DOB: September 1994 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. VIII No. 3 September 1994

Features

Enforcement Highlights:

Contributors:

Ralph A. Lambiase, Division Director
Cynthia Antanaitis, Assistant Director and Bulletin Editor
Eric J. Wilder, Assistant Director
Robert S. Rosenthal, Senior Administrative Attorney
Louise Hanson, Subscription Coordinator

A WORD FROM THE BANKING COMMISSIONER

Continuing education, adopted by various professions as a means of ensuring that individuals are kept abreast of current issues and new developments, soon may become an accepted standard in the securities industry. Building upon commendable earlier study, the Securities Industry/Regulatory Council on Continuing Education is completing work on a constructive program that reinforces the industry's customary high level of professional competence and business conduct.

In an original and resourceful approach, a dual element educational program has been devised. A Firm Element, specifically designed for each company's own products and services, would satisfy the diverse needs of individuals engaged in substantially dissimilar activities. In addition, a uniform Regulatory Element would address broader ethical and compliance issues.

As one of the program's inherent strengths, participating firms should gain competitive advantages as their representatives' knowledge is periodically refreshed about complex new products and trading strategies and the way those products and strategies respond to varying market conditions. The investing public, in turn, should gain an expanded measure of protection from representatives' up-to-date product knowledge and deepened awareness of regulatory standards.

Considerable praise must be given to the securities industry, the self-regulatory organizations, the North American Securities Administrators Association, Inc. and the Securities and Exchange Commission for their leadership and determination in crafting this program. As a government agency with a long tradition of commitment to investor protection, the Connecticut Department of Banking, through its Securities and Business Investments Division, is proud to have had an opportunity to contribute to the program as one of NASAA's two state liaisons, with Florida, to the Securities Industry/Regulatory Council on Continuing Education.

For your information, a status report on the continuing education program, with answers to common questions (reproduced with the permission of participating self-regulatory organizations), has been enclosed with this Bulletin issue.

I am also pleased to note that an exceptional agenda has been assembled for the department's sixth annual Securities Forum scheduled for November 21st at the Stamford Marriott Hotel. Richard Syron, Chairman and Chief Executive Officer of the American Stock Exchange, will deliver the keynote address at Securities Forum '94. In addition, a number of distinguished panelists will address timely topics such as Regulatory Issues, Arbitration Issues, Investment Advisory Matters, Securities Liability Issues and Banks' Expanding Securities and Insurance Activities.

For your convenience, a complete program listing for Securities Forum '94 and a registration form is included in this issue of the Securities Bulletin.

-- Ralph M. Shulansky, Banking Commissioner


TEXT OF LIMITED LIABILITY COMPANY
INTERPRETIVE RELEASE

The Connecticut Limited Liability Company Act (the "LLC Act")(Public Act 93-267, amended by Public Act 94-217) authorizes the organization of Limited Liability Companies ("LLCs") in Connecticut. LLCs are a hybrid form of business which offer the opportunity to combine the limited liability characteristics of a corporation with the pass-through tax status of a partnership. The LLC Act provides for organizational flexibility such that the management of an LLC may be undertaken directly by the members of the entity in the "member-member" form, or may be delegated to designated managers in the "manager-member" form. As a result of the structural flexibility afforded to this new entity, depending upon the choices made by the organizers, an LLC may resemble one of various business forms, including a corporation, a closely-held corporation, a general partnership, or a limited partnership.

The State of Connecticut Department of Banking (the "Department") is issuing this interpretive release to set forth its views concerning when and under what circumstances ownership interests in an LLC will be considered securities under the definition of "security" contained within Sec- tion 36-471(13) of Chapter 662 of the Connecticut General Statutes, The Connecticut Uniform Securities Act (the "Act"). Generally, it is the intention of the Department to undertake a case-by-case analysis with respect to such determinations. The primary responsibility, of course, is for each LLC and its legal adviser to make their own determination as to the status of LLC interests as "securities." This interpretive release, however, will provide organizers with some insight into the Department's analytical framework.

Section 36-471(13) of the Act defines the term "security" as "any note, stock, treasury stock, bond, debenture, evidence of indebtedness, ... interests of limited partners in a limited partnership ... investment contract ... or, in general, any interest or instrument commonly known as a 'security' ...." Organizers of an LLC should be cognizant that if the ownership interests in their business come within the definition of "security," the offer and sale of such interests will be subject to all of the requirements contained within the Act including the registration and antifraud provisions as well as the exemptions from registration contained therein.

The initial test that the Department will look to in determining whether ownership interests in an LLC will be considered "securities" is the investment contract analysis as outlined in SEC v. W.J. Howey, Inc., 328 U.S. 293 (1946). The Department will apply the four-part Howey test as enunciated by the Supreme Court which states that, "[a]n investment contract for purposes of the Securities Act [of 1933] means a contract, transaction, or scheme whereby [1] a person invests his money [2] in a common enterprise and [3] is led to expect profits [4] solely from the efforts of a promoter or a third party." Howey, 328 U.S. at 298-99. Subsequent case law has modified the last element to require only a showing that the investor expects a return as a result of the "significant" or "substantial" (as opposed to "sole") efforts of the promoter or third party.

In the case of most LLCs, the first three prongs of the Howey test will be satisfied: members of an LLC will give some form of consideration for their participation in a common enterprise with the expectation of realizing a profit from their investment. The fourth prong of the Howey test, which mandates that the return on the investment must be derived substantially from the efforts of others, therefore, will be the focus of the Department's analysis. The Department will specifically analyze the degree to which LLC members may participate in the management and operational decisions of the entity.

Where the organizers or the members of an LLC elect the "manager-member" form of operation, the Department ordinarily will presume that the entity will operate in a fashion similar to a limited partnership, whereby the managers possess the expertise and knowledge to conduct the affairs of the LLC and the members of the LLC will rely upon the efforts of those managers, similar to the manner in which limited partners rely upon the efforts of general partners. In such a situation, the fourth prong of the Howey test would be satisfied and the interests would constitute securities since the members of a "manager-member" LLC would rely substantially upon the efforts of the managers. While the presumption that membership interests in a "manager- member" LLC are securities is not a conclusive one, the Department would expect it to be an unusual situation where the members of a "manager-member" LLC do not rely substantially upon the efforts of the managers to conduct the business of the LLC.

Unlike "manager-member" LLCs, entities organized as "member-member" LLCs tend to resemble general partnerships from an operational standpoint. Accordingly, in determining whether such LLC interests come within the fourth prong of the Howey test, the Department will take an approach similar to that taken by the Federal Court of Appeals for the Fifth Circuit in Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981) with respect to general partnership and joint venture interests. Under Williamson, and the many federal and state courts which have adopted its approach, there is a presumption that general partnership interests ordinarily are not securities due to the control and direct participation customarily undertaken by such partners. There are instances, however, where that presumption can be rebutted. The court in Williamson identified three such instances when a general partner can demonstrate that such a partnership interest is a security, despite that partner's legal authority to exercise management control over the business of the entity. Should a general partner or a third party show that one or more partners' ability to exercise control over the business is ineffective, the presumption may be overcome and such general partnership interests may be considered securities for purposes of both state and federal securities law.

According to Williamson, a general partnership or joint venture interest can be considered a security, in the form of an investment contract, if the investor shows, for example, that (1) an explicit agreement exists among the partners that allocates so little power to one or more partners that the entity resembles a limited partnership; (2) a general partner is so inexperienced and lacking in knowledge in the business of the partnership that he or she cannot legitimately exercise any partnership powers; or (3) the promoter or manager of the general partnership has some entrepreneurial or managerial skill or expertise that would render such individual indispensable to the entity. Williamson, 645 F.2d at 424.

The Department intends to apply the Williamson analysis in the area of "member-member" LLCs because such LLCs are so structurally similar to general partnerships or joint ventures. Accordingly, where no agreement exists that explicitly establishes a management group for an LLC, the Department will apply the Williamson analysis and ascertain the extent to which the members of the LLC have the right to effectively participate in the management of the entity, and whether the members have the ability, knowledge, and expertise to legitimately exercise their management authority. If the Department finds that either such element is not satisfactorily established and the first three parts of the Howey test are satisfied, the LLC membership interests will be considered securities.

Analysis of the above factors to determine whether LLC interests come within the scope of the Act, as outlined in Howey and Williamson, should not be based upon a cursory review of the LLC's structure. Legal counsel for LLCs should not merely look to the organizational documents of the entity to determine whether a particular LLC is organized as a "member-member" LLC or a "manager-member" LLC in making the ultimate determination of whether certain LLC interests are securities. Rather, they should consider the economic realities of the business and the actual function and expertise of all those involved in the operation of the entity when determining whether a particular instrument or interest comes within the definition of "security."

Robert B. Titus
Deputy Banking Commissioner
August 24, 1994


COURT UPHOLDS SUBPOENA FOR FINANCIAL RECORDS

On September 7, 1994, the Superior Court for the Judicial District of Hartford-New Britain upheld an administrative subpoena duces tecum issued by the Commissioner pursuant to Section 36-495 of Chapter 662 of the Connecticut General Statutes, The Connecticut Uniform Securities Act (Shulansky v. Rene Rodriguez and PVT Realty, Inc., No. CV 94-705147). The subpoena was issued in connection with an investigation into the respondents' marketing of limited partnership interests in Park View Towers Limited Partnership. Rene Rodriguez was the president of PVT Realty, Inc., the partnership's general partner. The purpose of the partnership was to acquire residential rental property located in Hartford, Connecticut. The real estate purchase would be financed by the sale of limited partnership interests and by a bank loan, 50% of which would be guaranteed by respondent Rodriguez. The subpoena in question directed Rodriguez to produce documents and records concerning his personal finances as of the date when he completed a personal financial statement for the bank.

The court initially noted that, to prevail, the Commissioner would have to prove that the subpoena 1) was issued in the course of a legally authorized investigation; 2) sought documents, records and/or materials that were relevant to the investigation; and 3) was specific and otherwise not unduly burdensome. If the Commissioner did make such a showing, compliance with the subpoena would be required unless the subpoenaed party could prove by independent evidence that the subpoena had an improper purpose, that is, that it was issued to harass or punish rather than to gain information relevant to the investigation.

The court concluded that the issuance of the subpoena met the three-prong test. The court then observed that the purpose behind the subpoena was to determine whether the respondents violated Connecticut's securities laws through the way in which they marketed limited partnership interests. Moreover, omitting information from the Offering Statement on respondent Rodriguez's financial ability to honor his guarantee might have constituted a violation of C.G.S. 36-472(2) because, without it, the Offering Statement might have misled potential investors into believing that Rodriguez could make good on his guarantee and thereby convince them, to their detriment, that the partnership was a better, safer investment than might really have been the case. The subpoenaed records were thus relevant to the Commissioner's investigation. Finally, the court concluded that the subpoena to Rodriguez was both specific and not unduly burdensome since it focused on the state of Rodriguez's personal finances as of the date he completed his personal financial statement for the benefit of the bank. Respondents failed to show that the subpoena was issued for harassment purposes or for the improper purpose of investigating Mark Shapiro, Rodriguez's former employer.

The court therefore ordered that Rodriguez comply with the subpoena within twenty days following the issuance of the decision.


ORDER PRESCRIBING THE INCLUSION OF SECURITIES
LISTED ON THE PACIFIC STOCK EXCHANGE WHICH QUALIFY FOR TIER I LISTING AS EXEMPT SECURITIES IN ACCORDANCE WITH SECTION 36-490(a)(8) OF THE CONNECTICUT GENERAL STATUTES

1)  The Banking Commissioner (the "Commissioner") is charged with the administration of Chapter 662 of the Connecticut General Statutes, The Connecticut Uniform Securities Act (the "Act");

2)  Section 36-500(a) of the Act provides that:

The commissioner may from time to time make, amend and rescind such ... orders as are necessary to carry out the provisions of this chapter .... For the purpose of ... orders, the commissioner may classify securities, persons and matters within his jurisdiction and prescribe different requirements for different classes.

3) Section 36-490(a)(8) of the Act provides that the following securities are exempt from Sections 36-485 and 36-491 of the Act:

[a]ny security listed or approved for listing upon notice of issuance on the New York Stock Exchange, the American Stock Exchange, the Chicago Board Options Exchange and such other securities exchanges as may be designated by the commissioner from time to time, any security appearing on the list of over-the- counter securities approved for margin by the Board of Governors of the Federal Reserve System or any security designated or approved for designation upon notice of issuance as a National Market System security on the National Association of Securities Dealers Automated Quotation System established pursuant to the Securities Exchange Act of 1934 if, in each case, quotations have been available and public trading has taken place for such class of security prior to the offer or sale of that security in reliance upon this exemption; any other security of the same issuer which is of senior or substan- tially equal rank; any security called by subscription rights or warrants so listed, approved or designated; or any warrant or right to purchase or subscribe to any of the foregoing ....

(emphasis added)

4)  The Commissioner takes notice of the Memorandum of Understanding: The Uniform Model Marketplace Exemption from State Securities Exemption Requirements adopted by the North American Securities Administrators Association, Inc. on April 28, 1990 (the "NASAA MOU").

5)  The Commissioner further recognizes that the Pacific Stock Exchange has adopted the NASAA MOU listing standards for its Tier I listing criteria.

6)  The Commissioner finds that the issuance of this order is necessary and appropriate in the public interest and for the protection of investors and consistent with the purposes fairly intended by the policy and provisions of the Act.

7)  The Commissioner therefore orders that the Pacific Stock Exchange be a designated securities exchange on which listed securities will qualify for the exemption from securities registration under Section 36-485 of the Act and the exemption from filing marketing materials with the Commissioner under Section 36-491 of the Act, under the following limitations and conditions:

a)  Only securities which are listed or approved for listing under the Pacific Stock Exchange Tier I listing criteria are exempt from Sections 36-485 and 36-491 of the Act.

b)  Any security which otherwise qualifies for the exemption provided by this order is exempt only if quotations for such security have been available and public trading has taken place for such class of security prior to the offer or sale of that security in reliance upon this exemption.

c)  The Pacific Stock Exchange shall promptly notify the commissioner of any proposed rule change which modifies the Tier I listing criteria.

So ordered this 28th day of September, 1994.

Robert B. Titus
Deputy Banking Commissioner


ANSWERS TO COMMON QUESTIONS ON
TESTING REQUIREMENTS FOR SECURITIES INDUSTRY PERSONNEL

Effective August 22, 1994, the Regulations under The Connecticut Uniform Securities Act were amended. The changes included modifications to the examination requirements for securities personnel. Here are answers to some commonly asked questions.

BROKER-DEALER FIRMS

1. Q: Are there any special testing requirements for firm personnel who are not applying for agent registration in Connecticut?

A: Yes. Every applicant for broker-dealer registration must show that all officers, partners or sole proprietors who act as managers have passed an examination as principal given by the Securities and Exchange Commission (the "SEC") or a securities self-regulatory organization ("SRO") registered under the Securities Exchange Act of 1934.

2. Q. What is a manager?

A. Under Reg. 36-500-484e, a manager is either 1) any person who directly or indirectly supervises securities sales personnel or 2) any person responsible for the day-to-day operation and supervision of a broker-dealer office in Connecticut.

3. Q. What if a corporate officer, say the secretary, does not exercise any managerial duties?

A. The secretary would not have to take the principal's examination. However, be sure to provide a written explanation, signed by a partner, officer or authorized individual of similar rank, when the firm applies for registration.

4. Q. Must anyone else take the principal's exam?

A. Yes. Reg. 36-500-484e(b) requires that, for initial applicants for broker-dealer registration, all managers must take the exam as well.

5. Q: Are there any special rules once the firm becomes registered as a broker-dealer?

A: Yes. Under Reg. 36-500-484e(c), every registered broker-dealer must show that all new officers, partners or sole proprietors who act as managers have passed the principal's examination. This is done by amending the firm's filing.

6. Q: What if a registered firm hires a new manager with supervisory responsibility over Connecticut sales activity? Must he or she take the principal's exam?

A: Yes.

7. Q: I represent a general partnership that is applying for broker-dealer registration. There are two partners and one manager. All three will actively supervise the firm's operations. Before the partnership was formed, all three worked for another Connecticut registered broker-dealer for 30 years. Must they take the principal's exam?

A: No. Under Reg. 36-500-484e(g), if the individual became associated with a registered broker-dealer before October 1, 1965 and has been continuously associated with a registered broker-dealer since that time, he or she does not have to pass the principal's exam.

8. Q: Now that the partnership is registered, it has decided to bring in another partner to manage its options operations. That partner was associated with an unregistered firm from 1989 to 1991. Must he pass the principal's exam?

A: Yes.

BROKER-DEALER AGENTS

1. Q: Are there any special testing requirements for broker-dealer agents?

A: Yes. There are two examination requirements for broker-dealer agents. Under Reg. 36-500-484e(d)(1), every applicant for broker-dealer agent registration must show that he or she has passed an exam given by the SEC or a securities SRO registered under the Securities Exchange Act of 1934. Under Reg. 36-500-484e(d)(2), effective October 1, 1994, each applicant for agent registration must pass the Uniform State Agents Securities Law Examination (Series 63).

2. Q: What exam does Reg. 36-500-484e(d)(1) cover?

A: Reg. 36-500-484e(d)(1) does not prescribe a specific exam. However, Reg. 36-500-484b(a)(7) makes it a dishonest or unethical practice for an agent to effect transactions in securities products concerning which the agent has not passed an exam given by an SRO registered under the Securities Exchange Act of 1934 which would quality the agent to offer, sell or buy such products.

3. Q: Are there any exceptions to the Reg. 36-500-484e(d)(1) exam requirement?

A: Yes. Under Reg. 36-500-484e(g), an agent would not have to take a product specific exam if 1) he or she became associated with a registered broker-dealer prior to July 1, 1963; 2) was continuously associated with a registered broker-dealer since that date; and 3) has not been the subject of any disciplinary action or any finding of securities-related misconduct.

4. Q: I am currently registered as an agent but my registration will lapse on December 31, 1994. I plan to renew my registration. Must I take the Series 63 exam?

A: Under Reg. 36-500-484e(h), you must "look back" to October 1, 1994. If, on that date, you were associated with a registered broker-dealer, and if you were not the subject of any disciplinary action, you need not take the exam.

5. Q: What types of disciplinary actions do the Regulations cover?

A: Like the regulation covering investment adviser agents, Reg. 36=500-484e(h) divides disciplinary events into three types: 1) disciplinary actions including suspension or expulsion from membership in an SRO, suspension or revocation, fine or censure; 2) those involving a finding that you have violated any law concerning the supervision of the securities industry or any rule or regulation of a federally registered SRO; and 3) those involving a finding that you were a cause of any disciplinary action by the SEC or any securities governmental agency or any SRO.

6. Q: What are specific examples of disciplinary actions?

A: As a guideline, consider those actions that would support administrative action under C.G.S. 36-484 (denial, suspension or revocation of registration). Although each case must be decided on its own merits, personal bankruptcy, arbitration proceedings and liens would probably not, in and of themselves, constitute disciplinary events for purposes of the regulation.

7. Q: As of October 1, 1994, I was not associated with a registered broker-dealer, yet I have no disciplinary history. Must I take the exam?

A: Yes.

INVESTMENT ADVISER FIRMS AND INVESTMENT ADVISER AGENTS

1. Q: Are there any special testing requirements for investment advisory firms as such?

A: No. However, effective October 1, 1994, applicants for investment adviser agent registration must pass the Uniform Investment Adviser Law Exam (Series 65).

2. Q: What is an investment adviser agent?

A: Under C.G.S. 36-471(7), an investment adviser agent is an individual employed, appointed or authorized by an investment adviser to solicit business for the investment adviser within or from Connecticut and who receives compensation or other remuneration for the solicitation activity.

3. Q: I represent an investment adviser who is a sole proprietor. Must she take the exam?

A: No. Sole proprietors are excluded from the "investment adviser agent" definition in C.G.S. 36-471(7).

4. Q: I represent a partnership. Must all partners take the exam?

A: If they directly or indirectly are compensated for solicitation activity, they must take the exam and register as investment adviser agents.

5. Q: Are any examination substitutions allowed?

A: Yes. Under Reg. 36-500-484e(e), the agency may waive the examination requirements for individuals who have been designated as Chartered Financial Analysts by the Association for Investment Management and Research. Proof of the designation must accompany your filing.

Reg. 36-500-484e(e) also gives the agency flexibility to accept another substitute examination or a designation "equal or superior to" the Chartered Financial Analyst designation. However, to date, the agency has not exercised its discretion in this area.

6. Q: I am currently registered as an investment adviser agent but my registration will lapse on December 31, 1994. I plan to renew my registration. Must I take the Series 65 exam?

A: Under Reg. 36-500-484e(i), you must "look back" to October 1, 1994. If, on that date, you were associated with a registered investment adviser, and if you were not the subject of any disciplinary action, you need not take the exam.

7. Q: What types of disciplinary actions do the Regulations cover?

A: Reg. 36-500-484e(i) divides disciplinary events into three types: 1) disciplinary actions including suspension or expulsion from membership in an SRO, suspension or revocation, fine or censure; 2) those involving a finding that you have violated any law concerning the supervision of the securities industry or any rule or regulation of a federally registered SRO; and 3) those involving a finding that you were a cause of any disciplinary action by the SEC or any securities governmental agency or any SRO.

8. Q: What are specific examples of disciplinary actions:

A: As a guideline, consider 1) those actions that would support administrative action under C.G.S. 36-484 (denial, suspension or revocation of registration). Although each case must be decided on its own merits, personal bankruptcy, arbitration proceedings or liens would probably not, in and of themselves, constitute disciplinary events for purposes of the regulation.

9. Q: As of October 1, 1994, I was not associated with a registered investment adviser, yet I have no disciplinary history. Must I take the exam?

A: Yes.


ENFORCEMENT HIGHLIGHTS

ADMINISTRATIVE SANCTIONS

CEASE AND DESIST ORDERS

Stephen Virge Lamoreaux (CRD # 717220)

On July 11, 1994, following a Securities and Business Investments Division investigation, the Banking Commissioner issued a cease and desist order (CD-94-2483-S) against Stephen Virge Lamoreaux of New Fairfield, Connecticut. The Commissioner alleged that from approximately January 1991 through April 1993, while employed as an agent of Prudential Securities Incorporated, Lamoreaux violated the antifraud provisions in Section 36-472 of The Connecticut Uniform Securities Act. Specifically, the Commissioner alleged that Lamoreaux 1) caused the unauthorized liquidation of securities in a Connecticut resident's account; 2) requested that the proceeds be returned to him for deposit in the customer's brokerage accounts; 3) altered information on checks, enabling Lamoreaux to divert the funds and deposit the checks into accounts of other clients, including an account held by Celebrations Unlimited, for which Lamoreaux's wife, Denise H. Lamoreaux, was a signatory; and 4) following notice of a $10,000 bond redemption, caused a Letter of Authorization purportedly signed by the customer to be sent to the firm directing it to remit $10,000 to People's Bank for deposit in a loan account in the name of Lamoreaux and his spouse. Since the respondent did not request a hearing within the prescribed time frame, the Order became permanent on August 1, 1994.

CONSENT ORDERS

Musket Research Associates, Inc. (CRD # 30599)

On August 1, 1994, the Banking Commissioner entered a Consent Order with respect to Musket Research Associates, Inc. (No. CO-94-2635-S) of 260 Franklin Street, Nineteenth Floor, Boston, Massachusetts. The Consent Order followed an investigation by the Securities and Business Investments Division pursuant to Sections 36-476 and 36-495 of The Connecticut Uniform Securities Act in connection with the firm's application for broker-dealer registration. That investigation revealed indications that between January and March 1994, Musket Research Associates, Inc. effected transactions in the securities of Metra Biosystems and Cima Labs, Inc. on behalf of four Connecticut customers at a time when 1) the firm was not registered as a broker-dealer under Section 36-474(a) of the Act; and 2) the securities were neither registered under Section 36-485 of the Act nor the subject of a filed claim of exemption under Section 36-490 of the Act.

The Consent Order directed the firm to refrain from further regulatory violations and required that it review, revise and implement supervisory and compliance procedures designed to detect and prevent regulatory violations. In addition, the Consent Order required that the firm pay $3,500 to the department, $3,000 of which represented a civil penalty and $500 of which represented reimbursement for the division's investigative costs.

Comerica Securities (CRD # 17079)

On August 2, 1994, the Banking Commissioner entered a Consent Order with respect to Comerica Securities (No. CO-94-2636-S) of 100 Renaissance Center, Thirteenth Floor, Detroit, Michigan. The Consent Order followed an investigation by the Securities and Business Investments Division pursuant to Sections 36-476 and 36-495 of The Connecticut Uniform Securities Act in connection with the firm's application for broker-dealer registration. That investigation revealed indications that from approximately January 1993 through March 1994, the firm transacted business as a broker-dealer absent registration under Section 36-474(a) of the Act and employed unregistered agents in contravention of Section 36-474(b) of the Act.

The Consent Order directed Comerica Securities to refrain from regulatory violations and required that the firm review, revise and implement supervisory and compliance procedures designed to detect and prevent regulatory violations. In addition, the Consent Order required that the firm pay $2,500 to the department; $2,000 of that amount represented a civil penalty and uncollected registration fees during the period of unregistered activity. The remaining $500 represented reimbursement for division investigative costs.

Furgueson Capital Management, Inc. (CRD # 36988)

On August 9, 1994, the Banking Commissioner entered a Consent Order with respect to Furgueson Capital Management, Inc. (No. CO-94-2640-S) of 19 West 44th Street, New York, New York. The Consent Order followed a Securities and Business Investments Division investigation pursuant to Sections 36-476 and 36-495 of The Connecticut Uniform Securities Act in connection with the firm's application for investment adviser registration. That investigation uncovered indications that from approximately 1987 through 1994, the firm transacted business as an investment adviser absent registration under Section 36-474(c) of the Act and engaged unregistered investment adviser agents.

The Consent Order directed the firm to refrain from violations of the Act and its Regulations, and required that the firm review, revise and implement supervisory and compliance procedures designed to detect and prevent regulatory violations. In addition, the Consent Order required that the firm pay $8,500 to the department, $5,500 of which represented a civil penalty; $2,000 of which represented uncollected registration fees during the period of unregistered activity; and $1,000 of which represented reimbursement for the division's investigative costs.

Shochet Securities, Inc. (CRD # 8275)

On September 12, 1994, the Banking Commissioner entered a Consent Order with respect to Shochet Securities, Inc. (No. CO-94-2656-S) of 1484 East Hallandale Beach Boulevard, Hallandale, Florida. The Consent Order followed an investigation by the Securities and Business Investments Division pursuant to Sections 36-476 and 36-495 of The Connecticut Uniform Securities Act in connection with the firm's application for broker-dealer registration. That investigation revealed indications that in July 1994, the firm effected transactions in securities for two Connecticut customers absent registration as a broker-dealer under Section 36-474(a) of The Connecticut Uniform Securities Act and employed an unregistered agent in contravention of Section 36-474(b) of the Act.

The Consent Order directed Shochet to refrain from regulatory violations and required that the firm review, revise and implement supervisory and compliance procedures designed to detect and prevent regulatory violations. In addition, the Consent Order required that Shochet reimburse the agency $250 for the Division's investigative costs.

First Eastern Equity Corp. (CRD # 7331)

On September 16, 1994, the Banking Commissioner entered a Consent Order (No. CO-94-2484A-S) with respect to First Eastern Equity Corp. ("FEEC") of 80 Westchester Business Park, Armonk, New York. An investigation conducted by the Securities and Business Investments Division pursuant to Section 36-495 of The Connecticut Uniform Securities Act uncovered evidence that in July 1993, while one Edward L. Hutchings was acting as an agent of FEEC and under the firm's supervision and control 1) Hutchings solicited investor funds under the pretext of acquiring other businesses in an effort to expand his then accounting, financial planning and tax practices; 2) that the solicitation was made to the general public through a newspaper advertisement and to existing clients in both written and verbal form; 3) that, as a result of such solicitation, Hutchings received $30,000 in actual proceeds and approximately $70,000 in pledged funds; 4) that the $30,000 was evidenced by promissory notes issued by Hutchings; 5) that a portion of the funds received by Hutchings were used for his personal expenses; and 6) that in engaging in such activity, Hutchings offered and sold unregistered non-exempt securities in violation of Section 36-485 of the Act. The Division's investigation also uncovered indications that, during the course of his employment with FEEC, Hutchings offered and sold mutual fund products without having taken and passed the corresponding qualifying examination administered by the National Association of Securities Dealers.

The Consent Order directed FEEC to refrain from regulatory violations and required that the firm review, modify, as appropriate, and implement supervisory and compliance procedures designed to detect and prevent violations of the Act and its regulations. In addition, the Consent Order required that FEEC reimburse the department up to $1,500 for the cost of any examination(s) of the firm's books and records conducted within eighteen months following the entry of the Consent Order. The Consent Order also required the firm to notify the agency for two years of any securities-related complaints received from Connecticut residents.

Edward L. Hutchings (CRD # 1337667)

On September 29, 1994, the Banking Commissioner entered a Consent Order (No. CO-94-2484-S) with respect to Edward L. Hutchings of Danbury, Connecticut. An investigation conducted by the Securities and Business Investments Division uncovered evidence that in July 1993, while acting as an agent of First Eastern Equity Corp., a broker-dealer, and under the firm's supervision and control 1) Hutchings solicited investor funds under the pretext of acquiring other businesses in an effort to expand his then accounting, financial planning and tax practices; 2) that the solicitation was made to the general public through a newspaper advertisement and to existing clients in both written and verbal form; 3) that, as a result of such solicitation, Hutchings received $30,000 in actual proceeds and approximately $70,000 in pledged funds; 4) that the $30,000 was evidenced by promissory notes issued by Hutchings; 5) that a portion of the funds received by Hutchings were used for his personal expenses; and 6) that in engaging in such activity, Hutchings offered and sold unregistered non-exempt securities in violation of Section 36-485 of The Connecticut Uniform Securities Act. In furtherance of his desire to settle the matter informally Hutchings furnished proof to the Division that he had offered purchasers the opportunity to rescind the securities transactions in question.

The Consent Order directed Hutchings to refrain from regulatory violations. The Consent Order also required Hutchings to deliver to the department a written statement from his employing broker-dealer confirming that, when making offers and/or sales of securities, Hutchings would only do so at the main office of the broker-dealer where his activities would be subject to supervisory controls. In addition, the Consent Order precluded Hutchings from soliciting or accepting funds for investment purposes from public or private investors outside the scope of his employment with a registered broker-dealer unless prior written notice were provided to the agency and Hutchings consulted with legal counsel concerning such activity. The Consent Order also precluded Hutchings from exercising discretionary trading authority or control over client funds or securities until January 1, 1996 and required that he periodically report to the agency concerning any securities-related customer complaints he received.

STIPULATION AND AGREEMENTS

The Providence Group Investment Advisory Company

On July 22, 1994, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-94-2567-S) with The Providence Group Investment Advisory Company ("Providence Group") of One Turks Head Place, Suite 900, Providence, Rhode Island. The Stipulation and Agreement followed a Securities and Business Investments Division investigation which suggested that during 1993 the firm transacted business as an investment adviser absent registration under Section 36-474(c) of The Connecticut Uniform Securities Act and engaged unregistered investment adviser agents in contravention of that section.

Pursuant to the Stipulation and Agreement, the firm agreed to refrain from regulatory violations. In addition, the Stipulation and Agreement required that, within 30 days, the firm identify and engage an independent reviewer familiar with The Connecticut Uniform Securities Act and its regulations to conduct a review of Providence Group's supervisory and compliance procedures as they relate to state investment adviser licensing requirements. Within 120 days after the reviewer was retained, a report summarizing the results of the review would be submitted to the agency. The Stipulation and Agreement also required that Providence Group pay $1,250 to the department, $750 of which represents a civil penalty and uncollected registration fees during the period of unregistered activity. The additional $500 represented reimbursement for the division's investigative costs.

First Maryland Brokerage Corporation (CRD # 17531)

On August 1, 1994, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-94-2626-S) with First Maryland Brokerage Corporation of 25 South Charles Street, Baltimore, Maryland. The Stipulation and Agreement followed a Securities and Business Investments Division investigation which revealed indications that between 1992 and 1994, the firm had transacted business as a broker-dealer in Connecticut absent registration under The Connecticut Uniform Securities Act.

Pursuant to the Stipulation and Agreement, the firm agreed to refrain from regulatory violations and to review, revise and implement supervisory and compliance procedures designed to prevent and detect regulatory violations. In addition, the firm agreed to pay $1,550 to the department representing uncollected registration fees during the period of unregistered activity and the disgorgement of commissions earned while the firm was not registered as a broker-dealer under the Act.

LICENSING ACTIONS

M. Rimson & Co., Inc. (CRD # 5250) - Broker-dealer Registration Revoked

On August 30, 1994, the Commissioner entered an order revoking the broker-dealer registration of M. Rimson & Co., Inc. of 160 Broadway, Suite 5E, New York, New York (Docket No. NR-93-2481-S). The order was based on findings that the firm had wilfully violated Section 36-485 of The Connecticut Uniform Securities Act by selling unregistered non-exempt securities of Integrated Resources Technologies, Inc. (f/k/a International BankCard Services Corporation) to Connecticut residents. The Commissioner also found that the firm had failed to reasonably supervise its agents in the sale of securities to Connecticut residents. A hearing on the matter had been held on December 14, 1993.

Moshe Rimson (CRD # 376877) - Agent Registration Revoked

On August 30, 1994, the Commissioner entered an order revoking the registration of Moshe Rimson as an agent of M. Rimson & Co., Inc., a broker-dealer (Docket No. NR-93-2481-S). Moshe Rimson was also the president and owner of the firm. The order was based on findings that Moshe Rimson had wilfully violated Section 36-485 of The Connecticut Uniform Securities Act by selling unregistered non-exempt securities of Integrated Resources Technologies, Inc. (f/k/a International BankCard Services Corporation) to Connecticut residents. The Commissioner also found that Moshe Rimson failed to reasonably supervise agents of the firm in the sale of securities to Connecticut residents. A hearing on the matter had been held on December 14, 1993.

Townsley Associates & Company, Inc. (CRD # 14211) - Notice of Intent to Revoke Broker-Dealer and Investment Adviser Registrations Issued

On September 12, 1994, the Banking Commissioner issued a Notice of Intent to Revoke the broker-dealer and investment adviser registrations of Townsley Associates & Company, Inc. of The Professional Building, Suite 300, Hilton Head, South Carolina (Docket No. NR-94-2638-S). The Notice of Intent was based on a June 10, 1994 Amended Decision and Order issued by the United States District Court for the Western District of New York. The Amended Decision and Order, inter alia, preliminarily enjoined the firm and its president, Jesse Townsley, from committing further violations of 1) Sections 5(a) and 5(c) of the Securities Act of 1933 with respect to the sale of unregistered securities; and 2) Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder with respect to making further fraudulent misstatements or omissions of material fact in connection with the marketing of securities issued by The Twenty Plus Investment Club. The respondent firm was given an opportunity to request a hearing on the allegations in the Notice.

Jesse M. Townsley, Jr. (CRD # 448614) - Notice of Intent to Revoke Agent and Investment Adviser Agent Registrations Issued

On September 12, 1994, the Banking Commissioner issued a Notice of Intent to Revoke the registrations of Jesse M. Townsley, Jr. as an agent and investment adviser agent of Townsley Associates & Company, Inc. (Docket No. NR-94-2638-S). Jesse M. Townsley, Jr. was also the president of the firm. The Notice of Intent was based on a June 10, 1994 Amended Decision and Order issued by the United States District Court for the Western District of New York. The Amended Decision and Order, inter alia, preliminarily enjoined Jesse Townsley from committing further violations of 1) Sections 5(a) and 5(c) of the Securities Act of 1933 with respect to the sale of unregistered securities; and 2) Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder with respect to making further fraudulent misstatements or omissions of material fact in connection with the marketing of securities issued by The Twenty Plus Investment Club. The respondent was given an opportunity to request a hearing on the allegations in the Notice.


QUARTERLY STATISTICAL SUMMARY

July 1, 1994 through September 30, 1994

Registration

Securities

Business Opportunities

YTD

Total Coordination (Initial & Renewal) 1,459 n/a 4,727
-- (Investment Co. Renewals 959)      
-- (All Other Coordinations 500)      
Qualification (Initial) 3 n/a 14
Qualification (Renewal) 1 n/a 1
Regulation D Filings 396 n/a 1,237
Other Exemption or Exclusion Notices 86 10 231 (SE)
39 (BO)
Business Opportunity (Initial) n/a 17 35
Business Opportunity (Renewal) n/a 2 27
 
 
Licensing &
Branch Office Registration

Broker-Dealers

Investment Advisers

Issuers

YTD

Firm Initial Registrations Processed 67 48 n/a 203 (BD)
155 (IA)
Firms Registered as of 9/30/94 1,832 1,002 n/a n/a
Agent Initial Registrations Processed 6,959 1,031 2 22,740 (BD)
2,384 (IA)
34 (IS)
Agents Registered as of  9/30/94 70,196 8,776 180 n/a
Branch Offices Registrations
Processed
106 21 n/a 204 BD)
95 (IA)
Branch Offices Registered
as of 9/30/94
810 262 n/a n/a
Examinations Conducted 7 8 0 20 BD)
18 (IA)
0 (IS)
 
 
Investigations

Securities

Business
Opportunities

YTD

Investigations Opened 48 8 148 (SE)
50 (BO)
Referrals from Attorney General 0 0 1 (SE)
0 BO)
Referrals from Other Agencies 3 0 10 (SE)
0 BO)
Investigations Closed 51 13 143 (SE)
59 (BO)
Investigations in Progress
as of 9/30/94
76 12 n/a
Subpoenas Issued 5 0 15 (SE)
0 (BO)
 
 

Administrative Enforcement Actions

  Securities
#/Parties
Business Opportunities
#/Parties
YTD
#/Parties
Stipulation and Agreements 2/2 0/0 3/4 (SE)
0/0 (BO)
Consent Orders 6/6 0/0 22/24 (SE)
0/0 (BO)
Cease and Desist Orders 1/1 0/0 4/6 (SE)
0/0 (BO)
Denial, Suspension & Revocation Orders 2/2 n/a 3/3 (SE)
n/a (BO)
Other Notices and Orders 2/2 0/0 5/6 (SE)
0/0 (BO)
Referrals (Civil) 1/1 0/0 1/1 (SE)
0/0 (BO)
Referrals (Criminal) 3/5 0/0 4/7 (SE)
0/0 (BO)
 
 
Monetary Sanctions

$ Assessed

YTD

Consent Orders and Stipulation
and Agreements
    
- Securities $17,550 $ 721,085
- Business Opportunities 0 0
Totals $17,550 $ 721,085
 
 
Public Reimbursement Following
Division Intervention

Voluntary Restitution Offers;
Other Monetary Relief

YTD

Securities $152,207 $ 525,9456
Business Opportunities 1,525 7,250
  _____ _____
Totals $153,732 $ 533,465

Securities Division