREACH OF RDUCIARY DUTY.

10 - MISREPRESENTATION, UNAUTHORIZED TRADING. AND NEGUGENCE

11 - ALLEGED DAMAGES - COMPENSATORY $161,000 PLUS INTEREST, COSTS.

12 - ATTORNEYTS FEES AND PUNITIVE DAMAGES.

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CRD 817433 - BANDYK, THOMAS FRANK

381-40-9380 - STATUS Y, ACTON 1381. ON 12/10/91, SOURCE U5. PROVISO

- OCCURRENCE: 14, INODENT: Y5. COMPOSITE

- UPDATED: 12/10/91 BY: NGUYENL

1 - 8a. Current Stanjs; CLOSED

2 - 8b. Status Date: 10/31/91

3 - 8c. Resutts: SETTLEMEMT $97,000.00 THOMAS BANDYK DID NOT

4 - CONTRIBUTE TOWARD SETTLEMENT

5 - 9. Summary: RESPONDENTS GENERALLY DENIED ALL ALLEGATIONS BY

6 - CLAIMANTS. THE CASE WAS, HOWEVER, SETTLED. OPTIONS AND

7 - COMMOOmES NOT INVOLVED.

8 - 10. Attachments: Not Appticatjie

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CRD 817433 - BANDYK, THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 22H1. ON 4/29/92, SOURCE U4. PROVISO

- OCCURRENCE; 13. INCIDENT: Y4. COMPOSITE

- UPDATED: 4/29/92 BY: BREWERW

185

2
3

a
5
5
7
3
9
10
11
12

1 Questions: 22H1

2. Uoaate: no

3. Inmatea Dv: CUENT VIOUV DANCZ

A Type or Evem/Proceeaing: CUSTOMER CCMPUMNT

5. Date inrtiatea: 8-20-91

6. DocK8t/Cas8#: N/A

7 Allegations: ALLEGES UNSUITABLE TRADING - DID NOT SPECIFY
WHAT TYPE OF SECURITIES INVOIVED

Ba. Current Status: PENDING - i HAVE SEEN NOTHING FROM CLIENT
OR PRU-8ACHE

3b. Status Date:

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CRD 817433 - BANOYK. THOMAS FRANK

381^10-9380 - STATUS Y ACTION 22H1, ON 4/29/92. SOURCE U4. PROVISO

• OCCURRENCE. 13. INODENT: Y4. COMPOSITE

- UPDATED; 4/29/92 BY: BREWERW

2
3

3^
9
10

8c Results: NOTHING THAT I KNOW OF I HAVE TAKED WITH CUENT
OR PRU BACH SINCE BEFORE 6-5-90

9. SurnnwY: 00 NOT KNOW WHAT TO RESPOND TOO - 1 HAVE NOT SEEN
COMPUiJNT. 1 RECOMMEND TO CUENT GOV. BONDS AND CLOSED IN
TRUSTS. 1 HAD NO COMPLAJNTS FROM CUENT WHILE I WAS SUPERVISING
ACCOUNT. 'WHILE I WAS ON VACATION - PRU BACHE SOLD OUT MANY OF
MY CUENT IN SOME GOV BUNDS - MOST WITHOUT THHR PERMISSION
TOLD CUENTS LATER THAT THE GOV BONDS WERE HIGH RISK
INVESTMENTS - SEE ATTACHED.
1 0. Attacnments: Not AppticaOte

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CRD 817433 - BANDYK. THOMAS FRANK

381-10-9380 ■ STATUS Y ACTION 1381. ON 9/12/91. SOURCE US. PROVISO

■ OCCURRENCE- 13. INODENT: Y5. COMPOSITE

• UPDATED. 4/29/92 BY: BREWERW

2 1 Questions: 1381

3 - 2. Update: Not Provided

4 - 3. Initiated by: CUENT VIOU^ DANCZ

5 - 4 Type of Evem/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date initiated: ON OR ABOUT 8/20/91

7 - 6. DocKet/Case#: Noc ProvKJed

8 - 7 AJIegaiions: CUENT ALLEGES UNSUITABLE TRADING WITH

9 - ALLEGED DAMAGES OF 37.000.00. SECURITIES INVOLVE ZERO COUPON

10 - TREASURY STRIPS AND FRANKUN UNIVERSAL TRUST.

11 - 8a. Current Status; SETTLED

12 - 8b. Status Data: 3/6/92

186

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CRD 817433 • BANDYK. THOMAS FRANK

381^M3-9380 - STATUS Y. ACTION 1381. ON 9/12/91, SOURCE U5. PROVISO

- OCCURRENCE: 13. INCIDENT: Y5, COMPOSITE

- UPDATED: 4/29/92 BY: BREWERW

1 - 8c. Resutts: CASE SETTLED FOR $20,000.00.

2 - 9. Summary: Not Provided

3 - 1 0. Attacnmems: Not Applicatile

THAT IS ALL THE INCIDENTT TYPES FOR THIS OCCURRENCE

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CRD 817433 - BANDYK, THOMAS FRANK

381^«)-9380 - STATUS Y. ACTION 22H1. ON 4/29/92. SOURCE U4. PROVISO

- OCCURRENCE; 1Z INQDENT: Y4, COMPOSfTE

- UPDATED: 4/29/92 BY: BREWERW

2=- - 1. Questions: 22H1 22H2

3 • 2. Update: No

4 - 3. Initiated by: NANCY FRIDRICH - CUSTOMER

5 - 4. Type of Event/Proceeding: CUSTOMER COMPUUNT

6 - 5. Date Initiated: 9-5-1990

7 - 6. DocJ<et/Case#: NONE

8 - 7. AllegatJons: CUSTOMER ALLEGED DAMAGES TOTALLY 97000 DUE TO

9 - CHURNING AND UNAUTHORIZED TRADES

10 - 8a. Cun-ent Status: SETTLED

11 - 8b. Status Date: MAY 1991

12 - 8a Results: SETTLED FOR 47000

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CRD 817433 - BANDYK. THOMAS FRANK

381^*0-9380 - STATUS Y. ACTION 22H1. ON 4/29/92. SOURCE U4. PROVISO

- OCCURRENCE: 12. INQDENT: Y4. COMPOSITE

- UPDATED: 4/29/92 BY: BREWERW

1 - I WAS NOT INVOLVED IN SETTLEMENT. CUENT OR PRU HAVE

2 - CONTACTED ME I PAID NOTHING

3 - 9. Summary: I HAD NO PROBLEMS WITH CLIENT - GAVE ME

4 - REFERRALS FROM PEOPLE AT WORK WHILE I WAS ON VACATION ONE OF

5 - HER POSITIONS IN SOME GUV BOUNDS WERE SOLD OUT - CUENTS WERE

6 - LATER TOLD THESE WERE HIGH RISK - NOT TRUE - HIGH QUAUTY -

7 - RECOMMENDED BY RRM. I HAVE LETTERS FROM CUENTS • THAT I DID

187

a • NOT CHURT ACCOUNTS - ,MOT WHAT BROKERS TOLD MY CL:ENTS TO GET

9 • BUSINESS - SEE ATTACHED

10 10. Attacnments: Not AopiicaDle

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 ■ STATUS Y, ACTION 13B2. ON 7/22/91. SOURCE US. PROVISO

- OCCURRENCE; 12. INCIDENT: Y5. COMPOSITE

- UPDATED; 7/22/91 BY: MANDELBL

2 -1. QuesDons: 13B1

3 - 2. Update: Not Provided

4 ■ 3. Initiated by: NANCY FRIEDRICH. CUSTOMER

5 - 4 Type of Event /Proceeding: CUSTOMER COMPLAJNT

6 - 5. Dale initiated: SEPTEMBER 5. 1990

7 - 6. DocK«/Case#: NONE

8 - 7 AJIeganons: CUSTOMER ALLEGED DAMAGES TOTALLING £97.000.00

9 - DUE TO CHURNING AND UNAUTHORIZED TRANSACTIONS.

10 • 3a. Curreni Status- SETTLED

11 - 8b. Stams Date: may i991

12 - 8a Results: SETTLED FOR $47,000.00

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y ACTION 13B2. ON 7/22/91. SOURCE US. PROVISO

■ OCCURRENCE; 12. INODENT: Y5. COMPOSITE

- UPDATED. 7/22/91 BY: MANDELBL

1 - 9. Summary: Not Provided

2 - 1 0. Attacnments: Not AppiicatJle

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CRD 817433 - BANDYK. THOMAS FRANK

381^10-9380 - STATUS Y. ACTION 138i ON 7/22/91. SOURCE US PROVISO
- OCCURRENCE; 12. INODENT: Y5. RUNG: 1

1 - JDS 600-19791: Fonn US; Amend: B/D 07471

2 - 1 Questions: 1381

3 - 2. Update: Not Providad

188

4 - 3. Initiated by: NANCY FRIEDRICH. CUSTOMER

5 - 4. Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date Inrtiated: SEPTEMBER 5. 1990

7 - 6. Docket/Case*: NONE

8 - 7. Allegations: CUSTOMER ALLEGED DAMAGES TOTALUNG S97.000.00

9 - DUE TO CHURNING AND UNAUTHORIZED TRANSACTIONS.

10 - 8a. Current Status: SETTLED

11 - 8b. Status Date: MAY 1991

12 - 8c. Results: SETTLED FOR $47,000.00

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CRD 817433 - BANDYK, THOMAS FRANK

381-40-9380 - STATUS Y, ACTION 138Z ON 7/22/91, SOURCE U5. PROVISO
- OCCURRENCE; 12. INODENT: Y5. RUNG: 1

1 - 9. Summary: Not Provided

2 - 10. Attachments: Not Applicatiie

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CRD 817433 - BANDYK, THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 22H1. ON 4/29/92. SOURCE U4, PROVISO

- OCCURRENCE; 11, INODENT: Y4. COMPOSITE

- UPDATED: 4/29/92 BY: BREWERW

2 - 1. Ouestions: 22H1

3 - 2. Update: No

4 - 3. Initiated by: CUSTOMER WILUAM CONNOLLY

5 - 4. Type of Evem/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date Inrtiatad: 6/4/91

7 - 6. DocKet/Case#: 91-01705

8 - 7. Allegations: LOSS IN ACCOUNT

9 - 8a. Cun«nt Status: CLOSED

10 - 8b. Status Data: 12/27/91

11 - 8a Results: CHEAflSUN WAS GOING TO SETTLE I DO NOT KNOW RNAL

12 - RESULTS 1 PAID NOTHING

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CRD 817433 -BANDYK, THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 22H1. ON 4/29/92. SOURCE U4. PROVISO

- OCCURRENCE: 11. INQDENT: Y4. COMPOSITE

- UPDATED: 4/29/92 BY: BREWERW

1 - 9. Summary: LOSS DO TO SURRENDER CHARGES OF EFH GOV FUND

i
5
5
7
3
9

189

AND ICNI PHARM. CLIENT WANTED IN COME SO RECOMMEND GOV FUND -
-UND HAD NO FRONT END LOAD BUT A DEFFERRED SURRENDEN CHARGE
A/AS NOT GOING TO TOUCH MONEY FOR YEARS IN 6 MONTHS WAS BUYING
HORSES, BUILDING BARNS - REMEMBER MY HOME. iCN WAS RECOMMEND BY
SERVICES ■ AIDS • BOUGHT 500 SHARES FROM ME ■ '000 W R MEMBER
BROKER I TALKED WITH CUENT ON ALL TRADS STOCK WENT DOWN DUE TO
1987 CRASS NO PROBLEM WITH CUENT WHTH AT SCH.
1 0. Attacnments: Not AopiicatJle

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CRD 817433 - BANDYK. THOMAS FRANK

331-40-9380 ■ STATUS Y. ACTION 1381. ON 7/10/91. SOURCE US. PROVISO

- OCCURRENCE: 11. INODENT: Y5. COMPOSPTE

- UPDATED; 3/1 1 /92 BY: ALUSON

2 - 1. Ouestxjns: i3B1 13B2

3 - 2. Update: Yes

4 - 3. Initialed by: WILLIAM B. CONNOLLY

5 - 4. Type of Event/Proceeding: CUSTOMER COMPLAJNT/NASD

6 - ARBrTRATlON

7 - 5. Date initiated: 6/4/91
ff^ - 6. Doctcet/Caae#: 91-01705

9 - 7 AJIeganons: FAILURE TO FOLLOW INSTRUCTIONS. BREACH OF

10 - RDUCIARY. UNAUTHORIZED TRADING ALLEGED DAMAGES $20,000.

11 ■ 8a. Current Status: CLOSED

12 - 8b. Status Date: 12/27/91

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CRD 817433 - BANDYK THOMAS FRANK

381^10-9380 - STATUS Y ACTION 1381, ON 7/10/91. SOURCE US. PROVISO

• OCCURRENCE; 11. INCIDENT: Y5. COMPOSITE

- UPDATED; 3/11/92 BY: ALUSON

1 - 8C. ResUts: SETTLEMENT - SaSOO THOMAS BANDYK DID NOT

2 ■ CONTRIBUTE TOWARD SETTLEMENT

3 • 9. Summary: Not Provided

4 10. Attacnments: Not Applicable

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190

CRD 817433 • BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 22H1. ON 4/29/92. SOURCE U4. PROVISO

- OCCURRENCE: 10. INCIDENT Y4 COMPOSITE

- UPDATED: 4/29/92 BY: BREWEHW

2 -1 Questions: 22H2

3 - 2. Update: Not Provided

4 - 3. Initiated by: CUSTOMER GEELHOED

5 ■ 4 Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date Inftiated: 10-15-90

7 - 6. Docket/Case#: NONE

8 - 7. Allegations: ALLEGED THAT IMPROPER TRADES WERE DONE IN HER

9 - ACCOUNT - NO SPECIRC DAMAGES

10 - 8a. Current Status: SETTLED

11 - 8b. Status Date: i -28-91

12 - 8c. ResUts: SETTLED FOR $10,000

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CRD 817433 - BANDYK. THOMAS FRANK

381^*0-9380 - STATUS Y, ACTION 22H1, ON 4/29/9Z SOURCE U4, PROVISO

- OCCURRENCE 10. INODENT: Y4. COMPOSITE

- UPDATED: 4/29/92 BY: BREWERW

1 - 9. Summary: I PAID NOTHING - I HAVE NOT BEEN COMPLAINT. I

T ■ HAVE HAD NO CONTACT WITH CHARLOUE OR PAN BRCH SINCE MAY 1990

3 - RRM AS HIGH QUAUTY.

4 - 10. Attachments: I KNOW OF NO PROBLEMS WITH CUENT - HAVE ME

5 - REFER RALS. WHILE I WAS ON VACATION - PRU BACLE OF GRAND REPIDS

6 - SOLD OUT A LARGE POSITION OF SOME GOV BONDS THAT I HELD FOR

7 - CUENTS . MOST OF TRADES WERE DONE WITHOUT CUENTS PERMISSION -

8 - I HAVE LETTERS TO SUCH - CHAR LOITE HAD SOME OF THESE GOV BUNDS

9 - - CUENTS LATEN WERE TOLD WERE HIGH RISK - NOT TRUE - RECOMMEND

10 -BY

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y, ACTION 1381. ON 4/15/91. SOURCE U5. PROVISO

- OCCURRENCE: 10. INODENT: Y5. COMPOSITE

- UPDATED: 4/15/91 BY: D4NGUYEN

2 - 1. Questions: 1382

3 - 2. Update: No

4 - 3. Initiated by: CHARLOTTE GEELHOED

5 - 4. Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date Initiatad: 10/15/90

191

• 6. DocKet/Case#- NONE
3 - 7 Ailegauons: THE CUENT ALLEGED THAT IMPROPER TRADES WERE

9 • DONE IN HER ACCOUNT; NO SPECIRED DAMAGES WERE ALLEGED.

:0 - 8a. Current Status: SETTLED

■1 - ab. Status Date: 1/28/91

: 2 • 3C Results: THE CASE WAS SETTLED WITH THE CUENT FOR

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CRD 817433 - 8ANDYK. THOMAS FRANK

381-40-9380 • STATUS Y. ACTION 13B1. ON 4/15/91. SOURCE US. PROVISO

- OCCURRENCE; 10. INCIDENT: Y5. COMPOSITE

• UPDATED: 4/15/91 BY: D4NGUYEN

1 • $10,000.00.

2 9. Summary: Not Provided

3 10. Attacnments: Not Applicatate

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CffD 817433 • BANDYK. THOMAS FRANK

381^-9380 - STATUS Y. ACTION 22H1. ON 4/29/9Z SOURCE U4. PROVISO

- OCCURRENCE: 9. INQDENT: Y4. COMPOSITE

- UPDATED: 4/29/92 BY: BREWERW

2 - 1 Questions: 22H1

3 - 2. Update: No

4 - 3. initiated by: CUSTOMER JOHN & PATRINA CZYZIO

5 ■ 4 Type of Event /Proceeding: CUSTOMER COMPLAJNfT

6 - 5. Data initiated: 12/21/90

7 - 6. OocKet/Case#: NA

8 - 7 Allegations: ALLEGES UNAUTHORIZED & UNSUfTASLE

9 - TRANSACTIONS • ALLEGED DAMAGES OF 35000

10 - 8a. Current Status- SETTLED

11 - 8b. Status Date: 6-19-91

12 -80. Results: WITHOUT ADMITTING UABIUTY FRIM SETRED THE

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CRD 817433 - BANDYK. THOMAS FRANK

381^10-9380 - STATUS Y, ACTION 22H1. ON 4/29/92, SOURCE U4. PROVISO

- OCCURRENCE; 9. INQDENT: Y4. COMPOSITE

• UPDATED. 4/29/92 BY: BREWERW

1 . CLAIM FOR 20.000 I WAS NOT INVOLVED IN SETTLEMEhfT - I WAS NOT

192

2 - GIVEN ANY DUE PROCESS - JUST PAID OFF CUENT I HAVE NOT SEEN

3 - COMPUMNT I PAID NOTHING

4 - 9. Summary: I WAS NOT INVOLVED IN PROCEEDING - I

5 - CONTACTED CUENTS ON TRADES - I RECOMMEND BOUND TRNSTS AND

6 - AMERICA FIRST - AAA RSTING BY STANGER. 1 DO NOT HAVE THE

7 - RECORDS. - MOSTLY BOUGHT IN COME IDEAS FROM ME. NO CONFUCT

8 - WITH CUENT WHILE MANAGING ACCOUNT - HAS BAND WOULD HAVE UKED

9 - LESS VOLATIUTY - RECOMMEND BUYING BACK RO - DID NOT UKE ME

10 - YIELD. RECOMMEND TRADES FOR TRY PURPOSES AND VOLATIUTY OF IN

1 1 - TEREST RATES

12 - 10. Attactiments: Not Applicable

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CRD 817433 - BANOYK. THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 22H1. ON 4/29/92. SOURCE U4. PROVISO
- OCCURRENCE; 9. INQDENT: Y4. RUNG: 1

1 - JDS 2713-1 1 192: Form U4: Amend 3: B/D 00173

2 - 1. Questions: 22H1

3 - 2. Update: No

4 - 3. Initiated by: CUSTOMEH JOHN & PATRINA C2YZI0

5 - 4. Type of Event/Proceeding: CUSTOMER COMPLAINT
AT - 5. Date Initiated: 12/21/90

7 • 6. Docket/Casa#: NA

8 - 7. Allegations: ALLEGES UNAUTHORIZED & UNSUITABLE

9 - TRANSACTIONS - ALLEGED DAMAGES OF 35000

10 - 8a. Current Status: SETTLED

11 • 8b. Status Date: 6-19-91

12 - 8c. Results: WITHOUT ADMITTING UABIUTY FRIM SETRED THE

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CRD 817433 -BANDYK, THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 22H1. ON 4/29/92, SOURCE U4. PROVISO
- OCCURRENCE: 9. INODENT: Y4, RUNG: 1

1 - CLAIM FOR 20.000 I WAS NOT INVOLVED IN SETTLEMENT - I WAS NOT

2 - GIVEN ANY DUE PROCESS - JUST PAID OFF CUENT I HAVE NOT SEEN

3 - COMPLAINT I PAID NOTHING

4 - 9. Summary: I WAS NOT INVOLVED IN PROCEEDING - 1

5 - CONTACTED CUEhJTS ON TRADES - I RECOMMEND BOUND TRNSTS AND

6 - AMERICA RRST - AAA RSTING BY STANGER. I DO NOT HAVE THE

7 - RECORDS. - MOSTLY BOUGHT IN COME IDEAS FROM ME NO CONFUCT

8 - WITH CUENT WHILE MANAGING ACCOUNT - HAS BAND WOULD HAVE UKED

9 - LESS VOLATIUTY - RECOMMEND BUYING BACK RO - DID NOT UKE ME

10 - YIELD. RECOMMEND TRADES FOR TRY PURPOSES AND VOLATIUTY OF IN

11 -TEREST RATES

12 - 10. Attachments: Not AppllcatJie

193

-HAT IS ALL OF THE SRR INFORMATION FOR THIS INCIDENT TYPE.

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CRD 817433 ■ BANDYK. THOMAS FRANK

381^-9380 - STATUS Y ACTION 13B1. ON 3/18/91. SOURCE US PROVISO

OCCURRENCE. 9. INQDENT: Y5. COMPOSITE

UPDATED. 7/22/91 BY: MANDELSL

1
2

4
5
6
7
3
9
10
11
12

1 Questions: 1382

2. Update: Not Provided

3. Initiated by: CUSTOMER JOHN AND PATRICIA CZYZIO
4 Type of Event/Proceeding: CUSTOMER COMPLAINT

5. Date initlatad: 12/21/90

6. DocKet/Ca3a#- N/A

7 Allegations: CUSTOMERS ALLEGED UNAUTHORIZED AND UNSUITABLE
TRANSACTIONS. ALLEGED DAMAGES OF S35.000.
8a. Current Status; SETTLED
8bL Status Date: 6/19/91
8C Results: WTTHOLT ADMITTING UAfllUTY RRM SETTLED THE

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 13B1. ON 3/18/91. SOURCE U5 PROVISO
OCCURRENCE. 9. INCIDENT: Y5. COMPOSITE
- UPDATED: 7/22/91 BY: MANDELBL

1 - CU^JM FOR S20.000.

2 ■ 9. Summary- Not Provided

3 10. Attacnments: Not AppijcatJte

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y ACTION 13B1, ON 3/18/91. SOURCE US PROVISO
- OCCURRENCE; 9. INCIDENT: Y5. RUNG. 2

1 - JDS 501-19791: Form US; Amend: B/D 07471

2 - 1 Questions: 13B2

3 - 2. Update: Not Provided

4 . 3. Initiated by: CUSTOMER JOHN AND PATRICIA CZYZIO

194

5 - 4. Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date inrtiated: 12/21/90

7 - 6. Oocket/Case#: N/A

8 ■ 7. Allegations: CUSTOMERS ALLEGED UNAUTHORIZED AND UNSUITABLE

9 - TRANSACTIONS. ALLEGED DAMAGES OF S35.000.

10 - 8a. Current Status: SETTLED

11 - 8b. Status Date: 6/19/91

12 - 8c. Results: WITHOUT ADMITTING UABIUTY FIRM SETTLED THE

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CRD 817433 - BANDYK, THOMAS FRANK

381^«)-9380 - STATUS Y. ACTION 1381, ON 3/18/91. SOURCE U5, PROVISO
- OCCURRENCE; 9. INCIDENfT: Y5. RUNG; 2

1 - CLAJM FOR $20,000.

2 - 9. Summary: Not Provided

3 - 10. Attachmems: Not Applicable

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CRD 817433 - BANDYK, THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 1381. ON 3/18/91. SOURCE US. PROVISO
" - OCCURRENCE; 9. INODENT: Y5. RUNG; 1

1 - JDS 41.07491: Form US; Amend: B/D 07471

2 - 1. Questions: 1381

3 - 2. Update: No

4 - 3. Inrtiated by: JOHN & PATRICIA CZYZIO

5 - 4. Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date Initiated: 11/21/90

7 - 6. Docket/Case#: Not Provided

8 ■ 7. Allegations: CUB^TT ALLEGES UNAUTHORIZED EQUITIES TRADING

9 - WITH ALLEGED DAMAGES IN EXCESS OF $30,000.00

10 - 3a. Cun^nt Status; PENDING

11 - 8b. Status Date: Not Provided

12 - 8a Results: Not Provided

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 13B1. ON 3/18/91. SOURCE U5, PROVISO
- OCCURRENCE; 9. INCIDENT: YS. RUNG: 1

1 - 9. Summary: Not Provided

2 - 10. Attachments: Not Applicable

THAT IS ALL OF THE SRR INFORMATION FOR THIS INODENT TYPE.

195

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CRD 817433 - BANOYK. THOMAS FRANK

381-^-9380 - STATUS X. ACTION ARB. ON 11/25/91. SOURCE NA. PROVISO

■ OCCURRENCE. 8. INCIDENT; X, COMPOSITE

- UPDATED: 9/20/93 BY: CHERRY

2 - 1 . Type of Event ARBrTRATlON

3 • 2. Update: NO

4 3. /VrtJttraoon Fortim: NASD

5 - 4 Case Name: FRANKUN AND DORIS SHEARS VS. SHEARSON LEHMAN

6 - HUTTON AND TOM BANDYK

7 ■ 5. Case Served Date: 01/17/1991

8 - 6. Case#: 91-00135

9 ■ 7a. /sjleqauons: SUfTABIUTY; MISREPRESENTATION: UNAUTHORIZED

10 - TRADING. OTHER

n ■7b. Type of Secuntiea: COMMON STOCK; PREFERRED STOCK;

12 - OPTIONS

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CRD 817433 ■ BANDYK. THOMAS FRANK

381-40-9380 - STATUS X. ACTION ARB. ON 11/25/91. SOURCE NA. PROVISO

- OCCURRENCE; 8. INODENT: X, COMPOSITE

- UPDATED; 9/20/93 BY: CHERRY

1 - 7c Relte* Asked: ACTUAL/COMPENSATORY DAMAGES. ASKED AMOUNT

2 - $77,042.01: PUNITIVE /EXEMPLARY DAMAGES. ASKED AMOUNT SO.OO:

3 . OTHER COSTS. ASKED AMOUNT $0.00; ATTORNETS FEES. ASKED AMOUNT

4 - SO.OO

5 ■ 8a. Current Status; AWARD AGAINST PARTY

6 - 8tx Status Date: 11/25/1991

7 - 8c Relle* Awarded: ACTUAL/COMPENSATORY DAA4AGES. REUEF HAS

a - BEEN AWARDED (PARTIAL OR FULL). AWARD AMOUNT S85.000.00 JOINTLY

9 - AND SEVERALLY: PUNITIVE /EXEMPLARY DAMAGES. REUEF HAS BEEN

10 - AWARDED (PARTIAL OR FULL). AWARD AMOUNT $50,000.00 JOINTLY AND

1 1 - SEVERALLY: OTHER COSTS. REUEF HAS BEEN AWARDED (PARTIAL OR

12 - FULU. AWARD AMOUNT $4,000.00 JOINTLY AND SEVERALLY: ATTORNETS

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CRD 817433 ■ BANDYK. THOMAS FRANK

381^W3-9380 - STATUS X. ACTION ARB. ON 11/25/91. SOURCE NA PROVISO

- OCCURRENCE; 8. INODENT: X, COMPOSITE

- UPDATED; 9/20/93 BY: CHERRY

1 - FEES. REUEF HAS BEEN AWARDED (PARTIAL OR FULL). AWARD AMOUNT

2 - $15,000.00 JOINTLY AND SEVERALLY

196

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CRD 817433 - BANDYK, THOMAS FRANK

381-40-9380 - STATUS Y, ACTION 22H1. ON 4/29/92. SOURCE U4. PROVISO

- OCCURRENCE; 8. INCIDENT: Y4, COMPOSITE

- UPDATED: 4/29/92 BY: BREWERW

2 - 1. Questions: 22H1

3 - 2. Update: No

4 - 3. Initiated by: CUSTOMER - FRANK & DORIS SHEARS

5 - 4. Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date Initiated: 1/91

7 • 6. Doci(et/Casa#; 91-00135

8 - 7. Allegations: UNAUTHORIZED TRADING - NOT CODING GERBER

9 - STOCK FOR IRA

10 - 8a. Current Status: IN REVIEW

11 - 8b. Status Data: STILL BBNG CONTESTED BY SLH

12 - 8c. Results: SETTLEMENT BEING CONTESTED I PAID NOTHING

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CRD 817433 - BANDYK. THOMAS FRANK

381^*0-9380 - STATUS Y, ACTION 22H1, ON 4/29/92. SOURCE U4. PROVISO

- OCCURRENCE; 8. INCIDENT: Y4, COMPOSITE

- UPDATED: 4/29/92 BY: BREWERW

1 - 9. Summary: PARENTS OF WIFE'S EMPLOYEE - RETIRED FROM GERBER

2 - - EFH DID NOT RELORD STOCK ENDING RIGHT OR CUENT DOD NOT GIVE

3 - INSTRUCTION - 1 DONT KNOW - WANTER GERBER RETIREMENT ACT - NOT

4 - DONE IN 60 DAYS HAD TO PAY TAXES. SOLD GERBER FOR TAXES

5 - PURPUSES BASED ON RECOMMENDATION OF CPA - FRANK DID NOT WANT TO

6 - BUY IT BACK HIGHER - BERBER NEVER WENT LOWER - LOST OPPORTUNITY

7 - TO BY BACH GERBER - IN HEARING - STATED UKED AND TRUSTED ME

8 - BUT NOT THE BROKERAGE RRM I CALLED FRANK ON TRADES. NO PROBLEM

9 - WITH CUENT WHILE AT SCH - TRANSFER ACT WHEN I LEFT SHEARSON.

10 - 10. Attachments: Not Applicable

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CRD 817433 - BANDYK. THOMAS FRANK

381-40-9380 - STATUS Y, ACTION 1381, ON 3/12/91. SOURCE U5. PROVISO

- OCCURRENCE: 8. INODENT: Y5. COMPOSITE

- UPDATED: 6/04/92 BY: MORAWSW

197

2
3

5
6
7
3
9
10
n
12

1 Questions: 13B1 13B2

2. Update: Not Provioed

3. Initiatea Dy: =RANKUN SHEARS

4 Type Of Event /Proceeaing: CUSTOMER COMPLAINT/NASD
ARBfTRATlON

5. Date initiatea: ' /2/91

6. Docket/Case#: 91-00135

7. AJIeqations: CHURING; OPTIONS ALLEGED DAMAGES -
SaS.OOO COMPENSATORY

8a. Current Status: CLOSED
8b. Status Date: i /3/92

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CRD 817433 - BANDYK. THOMAS FRANK

381-tO-9380 - STATUS Y. ACTION 1381. ON 3/12/91. SOURCE U5. PROVISO

• OCCURRENCE: 8. INODENT: Y5. COMPOSrTE

- UPDATED: 6/04/92 BY: MORAWSW

1 - 8c. Resuttr AWARD - $153,054 THOMAS BANDYK DID NOT

2 - CONTRIBUTE TOWARD AWARD

3 - 9. Summary: FOR FURTHER INFORMATION CONTACT WILLIAM

4 - HOHAUSEH 212-464-7294

5 - 10. Attacnmems: Not Applicable

THAT IS ALL THE INCIDENT TYPES FOR THIS OCCURRENCE.

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CRD 817433 - BANDYK. THOMAS FRANK

381^10-9380 - STATUS Y. ACTION 22H1, ON 4/29/92. SOURCE U4. PROVISO

OCCURRENCE 7. INODENT: Y4, COMPOSITE

UPDATED; 4/29/92 BY: BREWERW

2
3

4
5
6

7
8
9
10
11
12

1 . Questions: 22H1

2. Update: No

3. Initiated by: WILLIAM VAN BRUGGEN

4 Type of Event/Proceeding: CUSTOMER COMPLAJNT

5. Date Initiated: 8-9-90

6. DocKet/Case#: NONE

7. Allegauons: CUENT ALLEGES UNSUITABLE TRADING WITH
ALLEGED DAMAGES IN EXCESS OF $10,000

8a. Cun^nt Status: I HAVE HAD NO CONTACT WITH CUENT OR RRM
- PER JOEL BASSOFF OF PRU BACHE 8-21-90 ON COMPLAINT
8b. Status Date: NONE TO MY KNOWLEDGE

198

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CRD 817433 - BANDYK. THOMAS FRANK

381^«)-9380 - STATUS Y. ACTION 22H1. ON 4/29/92. SOURCE U4. PROVISO

- OCCURRENCE; 7, INCIDENT: Y4, COMPOSITE

- UPDATED: 4/29/92 BY: BREWERW

1 - 8c. Results: MR VAN BRUGGEN WAS A CUENT AT EFH. SLH AND

2 - THOMAOR. HE TRADED STOCK SAND BOND TRUST FOR JT SCT. CHILDREN'S

3 - ACT AND IRA'S HE HAD FULL KNOWLEDGE OF ACCOUNT. I WOULD CALL -

4 - LEFT MESSAGES WITH MKS. AT OFFICE OR HIS ANSWERING MACHINE I

5 - EXPLAINED THE RISK. MR WANTED TO INVEST IN STOCK MARKET INTO

6 - ACT. ONE COMPANY ORFR FOLLOWED BY SLH IN WASTE INDUSTRY HAS

7 - BECOME WONTHLESS. I TOLD HIM OF RISK. 1 DONT KNOW WHAT HE TOLD

8 - MRS. ABOUT HIS TRADING. CUENT BOUGHT BOND TRUST. ZERO'S

9 - GOVERNMENT. ETC IN CHILDREN AND IRA ACTS - NOT HIGH RISK

10 - INVESTMENT. CONFUCT BETWEEN MR & MRS. MR. MADE THE DECISIONS

11 - AA JOINT ACT. I TAKED MOSTLY TO WILLIAM. TRANSFER WITH ME TO 3

12 - RRMS. NEVER COMPLAINTS TO ME ABOUT ANY TRADES.

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CRD 817433 - BANDYK, THOMAS FRANK

381-40-9380 - STATUS Y, ACTION 22H1. ON 4/29/9Z SOURCE U4. PROVISO

- OCCURRENCE: 7, INODENT: Y4, COMPOSfTE
^ - UPDATED: 4/29/92 BY: BREWERW

1 - 9. Summary: Not Provided

2 - 10. Attachmems: Not ApplicatJie

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CRD 817433 - BANDYK. THOMAS FRANK

381^*0-9380 - STATUS Y. ACTION 13B1. ON 1/11/91, SOURCE U5. PROVISO

- OCCURRENCE; 7, INODENT: Y5. COMPOSITE

- UPDATED: 1/11/91 BY: BLAKEJ

2 - 1. Ouestions: 13B1

3 - 2. Update: Not Provided

4 • 3. Initiated by- WILLIAM SAN BRUGGEN

5 - 4. Type of Event/Proceeding: CUSTOMER COMPLAINT

6 - 5. Date initiated: 8/9/90

7 - 6. Docl<et/Cas8#: Not Provided

8 - 7. Allegations: CUENT ALLEGES UNSUITABLE TRADING WITH

9 - ALLEGED DAMAGES IN EXCESS OF SI 0.000.

10 - 8a. Cun-ent Status: PENDING

11 • Qti. Status Date: Not Provided

199

3c. Results: Not Proviaea

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CRD 317433 - BANOYK. THOMAS FRANK

381-10-9380 - STATUS Y ACTICN 1381. ON 1/11/91. SOURCE U5. PROVISO

■ OCCURRENCE. 7 'NCIDENT: Y5. COMPOSITE

■ UPDATED; 1/11/91 BY: BUVKEJ

1 - 9. Summarv: THIS MATTER IS FROM THOMSON MCKINNON SECURITIES.

2 1 0. Attacnments: Not App)icat)le

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CRD 817433 - BANOYK. THOMAS FRANK

381-40-9380 - STATUS Y. ACTION 22H1. ON 4/29/9Z SOURCE U4, PROVISO

■ OCCURRENCE: 6. INaOENT: Y4. COMPOSITE

• UPDATED; 4/29/92 BY: BREWERW

7~ - 1. Quesoona: 22H2

3 - 2. Update: Yes

4 - 3. Inmated try: CLIENT KENNETH AND VOYCE MAST

5 - 4 Type of Event/Proceeoing: LAWSUIT - STATE OF MICH - CIRCUT

6 ■ CT RENT COUNTRY

7 - 5. Data inittaied: 8-16-91

8 - 6. DocKec/Cas»#- 91-73146-CZ

9 • 7 AllegaDons: CUENT ALLEGES UNAUTHORIZED EXCESSIVE AND

10 ■ UNSUTHORIZED TRADING - DAMAGES OF ZOM DID NOT SPECIRC TYPE OF

11 ■ SECURITIES

12 • 8a. Cunwn Status: % I HAVE HAD NO CONTACT WITH PRU OR

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CRD 817433 - BANDYK. THOMAS FRANK

381^10-9380 - STATUS Y ACTION 22H1. ON 4/29/92. SOURCE U4. PROVISO

OCCURRENCE: 6. INQDENT: Y4. COMPOSITE

UPDATED; 4/29/92 BY: BREWERW

1
2

3
4
5
6

CUENT SINCE 1990 MAY

3b. Status Date: 8/91

8c. Results: CASE SETTLED FOR S24.000

9. Summary: WHILE I WAS ON VACATION THE PRU-BACHE OFFICE OF
GRAND RAPIDS SOLD O