UNITED STATES OF AMERICA
|In the Matter of
D.E. FREY AND COMPANY, INC.
|ORDER INSTITUTING PUBLIC PROCEEDINGS PURSUANT TO SECTIONS 15(b) AND 19(h) OF THE SECURITIES EXCHANGE ACT OF 1934, MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS|
The Securities and Exchange Commission ("Commission") deems it appropriate, in the public interest and for the protection of investors that administrative proceedings be instituted pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") against Respondent D.E. Frey and Company, Inc., ("D.E. Frey" or "Respondent"). Accordingly, it is hereby ORDERED that these proceedings be, and hereby, are instituted.
In anticipation of the institution of these administrative proceedings, the Respondent has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission or in which the Commission is a party, and without admitting or denying the findings herein, except that the Respondent admits the Commission's jurisdiction over it and over the subject matter of these proceedings, D.E. Frey has consented by its Offer to the entry of the findings and the imposition of the remedial sanctions as to it as set forth below.
On the basis of this Order and the Offer submitted by the Respondent, the Commission finds1 that:
D. E. Frey is a corporation registered with the Commission as a broker-dealer since 1988. It is a member of the National Association of Securities Dealers, Inc. ("NASD").
Between 1995 and 1999, three registered representatives at D.E. Frey, each of whom had a disciplinary history or history of customer complaints, engaged in one or more sales practice abuses including unsuitable trading, unauthorized trading or churning in customer accounts. D.E. Frey failed reasonably to supervise those registered representatives to prevent or detect violations of the securities laws by those three registered representatives. In particular, D.E. Frey failed to develop procedures for imposing heightened supervision where appropriate and failed to develop a system and commit adequate resources for implementing the supervisory procedures the firm did have in place.
C. Unsuitable Trading, Unauthorized Trading and Churning in Customer Accounts by Registered Representatives
1. In 1998 and 1999, a registered representative of D.E. Frey located at an office of supervisory jurisdiction ("OSJ") in Colorado Springs, Colorado ("the Colorado Springs representative"), engaged in unsuitable trading in the accounts of at least three elderly D.E. Frey clients who had stated investment objectives of growth and safety. The Colorado Springs representative engaged in margin trading, purchasing options, investing in high yield funds and regularly selling a security and buying it back shortly thereafter. In addition, the Colorado Springs representative churned two of those accounts.
2. In 1998, a registered representative and branch manager of D.E. Frey located at an OSJ in Atlanta, Georgia ("the Atlanta representative"), made unsuitable trade recommendations involving options transactions to two D.E. Frey clients who were not approved for the transactions, had not completed options agreements, and had stated investment objectives including preservation of capital and avoidance of risk.
3. From October 1995 through May 1996, a registered representative of D.E. Frey located at an OSJ in Denver, Colorado ("the Denver representative"), churned and engaged in unsuitable trading for the account of one customer. The Denver representative failed to follow the customer's directions to avoid risk to principal, and make conservative investments; instead, the Denver representative invested in a high-risk fund and engaged in excessive use of margin trading. The Denver representative also made unsuitable trades in the accounts of three other clients and engaged in unauthorized trading in one of those accounts. Each customer had a stated investment objective of conservative growth and each sustained losses when the Denver representative: (1) engaged in mutual fund switching in one account to increase his commissions, (2) invested in a high risk fund in two of the accounts, (3) took a short position in the same high risk fund for one account, and (4) failed to follow sell instructions from one customer.
D. D.E. Frey's Failure to Supervise
1. D.E. Frey presently has 48 branch offices. Registered representatives at D.E. Frey are independent contractors and are not employees of D.E. Frey. Thirty-six of D.E. Frey's 48 branch offices are OSJ offices; three of those OSJ offices were the location of violations by the registered representatives in Colorado Springs, Atlanta and Denver.
2. According to D.E. Frey's compliance manuals, branch managers of OSJ offices were required to review trading activity, customer correspondence and statements, respond to exception reports, conduct internal inspections, meet with registered representatives and conduct compliance meetings. Specifically, D.E. Frey's written supervisory procedures required that branch managers review and initial all trade tickets daily and review all customer monthly statements at least three times a year, with a particular sensitivity to actively traded accounts, the suitability of investments and the reasonableness of investment activity. Monthly checklists of tasks to be performed were provided.
3. D.E. Frey's responsibilities with respect to OSJ offices consisted of annual oversight audits by the compliance department. In the audits, the compliance department was tasked with reviewing trade tickets, customer correspondence and statements, and customer complaints. Moreover, the departments of compliance and supervision were responsible for reviewing exception reports and periodically reviewing branch office trading activities.
4. D.E. Frey lacked a system to implement firm procedures and did not commit adequate resources to develop or implement such a system.
5. D.E. Frey's compliance and supervision departments also did not adequately review exception reports on the Colorado Springs branch that noted excessive trading activity, excessive losses, excessive commissions, and trading activity inconsistent with account investment objectives. D.E. Frey's written supervisory procedures required the compliance department to send activity reports to the manager of the relevant branch office; the branch manager then was required to investigate and report back to the compliance department. However, there was no established system for follow-up by the supervision department to determine if a branch manager reviewed the trading, if the explanations offered by registered representatives were valid, or if additional corrective measures needed to be taken.
6. When D.E. Frey hired the Colorado Springs representative in June 1997, his registration to sell securities in Colorado was subject to a "special supervision order" because of previous customer complaints. Accordingly, the firm agreed with the state of Colorado that he would be subject to increased supervision. Further, the firm prohibited the Colorado Springs representative from exercising discretion over any client accounts. Although D.E. Frey designated a branch manager as responsible for supervision of that registered representative, the firm did not establish adequate policies or procedures for implementing any increased supervision of the Colorado Springs representative.
7. The Atlanta representative was the subject of prior customer complaints involving unauthorized and unsuitable trading activity prior to becoming associated with D.E. Frey. When the Atlanta representative associated with D.E. Frey in 1994, he was required to agree to increased supervision and other restrictions as a condition of his registration in six states which restrictions expired by their terms, at the latest, February 1998. Thereafter, despite its knowledge of the registered representative's history, the firm did not establish adequate policies or procedures for increased supervision of the Atlanta representative.
8. Before associating with D.E. Frey, the Denver representative had been discharged by his former employer for unauthorized trading in a client's account. Notwithstanding D.E. Frey's knowledge of that discharge and the reasons for it, D.E. Frey did not establish or implement sufficient procedures for increased supervision of the Denver representative.
9. The registered representatives in Colorado Springs, Atlanta and Denver violated Section 17(a) of the Securities Act of 1933 ("Securities Act") and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder in that, directly or indirectly, in connection with the offer, purchase or sale of securities by use of the means or instrumentalities of interstate commerce or by use of the mails, they employed devices, schemes or artifices to defraud; made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or engaged in acts, transactions, practices, or courses of business which would or did operate as a fraud or deceit. Specifically, the Colorado Springs representative engaged in unsuitable trading in three client accounts and churned two of those accounts. The Atlanta representative made unsuitable trading recommendations to two clients. The Denver representative churned and engaged in unsuitable trading for the account of one client but also made unsuitable trades in the accounts of three other clients and engaged in unauthorized trading in one of those accounts.
Based upon the foregoing, D.E. Frey failed reasonably to supervise the registered representatives in Colorado Springs, Atlanta and Denver, persons subject to that firm's supervision, with a view toward preventing their violations of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act and Rules 10b-5 thereunder, within the meaning of Section 15(b)(4)(E) of the Exchange Act.
In view of the foregoing, the Commission deems it appropriate, in the public interest and for the protection of investors to accept the Offer submitted by D.E. Frey and to impose the sanctions specified therein.
Accordingly, pursuant to Sections 15(b) and 19(h) of the Exchange Act, IT IS ORDERED that:
A. D.E. Frey be, and hereby is, censured;
B. D.E. Frey shall comply with its undertaking:
1. To retain, within 60 days of the date of this Order, at its expense, an Independent Consultant approved by the Commission's staff. The Independent Consultant shall conduct a review of D.E. Frey's supervisory and compliance policies, procedures and systems to ensure that they are adequate.
2. At the end of that review, which in no event shall be more than 180 days after the date of this Order, the Independent Consultant shall submit to D.E. Frey and to the Commission's staff an Initial Report. The Initial Report shall describe the review performed, the conclusions reached and shall include any recommendations deemed necessary to make the policies, procedures and system of supervision adequate.
3. Within 210 days of the date of this Order, D.E. Frey shall in writing advise the Independent Consultant and the Commission's staff of the recommendations from the Initial Report that it has determined to accept and the recommendations it considers unnecessary or inappropriate. D.E. Frey shall propose alternative procedures for the procedures it does not accept.
4. The Independent Consultant and D.E. Frey shall work in good faith to determine whether any of the objections made by D.E. Frey are valid and whether any of D.E. Frey's alternatives are acceptable. In the event that the Independent Consultant and D.E. Frey are unable to agree on a recommended procedure or an alternative one within 60 days, D.E. Frey shall abide by the Independent Consultant's recommendation and shall advise the Commission's staff.
5. Within 270 days of the date of this Order, D.E. Frey shall in writing advise the Independent Consultant and the Commission's staff of the recommendations it is adopting.
6. Within 330 days of the date of this Order, the Independent Consultant shall complete its review and submit a written final report to D.E. Frey and the Commission's staff. The Final Report shall: describe the review made of D.E. Frey's supervisory functions, compliance mechanisms, and other policies and procedures; set forth conclusions and recommendations and any proposals by D.E. Frey; and describe how D.E. Frey is implementing those recommendations and proposals.
7. D.E. Frey shall take all necessary and appropriate steps to adopt and implement all recommendations contained in the Independent Consultant's Final Report.
8. No later than one year after the date of the Independent Consultant's final report, D.E. Frey shall submit to the Commission's staff an affidavit setting forth the details of its efforts to implement the Independent Consultant's recommendations as set forth in the Final Report and its compliance with them.
9. For good cause shown and upon timely application for the Independent Consultant or D.E. Frey, the Commission's staff may extend any of the deadlines set forth in these undertakings.
10. For the period of engagement and for a period of two years from the completion of the engagement, D.E. Frey shall not enter into any employment, consultant, attorney-client, auditing, or other professional relationship, whether directly or through its affiliates, directors, officers, or agents, with the Independent Consultant or with any person engaged to assist the Independent Consultant in the performance of duties under this Order.
C. D.E. Frey shall, within 30 days of the entry of this Order, pay a civil money penalty of $100,000. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Office of the Comptroller, U.S. Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter which identifies D.E. Frey as a Respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Donald M. Hoerl, Associate Regional Administrator, Securities and Exchange
Commission, Denver Regional Office, 1801 California Street, Suite 4800, Denver, Colorado 80202.
By the Commission.
Jonathan G. Katz
1 The findings herein are made pursuant to D.E. Frey's Offer of Settlement and are not binding on any other person or entity.
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