December 30, 1993
TO: BROKER/DEALER ASSOCIATE MEMBERS NO. 29-93
COMPLIANCE COMMITTEE NO. 31-93
SEC RULES MEMBERS NO. 104-93
RE: SEC SANCTIONS FOR FAILURE TO SUPERVISE IN CONNECTION WITH
MUTUAL FUND SALES
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The Securities and Exchange Commission recently sanctioned
several senior and other officers of a registered broker-dealer in connection
with alleged deficiencies with respect to supervising the sale of shares of
two high yield bond funds. The broker-dealer is the underwriter of these
funds, as well as other affiliated funds.
Specifically, the SEC alleged that the broker-dealer had violated the
anti-fraud provisions under the Securities Act of 1933 and the Securities
Exchange Act of 1934 in connection with the sale of shares in two high yield
bond funds. The SEC alleged that the broker-dealer's sales representatives
had made misleading statements regarding the risk of loss of principal
invested in the funds and the return on an investment in the funds, omitted to
state material facts necessary to make certain statements made not misleading,
and sold shares of the funds to certain investors for whom such shares were
unsuitable investments. The broker-dealer previously had agreed to settle SEC
charges based on this alleged misconduct.
In this proceeding, the SEC asserted that with respect to the alleged
misconduct described above, the broker-dealer's sales training, supervisory,
and compliance programs regarding the sales presentations for the funds were
inadequate in several respects. The SEC found that the broker-dealer failed
to: (1) adopt and maintain uniform standards of sales training company-wide;
(2) adopt adequate procedures to ensure the suitability of customer's
investments; and (3) adopt and implement an adequate system of monitoring
sales training to ensure that sales presentations complied with applicable
state and federal securities laws and rules and regulations of national
securities exchanges.
The SEC alleged that the respondents failed reasonably to supervise
certain of the broker-dealer's sales representatives under their direct or
indirect supervision by failing to establish procedures reasonably designed to
prevent and detect the violative conduct and by failing to respond reasonably
to indications that the broker-dealer's sales training, supervisory, and
compliance systems might not reasonably be expected to prevent and detect,
insofar as practicable, violative sales practices.
In addition, the SEC alleged that as part of their failures to
supervise, the respondents failed adequately to investigate, or cause an
adequate investigation to be made into, allegations suggesting that some of
the broker-dealer's sales representatives were inadequately trained and that
some sales presentations for the funds contained misrepresentations regarding
the return on investment in the funds and the risk of loss of principal in the
funds.
The respondents, without admitting or denying the SEC's allegations,
agreed to settle the charges and to the imposition of the sanctions set forth
in the SEC's order.
A copy of the SEC's order is attached.
Amy B.R. Lancellotta
Associate Counsel
Attachment