NASD Regulation Fines Alex. Brown & Sons, and Registered Representative $150,000; Another $150,000 in Disgorgement Ordered
Washington, D.C. — NASD Regulation, Inc., today announced that it fined Alex. Brown & Sons $100,000 and one of the firm's registered representatives $50,000 in connection with the sale of Regulation S securities in six companies by one of the firm's customers. Alex. Brown and the registered representative, Beaumont Bianchi, also agreed to disgorge a total of $150,000 in commissions related to the sale of the Regulation S securities, without admitting or denying NASD Regulation's findings. Both the firm and Bianchi were also censured. In addition, Alex. Brown was cited for not having adequate supervisory procedures in place.
This sanction marks the first time NASD Regulation has taken disciplinary action in connection with the sale of Regulation S securities. Regulation S describes the circumstances in which an offering of securities is not required to be registered with the Securities and Exchange Commission (SEC) because it is deemed to occur outside the United States. To qualify for this "safe harbor," the securities of the six companies in question could not be sold, directly or indirectly, to any U.S. company or citizen prior to the expiration of a 40-day restricted period after the offshore offering.
"This settlement makes it clear that all NASD member firms are responsible for educating their staffs about the need to prevent abuses associated with Regulation S offerings," said NASD Regulation Chief Operating Officer, Elisse B. Walter. "In order to ensure that every investor is treated fairly, all of our members must establish and follow adequate supervisory procedures."
A lengthy investigation by NASD Regulation's Market Regulation Department found that for almost a year (from July 1993 through April 1994) an Alex. Brown customer purchased shares in six Regulation S offerings and then sold them back into the U.S. markets-through accounts maintained at Alex. Brown-prior to the expiration of the 40-day restricted period. NASD Regulation determined that 117 sales transactions were executed in the six securities through several offshore accounts maintained at Alex. Brown by the customer. Two of the securities were traded on The Nasdaq National MarketSM, and four of them on the Nasdaq SmallCap MarketSM.
NASD Regulation found that Bianchi (who works in Alex. Brown's Los Angeles office), or his sales assistant, executed the 117 transactions without making an "affirmative determination," or accurately marking order tickets as "long" or "short." NASD Rules require the broker - based on a conversation with the customer - to make an "affirmative determination" at the time an order is taken. This requires the broker to write on the order ticket the location of the securities in question, whether the securities are in good deliverable form, the customer's ability to deliver the securities by the settlement date, and, if it is a short sale, whether the broker can borrow the securities on behalf of the customer for delivery by the settlement date. In addition, NASD Regulation found that Alex. Brown failed to establish, maintain, and enforce a supervisory system designed to achieve compliance with the NASD Rules.
As part of its agreement with NASD Regulation, Alex. Brown must put in place the necessary supervisory and educational procedures to prevent similar violations in the future. Bianchi must requalify as a general securities representative by taking the Series 7 exam again.
NASD Regulation's National Business Conduct Committee approved this settlement on September 3, 1996.