DOB: June 1996 Securities Bulletin

Securities and Business Investments Division

Securities Bulletin

Vol. X No. 2 June 1996

  Features:

Enforcement Highlights:

Contributors:

Ralph A. Lambiase, Division Director
Cynthia Antanaitis, Assistant Director and Bulletin Editor
Eric J. Wilder, Assistant Director
Jeffrey P. Halperin, Senior Administrative Attorney
Louise Hanson, Subscription Coordinator

A WORD FROM THE BANKING COMMISSIONER

Congress is currently considering sweeping securities legislation which would redraw the lines of state and federal government responsibility. Both the Senate and House of Representatives have passed legislation with wide bi-partisan support and conferees have been appointed to address the differences between the two bills. If Congress enacts and the President signs future legislation, the Department of Banking will carefully study its resulting regulatory responsibility, and will consider whether Connecticut's statutes and regulations need to be amended. We would expect to seek comments from both industry and the public during such a process.

The Congressional legislation is intended to encourage business investment, an objective the Department of Banking fully embraces. The Securities Division recently announced it is joining with the other New England state securities regulators to expand the market for small businesses seeking to raise capital.

By agreement among the six New England states, small businesses issuing up to $5 million in securities by means of the Small Corporate Offering Registration (SCOR) or Regulation A offering may now elect to have their applications for registration of securities reviewed on a regional basis. Once an application to register securities has been filed with two or more states in the region, a lead state will be selected. The lead state will coordinate comments among the various states on the completeness of the application, make contact with the issuers and determine when securities may be sold in the region. Businesses need not be located in New England to seek regional review of offerings.

As part of our goal of making Connecticut business friendly, we believe the regional review concept will reduce costs for small businesses and ease the capital formation process, while maintaining our strong commitment to protecting the state's investors.

Save this date - Securities Forum '96 will be held on Monday, November 25, 1996. The department's eighth annual seminar will again offer an outstanding full day's agenda with an exceptional faculty. Detailed information on Securities Forum '96 will be posted later this summer on the Department of Banking's World Wide Web site and will be included with the next Bulletin issue.

-- John P. Burke, Banking Commissioner


POLICY STATEMENT CONCERNING
ACCEPTABILITY OF SERIES 37 AND SERIES 38 EXAMINATIONS

Questions have been raised concerning the acceptability of the National Association of Securities Dealers' Series 37 and Series 38 examinations in fulfillment of the requirements in Section 36b-31-15e(d) of the Regulations promulgated under Chapter 672a of the Connecticut General Statutes, the Connecticut Uniform Securities Act (the "Act").

On March 8, 1996, the New York Stock Exchange issued an Information Memo (No. 96-6) on Approval of the Canada Module of the General Securities Registered Representative Examination. The Information Memo explained that the Series 37 and Series 38 examinations were a subset of the General Securities Registered Representative Examination (Series 7) and had been approved by the Securities and Exchange Commission to test knowledge of U.S. securities laws, markets, investment products, and sales practices. The Information Memo added that, unlike the Series 37 examination, Series 38 excluded option questions, and that neither examination would qualify an individual to sell municipal securities. Representatives wishing to sell municipal securities would be required to take the Series 7 or the Series 52 examination.

Section 36b-31-15e(d) of the Connecticut Regulations requires that:

Each applicant for registration as an agent shall supply evidence to the commissioner that such applicant has taken and successfully passed (1) an examination given by the United States Securities and Exchange Commission or by a securities self-regulatory organization registered under the Securities Exchange Act of 1934, and (2) effective October 1, 1994, the Uniform State Agents Securities Law Examination [Series 63].

Connecticut will accept the Series 37 or the Series 38 examination in fulfillment of Section 36b-31-15e(d)(1) of the Connecticut Regulations for Canadian agents seeking registration under the Act. Such agents should recognize, however, that under Section 36b-31-15b(a)(7) of the Regulations, it is a dishonest or unethical business practice to effect transactions in securities products concerning which the agent has not passed an appropriate product-specific examination. In addition, although the Series 37 or Series 38 examination would fulfill the requirement in Section 36b-31-15e(d)(1) of the Regulations, the agent would nonetheless be required, absent a waiver, to meet the Series 63 examination requirement in Section 36b-31-15e(d)(2).

John P. Burke
Banking Commissioner
May 1, 1996


NO-ACTION RELIEF GRANTED TO
INTERNET STOCK TRADING SERVICE

Text of Reply

This will acknowledge receipt of your June 13, 1996 and April 24, 1996 correspondence concerning the above matter, together with copies of no-action letters issued by the states of Illinois and Kansas. The information contained in your correspondence is incorporated by reference herein.

In your letters, you inquire whether NetProphet, an Internet stock tracking and prediction service sponsored by Neural Applications Corporation, would be subject to the investment adviser registration requirements under the [Connecticut Uniform Securities] Act. As described in your correspondence, NetProphet would enable Internet users to access current stock pricing information for securities selected by the user; and provide daily listings of the top five buy and sell candidates based on technical indicators and current market information. This information would initially be provided free of charge. Ultimately, users would pay a subscription charge to obtain price prediction services. Neural Applications Corporation will not assist subscribers in executing trades with respect to any securities the subscribers may track, nor will information be gathered concerning any user's specific investment needs, risk tolerances or financial position. Neural Applications Corporation also proposes to offer advertising space on its Web site to third parties, including unaffiliated broker-dealers who would be required to certify their compliance with applicable state securities laws.

Section 36b-3(6) of the Act defines the term "investment adviser" to mean "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as a part of a regular business, issues or promulgates analyses or reports concerning securities. At a minimum, it would appear that, Neural Applications Corporation, through NetProphet, would be issuing or promulgating analyses or reports concerning securities as part of a regular business. However, since these services would not be provided for compensation during the initial period, the "investment adviser" definition would not be triggered at that time.

Once NetProphet obtains paid subscribers, however, the definition would come into play. Moreover, the exclusions contained in Sections 36b-3(6)(D) [bona fide publications of general, regular and paid circulation] and 36b-3(6)(H) [investment advisory publications with a minimal number of Connecticut subscribers] do not easily lend themselves to Internet activity. Based exclusively on the facts presented, however, particularly the impersonal nature of the reports, the generic quality of the recommendations and the user's interactive role in the process, this department would take no enforcement action at the present time if the NetProphet service is not registered as an investment adviser. Note that any material change in the facts presented may prompt a conclusion varying from that contained herein and that, notwithstanding our position on registration status, NetProphet would remain subject to the antifraud provisions in Section 36b-5(a) of the Act.

John P. Burke
Banking Commissioner
July 5, 1996


DEPARTMENT CLARIFIES VIEWS ON
INVESTMENT ADVISER REFERRAL ARRANGEMENTS

Text of Reply

This department is in receipt of your April 30, 1996 and April 4, 1996 correspondence concerning the above matter, together with a copy of a proposed Referral Agreement (the "Agreement") between Olson Mobeck & Associates, Inc. and an unnamed investment adviser. You have requested guidance on whether Olson Mobeck & Associates, Inc. may compensate the adviser for the services described in the Agreement.

Facts

As I understand them, the pertinent facts are as follows. Olson Mobeck & Associates, Inc. (hereinafter, "Investment Adviser #1") proposes to enter into a referral agreement with another investment adviser ("Investment Adviser #2") which may be either an entity or a sole proprietorship. Both investment advisers would be registered under the Act and under federal law. Neither investment adviser would be affiliated with the other. According to the Agreement, Investment Adviser #2 would offer the services of Investment Adviser #1 to certain of Investment Adviser #2's clients who may execute an Investment Advisory Agreement with Investment Adviser #1 at their election. If such clients do enter into an investment advisory agreement with Investment Adviser #1, the Agreement indicates that Investment Adviser #2 may deliver contracts, forms and other documents relating to the account to and from Investment Adviser #1 and the client. In addition, upon the client's request, Investment Adviser #2 would help the client to complete forms, applications, investment advisory agreements and/or other documents, and to answer general questions concerning those documents as may be required for the proper handling of the client's account with Investment Adviser #1. The Agreement, however, precludes Investment Adviser #2 from acting on Investment Adviser #1's behalf in providing investment advice to the client. This fact would be disclosed to the client. To compensate Investment Adviser #2 for its solicitation activities and other services, Investment Adviser #1 will pay Investment Adviser #2 a fee equal to .25% of the value of each client's assets under Investment Adviser #1's management at the beginning of each quarter; the fee will be paid quarterly in arrears. In your April 30, 1996 letter, you stated that Investment Adviser #1 would not pay any employee of Investment Adviser #2 for the services described in the Agreement; rather, the payment arrangement would only be with Investment Adviser #2. Pursuant to the Agreement, Investment Adviser #2 would not be authorized to collect or receive payments in its own name which are due from the client under the client's investment advisory arrangement with Investment Adviser #1. Clients would receive a solicitors disclosure document prepared in accordance with Rule 206(4)-3 under the federal Investment Advisers Act of 1940. The disclosure document included with your correspondence recites that Investment Adviser #2 has a financial interest in the selection of Investment Adviser #1 as the client's investment adviser; that Investment Adviser #2 is not otherwise affiliated with Investment Adviser #1; and that Investment Adviser #2 would receive a specified percentage of the fees the client pays to Investment Adviser #1. The disclosure document adds that fees charged to clients by Investment Adviser #1 would be the same regardless of whether a solicitor were involved.

Fee Sharing; Investment Adviser #2 as an Investment Adviser Agent of Investment Adviser #1

At the outset, please note that no provision in the Act or the Regulations thereunder specifically prohibits fee sharing by investment advisers. However, a question does arise concerning whether Investment Adviser #2 would be considered an investment adviser agent of Investment Adviser #1 for purposes of Section 36b-3(7) of the Act and required to register as such. Section 36b-3(7) defines the term "investment adviser agent" to mean:

any individual, other than an investment adviser, or a sole proprietor of an investment adviser, employed, appointed or authorized by an investment adviser to solicit business from any person for such investment adviser, within or from this state, and who receives compensation or other remuneration, directly or indirectly, for such solicitation.

Where the recipient of solicitation-related compensation is a corporation or other entity, it would not be deemed an "investment adviser agent" since it is not an "individual." If the recipient is a sole proprietorship, however, it would be considered an "investment adviser agent" and subject to the Act's registration requirements.

The scenario you describe, however, indicates that, although the recipient of solicitation-related compensation may be a sole proprietor, it would also be an investment adviser registered at both the state and federal levels. As such, it would owe a fiduciary duty to those clients to whom it offers Investment Adviser #1's services as an enhancement to its own investment advisory services. Because of that higher standard of conduct and the fact that the antifraud provisions in Section 36b-6(f) would still apply to Investment Adviser #2, this department would take no enforcement action at the present time if Investment Adviser #2 is not registered as an investment adviser agent of Investment Adviser #1. Our position is contingent on 1) the client receiving sufficient disclosure, before contracting with Investment Adviser #1, concerning such items as the referral fee arrangement, any fee differential between clients whose accounts were referred and those whose accounts were not, and any material conflicts of interest involving the solicitor; 2) Investment Adviser #1 maintaining adequate records, open to inspection by our department, regarding the amounts and recipients of referral fees paid; and 3) Investment Adviser #1 refraining from paying any solicitation-related compensation, directly or indirectly, to agents, employees or representatives of Investment Adviser #2.

In addition, the foregoing no-action position is based exclusively on the facts presented, and any material change in those facts may prompt a conclusion at variance from that contained herein.

Pass-through and Other Payments by Investment Adviser #2 to its own Employees, Agents or Representatives

Even though Investment Adviser #1 may not pay solicitation-related compensation directly or indirectly to employees, agents or representatives of Investment Adviser #2 (the"Representatives"), situations may arise where Investment Adviser #2 either 1) passes through to its Representatives all or a portion of the referral fee it receives from Investment Adviser #1; or 2) otherwise compensates its Representatives for their role in Investment Adviser #2's solicitation effort. The question then becomes whether Investment Adviser #2's Representatives would be considered statutory investment adviser agents of Investment Adviser #1.

The department has previously taken the position that, where Investment Adviser #1 and Investment Adviser #2 are affiliated, authorization to solicit business for Investment Adviser #1 could be implied from the employment arrangement pursuant to which the Representatives of Investment Adviser #2 referred clients to Investment Adviser #1 for compensation. In effect, the referral fee arrangement benefited the organizational structure as a whole, such that the Representatives would be considered statutory investment adviser agents of Investment Adviser #1. (Later, the department prescribed an abbreviated registration procedure for investment adviser agents where multiple affiliates were involved.)

Where Investment Adviser #1 and Investment Adviser #2 are not affiliated, however, and where Investment Adviser #1 takes no active steps to pay solicitation-related compensation to the Representatives as such and does not anticipate payment of such compensation to the Representatives, the Representatives would not be deemed investment adviser agents of Investment Adviser #1. In making this determination, we would look closely at the terms of any contract between Investment Adviser #1 and Investment Adviser #2 as well as the existence of any separate agreement between Investment Adviser #1 and the Representatives. In this scenario, Investment Adviser #2's compensatory arrangement with its Representatives would be for the convenience of Investment Adviser #2, and the Representatives' working identification would be with Investment Adviser #2 rather than Investment Adviser #1. This is particularly true where Investment Adviser #2 markets its services as a package with specialized features provided by Investment Adviser #1. Here, however, since the soliciting Representatives' efforts would augment Investment Adviser #2's business, those Representatives would be deemed investment adviser agents of Investment Adviser #2 and required to be registered as such.

Limitations

Please be advised that this letter expresses no opinion on any independent regulatory responsibilities of Investment Adviser #2 under federal or state law where Investment Adviser #2 is either a registered representative of a broker-dealer or a broker-dealer. In addition, factual variations on the above would require further evaluation by our office.

John P. Burke
Banking Commissioner
May 13, 1996


GUIDANCE OFFERED ON INVESTMENT ADVISORY
SOLICITATION AGREEMENT INVOLVING BROKER-DEALERS

Text of Reply:

As I understand them, the pertinent facts are as follows. Keystone [Capital Management, Inc.], a Mississippi-based investment adviser registered under the [Connecticut Uniform Securities] Act, proposes to enter into a "Principal Representative/Investment Advisor Agreement" (hereinafter, the "Firm Agreement") with proprietorships, partnerships or corporations. Although your June 14, 1996 correspondence indicates that Keystone markets its services solely through NASD broker-dealers and their registered representatives, the Firm Agreement states, at page 2, that signatories may include, not only broker-dealers, but law firms, pension consultants, investment companies, accounting firms, other investment advisers, commodity trading advisors, financial planning firms and insurance agencies. In analyzing the issues involved, we will limit our response to broker-dealer signatories in accordance with your letter of inquiry.

The Firm Agreement recites that, after it is executed, one or more associated persons who are under the supervision and control of the signatory firm "may" enter into separate "Sales Representative/Investment Advisor Agreements" (hereinafter, "Sales Representative Agreements") with Keystone. A copy of the Sales Representative Agreement, however, was not included with your correspondence. Pursuant to the Firm Agreement, the signatory firm, through its associated persons, would contact client prospects on behalf of the adviser and solicit them to enter into mutual fund management program agreements with Keystone. Specifically, associated persons of the firm would be limited to providing prospective clients with an explanation of Keystone's advisory service, Keystone's client contract and other aspects of Keystone's business using Keystone's written information. The associated persons would also recommend Keystone to prospective clients but would not make any investment recommendation or give investment advice to clients or prospective clients while acting on Keystone's behalf. The Firm Agreement adds that associated persons would maintain client relations for solicited accounts; serve as intermediaries between solicited clients and Keystone while Keystone's contract with the client remains in effect; field client questions concerning the status and performance record of the account; forward instructions to Keystone concerning the client's request for special activity in the account; and forward to clients a copy of Keystone's disclosure document as well as the solicitor's statement (consisting of a copy of the Firm Agreement) required under Securities and Exchange Commission Rule 206(4)-3.

For such services, the Firm Agreement requires Keystone to compensate the firm with a prepaid quarterly solicitation fee for each solicited client contract in accordance with the Sales Representative Agreement, and for the firm to pay its associated persons an agreed upon amount. Keystone will mail notice of any change in the solicitation rates directly to the sales representatives.

In your correspondence, you maintain that since the participating broker-dealers would be responsible for supervising representatives who sell Keystone's services, those representatives would not be considered "investment adviser agents" of Keystone under the Act. In support of your view, you cite NASD Notice to Members 94-44, and claim that Article III, Section 40 of the Rules of Fair Practice extended an NASD member's oversight and supervision of associated persons to situations that otherwise would be outside the supervisory scope. As explained in NASD Notice to Members 96-33 (May 1996), Notice to Members 94-44 "clarified the applicability of Article III, Section 40 ... to investment advisory activities of registered representatives ... who also are investment advisers ... In particular, the Notice addressed the supervision of securities transactions conducted by ... [such persons] away from the NASD members with which they are associated." Since the facts presented do not indicate that the associated persons will independently be functioning as investment advisers or that they will be participating in the execution of a securities transaction away from their NASD member firms, it would appear that neither Notice to Members 94-44 nor Article III, Section 40 of the Rules of Fair Practice is on point. Moreover, the obligation of a broker-dealer to supervise its agents is separate and apart from the question of whether those agents must register as investment adviser agents of a third party investment adviser.

Section 36b-3(7) of the Act defines the term "investment adviser agent" to mean:

any individual, other than an investment adviser, or a sole proprietor of an investment adviser, employed, appointed or authorized by an investment adviser to solicit business from any person for such investment adviser, within or from this state, and who receives compensation or other remuneration, directly or indirectly, for such solicitation.

The Firm Agreement expressly authorizes the associated persons to solicit business for Keystone, an investment adviser, and envisions that the associated persons will be compensated for this activity. In this regard, even though the Firm Agreement states that Keystone will compensate the broker-dealer directly, and the broker-dealer will compensate its representatives, we question the purpose of the separate Representative Agreement between Keystone and the associated persons. Not having received a copy of that agreement, for example, we cannot ascertain whether it contains additional compensation terms or if there is any requirement therein that the associated person notify the broker-dealer of its existence.

In conclusion, given the express authorization to solicit contained in the Firm Agreement, and the fact that all parties contemplate compensation flowing to the participating representatives, we believe that those representatives would be required to register as investment adviser agents of Keystone. Indeed, Section 36b-31-6g(d) of the Regulations under the Act specifically contemplates multiple registration in this instance; all that is required is prior written consent from both parties involved.

You also inquire whether our office would require Keystone to have a selling agreement only with a broker-dealer rather than with an advisory affiliate of the firm or with a broker-dealer that is also an investment adviser. Please be advised that neither the Act nor the Regulations thereunder would preclude Keystone from entering into a solicitation agreement with any of the entities you mention, and that such a decision rests entirely with Keystone.

John P. Burke
Banking Commissioner
July 5, 1996


ENFORCEMENT HIGHLIGHTS

ADMINISTRATIVE SANCTIONS

CEASE AND DESIST ORDERS

Business Motivations, Inc. of Florida

On April 8, 1996, the Commissioner issued an Order to Cease and Desist and Notice of Right to Hearing (Docket number CD-96-253-B) under the Connecticut Business Opportunity Investment Act against Business Motivations, Inc. of Florida, a corporation with its principal office at 3400 Park Central Boulevard North, Suite 3420, Pompano Beach, Florida. The Order to Cease and Desist alleged that the corporation, which markets pre-paid telephone calling cards through distributors, offered and sold unregistered business opportunities in violation of Section 36b-67(1) of the Act. The Order also alleged that the respondent violated the Act's antifraud provisions by failing to disclose to purchaser-investors the unregistered status of the business opportunity. Since the respondent did not request a hearing within the prescribed time period, the Order to Cease and Desist became permanent on April 30, 1996.

Computer Business Services, Inc.

On April 1, 1996, the Commissioner issued an Order to Cease and Desist and Notice of Right to Hearing (Docket number CD-96-722-B) under the Connecticut Business Opportunity Investment Act against Computer Business Services, Inc., a corporation located at CBSI Plaza in Sheridan, Indiana. The Order to Cease and Desist alleged that the corporation, which markets a program enabling purchasers to start a home business using computer technology, offered unregistered business opportunities in violation of Section 36b-67(1) of the Act. The respondent was afforded an opportunity to request a hearing on the allegations in the Order to Cease and Desist.

Johnston Kent Securities, Inc. (CRD # 21618), George R. Johnston (CRD # 1211272) and Anthony L. Leone

On June 26, 1996, the Commissioner issued an Order to Cease and Desist and Notice of Right to Hearing (Docket number CD-96-2889-S) under the Connecticut Uniform Securities Act against Johnston Kent Securities, Inc., of 216 Sixteenth Street, Suite 840, Denver, Colorado; George R. Johnston, the firm's president; and Anthony L. Leone, an employee sales representative operating from the firm's office at 14 Vanderventer Avenue, Suite 105, Port Washington, New York. The Order to Cease and Desist alleged that in August, 1995, the firm sold unregistered non-exempt shares of Dawson Science Corporation to Connecticut residents in purported violation of Section 36b-16 of the Act; that, at the time of such sales, the firm was not registered as a broker-dealer under Section 36b-6 of the Act nor was respondent Leone registered as an agent of the firm in Connecticut; and that the firm had misrepresented to the Commissioner that it had not effected any Connecticut securities transactions. The respondents were afforded an opportunity to request a hearing on the allegations in the Order to Cease and Desist.

ORDERS REVOKING SECURITIES EXEMPTIONS

Hawaii SMR, Inc. - Private Placement Exemption Revoked

On June 3, 1996, the Commissioner entered Findings of Fact, Conclusions of Law and an Order revoking the private placement exemption of Hawaii SMR, Inc. under the Connecticut Uniform Securities Act. The corporation had been the subject of an August 1, 1995 Order to Cease and Desist (Docket number CD/NE-95-2692-S) which became permanent on August 21, 1995 since the respondent did not request a hearing on the allegations in the order. Hawaii SMR, Inc. is located at 4275 Executive Square, Suite 800, La Jolla, California.

In revoking the corporation's exemption, the Commissioner found that the respondent engaged in a general public solicitation consisting of unsolicited cold-calls which disqualified the corporation from relying on the private placement exemption. The Commissioner noted that such cold-calls involved high pressure sales tactics and representations to purchasers that, for a $10,000 minimum investment, they would have an opportunity to realize a 300 percent return. Sales of the shares would finance the development of a statewide network of wireless communications in Hawaii. The Commissioner also found that one Robert Morgan of San Diego, California made unsolicited offers of respondent's common stock at a time when Morgan was not registered as an agent of the issuer under the Act, and that this factor similarly disqualified the respondent from relying on the exemption. The Commissioner also concluded that the offering materials failed to disclose that James E. Gasper, president of the corporation, had been barred from association with any member of the NASD for conducting broker-dealer activity absent registration.

CONSENT ORDERS

Linda Sue Schwarz (CRD # 416544)

On April 10, 1996, the Banking Commissioner entered a Consent Order (No. CO-96- 03-2428-S) with respect to Linda Sue Schwarz of Stamford, Connecticut. The Consent Order, which followed a Securities and Business Investments Division investigation under the Connecticut Uniform Securities Act, alleged that Schwarz engaged in dishonest or unethical business practices in the securities business by wilfully causing at least one person to enter false information on a client new account form.

The Consent Order suspended Schwarz from acting as an agent of a broker- dealer, issuer or investment adviser for 15 consecutive days, and fined her $5,000. In addition, the Consent Order required that Schwarz limit her business to serving institutional customers and professional traders. Schwarz could, however, service other retail accounts if each account order were approved by a principal of her employing broker-dealer. The Consent Order also prohibited Schwarz from maintaining or servicing any discretionary account absent prior written consent of the Division Director. Pursuant to the Consent Order, Schwarz was also required to complete the Regulatory Element of the Securities Industry Continuing Education Program within 90 days; and procure an undertaking from her employing broker-dealer to periodically submit to the Division for 2 years copies of any complaints against Schwarz.

On April 18, 1996 the Consent Order was amended to indicate that its date of issuance would be deemed to be April 12, 1996.

Kalb, Voorhis & Co. (CRD # 479)

On May 8, 1996, the Banking Commissioner entered a Consent Order (No. CO-96- 2953-S) with respect to Kalb, Voorhis & Co. ("Kalb") of 27 William Street, New York, New York. The Consent Order, which followed a Securities and Business Investments Division investigation under the Connecticut Uniform Securities Act, alleged that from at least 1994, the firm transacted business as a broker-dealer absent registration under Section 36b-6(a) of the Act and employed unregistered agents in alleged violation of Section 36b-6(b) of the Act.

The Consent Order directed Kalb to cease and desist from violative conduct, and required that it implement revised supervisory and compliance procedures designed to ensure better monitoring of state broker-dealer and agent licensing requirements. In addition, the Consent Order mandated that Kalb pay $14,000 to the agency; $10,000 of that amount constituted an administrative fine, $1,500 reflected past due registration fees and $2,500 represented reimbursement for the Division's investigative costs. The Consent Order also required that the firm submit quarterly reports to the department for two years describing any securities-related complaints, actions or proceedings involving Connecticut residents.

The Thornwater Company, L.P. (CRD # 36195)

On May 31, 1996, the Banking Commissioner entered a Consent Order (No. CO-96- 2969-S) with respect to The Thornwater Company, L.P. ("Thornwater") of 107 East 37th Street, New York, New York. The Consent Order, which followed a Securities and Business Investments Division investigation under the Connecticut Uniform Securities Act, alleged that from approximately January 1996, the firm employed one Scott Edward Schalk (CRD number 2241998) as an agent at a time when Schalk was not registered as an agent of Thornwater under the Act, and that Thornwater had filed a materially false and misleading document with the department representing that Schalk had not sold or offered any securities to Connecticut residents. Thornwater neither admitted nor denied the Commissioner's allegations.

The Consent Order directed Thornwater to cease and desist from violative conduct, and required that it implement revised supervisory and compliance procedures designed to ensure improved monitoring of state broker-dealer and agent licensing requirements. In addition, the Consent Order mandated that Thornwater pay $3,550 to the agency; $2,500 of that amount constituted an administrative fine, $1,000 represented reimbursement for the Division's investigative costs and $50 represented past due registration fees. The Consent Order also required that the firm submit quarterly reports to the department for two years describing any securities-related complaints, actions or proceedings involving Connecticut residents.

Painewebber Incorporated (CRD # 8174)

On June 13, 1996, the Banking Commissioner entered a Consent Order (No. 96-2851-CO) with respect to Painewebber Incorporated ("PWI"), a broker-dealer registered under the Connecticut Uniform Securities Act (the "Act"). The Consent Order was predicated on allegations that PWI violated Section 36b-4 of the Act in disseminating misleading marketing materials relating to investments in PaineWebber/Geodyne oil and gas programs, PaineWebber Insured Mortgage Partners, PaineWebber Independent Living Mortgage Partners and Pegasus Aircraft Partners. The Consent Order also claimed that PWI had sold unsuitable investments; failed to keep adequate books and records in connection with certain secondary market transactions; and failed to reasonably supervise its agents.

The Consent Order required that PWI cease and desist from regulatory violations ; pay a $96,202 civil penalty to the department; and maintain supervisory and compliance procedures designed to prevent future regulatory violations.

Schroder Wertheim & Co., Inc. (CRD # 35021)

On June 25, 1996, the Banking Commissioner entered a Consent Order (No. CO-96- 2978-S) with respect to Schroder Wertheim & Co., Inc. ("SWC") of 787 Seventh Avenue, New York, New York. The Consent Order, which followed a Securities and Business Investments Division investigation under the Connecticut Uniform Securities Act, alleged that from approximately 1983 through 1995, the firm, a registered broker-dealer and investment adviser, engaged six unregistered investment adviser agents in purported contravention of Section 36b-6(c) of the Act. SWC neither admitted nor denied the Commissioner's allegations.

The Consent Order directed SWC to cease and desist from violative conduct, and required that the firm continue its review, revision and implementation of supervisory procedures designed to improve regulatory compliance. The Consent Order also fined the firm $4,000 and required that it reimburse the department an additional $1,000 for past due registration fees.

STIPULATION AND AGREEMENTS

Gruntal & Co. (CRD # 372)

On April 10, 1996, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-96-2425-S) with Gruntal & Co., a securities broker-dealer located at 14 Wall Street, New York, New York. The Stipulation and Agreement followed a Securities and Business Investments Division investigation under the Connecticut Uniform Securities Act. That investigation uncovered indications that from approximately October 1995 to January 1996, the firm allegedly transacted business from an unregistered branch office in contravention of Section 36b-6(d) of the Act.

Pursuant to the Stipulation and Agreement, the firm agreed to implement revised procedures designed to ensure regulatory compliance; to periodically report to the Division concerning any securities-related complaints, actions or proceedings involving Connecticut residents; and to reimburse the agency $750 for its investigative costs.

Fisco Equity Inc. (CRD # 24067)

On May 10, 1996, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-96-2943-S) with respect to Fisco Equity Inc. ("Fisco") of 6 Blackstone Valley Place, Suite 301, Lincoln, Rhode Island. The Stipulation and Agreement followed an investigation by the Securities and Business Investments Division under the Connecticut Uniform Securities Act. That investigation suggested that from approximately 1994, Fisco transacted business from an office in Connecticut without registering that location as a branch office in alleged contravention of Section 36b-6(d) of the Act.

The Stipulation and Agreement required that Fisco review, revise and implement supervisory procedures designed to ensure regulatory compliance; that the firm refrain from violative conduct; and that Fisco pay $600 to the department, $500 of which constituted a civil penalty and $100 of which represented the cost of registering the branch office.

John A. Levin & Co., Inc. (CRD # 40676)

On May 14, 1996, the Banking Commissioner entered into a Stipulation and Agreement (No. ST-96-2959-S) with John A. Levin & Co., Inc. ("Levin") of One Rockefeller Plaza, 25th Floor, New York, New York. The Stipulation and Agreement, which followed a Securities and Business Investments Division investigation under the Connecticut Uniform Securities Act, alleged that from at least 1992, the firm transacted business as an investment adviser absent registration under Section 36b-6(c) of the Act.

Pursuant to the Stipulation and Agreement, the firm agreed to review, revise and implement supervisory procedures designed to ensure regulatory compliance, and to refrain from violations of the Act or the Regulations thereunder. In addition, Levin agreed to pay $5,000 to the agency; $3,500 of that amount constituted an administrative fine, $900 reflected uncollected registration fees during the period of unregistered activity and $600 represented reimbursement for department investigative costs.

LICENSING ACTIONS

Stratton Oakmont, Inc. (CRD # 18692) - Notice of Intent to Revoke Registration as a Broker-dealer Issued

On June 13, 1996, the Banking Commissioner issued a Notice of Intent to Revoke the broker-dealer registration of Stratton Oakmont, Inc. ("Stratton") (Docket No. NR-96-2615-S). The firm is located at 1979 Marcus Avenue, Lake Success, New York. The Commissioner's action was based on a February 28, 1995 permanent injunction entered by the United States District Court for the District of Columbia; certain sanctions imposed by the National Association of Securities Dealers; and suspension orders entered against the firm by other states. In addition, the Commissioner alleged that Stratton had engaged in dishonest or unethical business practices by falsifying customers' net worth and/or annual income figures on new account forms; made material misrepresentations in connection with a department investigation; wilfully filed a false or misleading statement with the agency; and wilfully violated Section 36b-31-14f(b)(4) of the Regulations under the Act by failing to furnish access to all areas of its securities operations during the course of an examination. The firm was afforded an opportunity to request a hearing on the allegations in the Notice.


QUARTERLY STATISTICAL SUMMARY

April 1, 1996 through June 30, 1996

Registration

Securities

Business
Opportunities

YTD

Total Coordination (Initial & Renewal) 1,273 n/a 3,440
-- (Investment Co. Renewals: 613)
 

 

 
-- (All Other Coordinations: 660)
 

 

 
Qualification (Initial) 6 n/a 10
Qualification (Renewal) 1 n/a 1
Regulation D Filings 504 n/a 968
Other Exemption or Exclusion Notices 50 12 73 (SE)
23 (BO)
Business Opportunity (Initial) n/a 6 13
Business Opportunity (Renewal) n/a 20 24
 
 
Licensing & Branch Office Registration

Broker-Dealers

Investment Advisers

Issuers

YTD

Firm Initial Registrations Processed 110 33 n/a 238 (BD)

 

 

 

 
77 (IA)
Firms Registered as of 6/30/96 2,026 1,140 n/a n/a
Agent Initial Registrations Processed 7,789 597 44 16,839 (BD)
1,334 (IA)
59 (IS)
Agents Registered as of 6/30/96 77,062 10,278 294 n/a
Branch Offices Registered as of 6/30/96 1,125 364 n/a n/a
Examinations Conducted 52 11 0 93 (BD)
19 (IA)
0 (IS)
 
 
Investigations

Securities

Business
Opportunities

YTD

Investigations Opened 53
 
2
 
96 (SE)
2 (BO)
Investigations Closed 44 3 83 (SE)
6 (BO)
Investigations in Progress
as of 6/30/96
98 5 n/a
Referrals from Attorney General 1 0 4 (SE)
2 (BO)
Referrals from Other Agencies 9 0 13 (SE)
1 (BO)
Subpoenas Issued 2 0 2 (SE)
0 (BO)
 
 
Administrative Enforcement
Actions

Number

Parties

YTD
(#/Parties)

Securities      
Consent Orders 5 5 9/10
Stipulation and Agreements 3 3 7/7
Cease and Desist Orders 1 3 2/5
Denial, Suspension & Revocation Orders 0 0 4/4
Conditional Licensing Orders 0 0 0/0
Other Notices and Orders 2 2 2/2
Referrals (Civil) 0 0 1/2
Referrals (Criminal) 0 0 0/0
Business Opportunities      
Consent Orders 0 0 0/0
Cease and Desist Orders 2 2 5/8
Other Notices and Orders 0 0 0/0
Referrals (Civil) 0 0 0/0
Referrals (Criminal) 0 0 0/0
 
 
Monetary Sanctions

$ Assessed

YTD

Consent Orders and Stipulation
and Agreements (Securities)
$ 130,102 $ 168,139
 
 
Reimbursement to
the Investing Public

Voluntary Restitution Offers;
Other Monetary Relief

YTD

Securities $ 6,551,038 $ 7,198,939
Business Opportunities 0 0

________ ________
Totals $ 6,551,038 $ 7,198,939

Securities Division