UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Release No. 37755 / September 30, 1996 ADMINISTRATIVE PROCEEDING File No. 3-9123 ___________________________________ : In the Matter of : ORDER INSTITUTING : PUBLIC PROCEEDINGS, THE O.N. EQUITIES SALES COMPANY : MAKING FINDINGS, : AND IMPOSING : REMEDIAL SANCTIONS ___________________________________: I. The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest that administrative proceedings be instituted pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") against the O.N. Equities Sales Company ("ONESCO"), a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act. In anticipation of the institution of these proceedings, ONESCO 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 to which the Commission is a party, and without admitting or denying the findings contained herein, except for those set forth below in Section II., paragraph A., which are admitted, and prior to a hearing pursuant to the Commission's Rules of Practice, 17 C.F.R. 201.1 et seq., ONESCO, by its Offer, consents to the entry of the findings and the imposition of the remedial sanctions set forth below. Accordingly, IT IS ORDERED that proceedings pursuant to Sections 15(b) and 19(h) be, and hereby are, instituted. II. On the basis of this Order Instituting Public Proceedings, Making Findings and Imposing Remedial Sanctions ("Order"), and ==========================================START OF PAGE 2====== the Offer submitted by ONESCO, the Commission finds that:-[1]- A. ONESCO is an Ohio corporation with its principal place of business in Cincinnati, Ohio. Since 1968, ONESCO has been registered with the Commission as a broker-dealer pursuant to Section 15(b) of the Exchange Act. It similarly has been a member of the National Association of Securities Dealers, Inc. ("NASD") since 1968. B. During the period from May 1993 through March 1995, Michael D. Gibson ("Gibson") was a registered representative associated with ONESCO. Gibson maintained his office in Bethel Park, Pennsylvania. C. From May 1993 through January 1995, C'est Lestial Waters, Inc. ("CWI") raised over $7 million from more than 100 investors through the offering and sale of unregistered collateral trust bonds (the "CWI bonds"), as well as the securities of certain entities related to CWI (the "CWI entities"). In connection with that offering, CWI, certain of its principals and agents, as well as certain other entities and individual sales representatives, violated, variously, the securities registration, antifraud and broker-dealer registration provisions of the federal securities laws. Specifically, these entities and individuals made misrepresentations of material fact and failed to disclose material information concerning the security underlying the CWI bonds and their relative safety, their status as exempt from registration with the Commission, and the use of offering proceeds. D. From April 1994 through January 1995, Gibson sold over $2.7 million in CWI bonds by, among other things, misrepresenting to investors that the CWI bonds were fully secured through a first and irrevocable lien interest in certain assets of CWI in favor of investors, and that the financial stability of CWI was irrelevant because the CWI bonds were fully secured. Through this conduct, Gibson violated Sections 5(a), 5(c) and 17(a) of the Securities Act and Sections 10(b), 15(a) and 15(c) of the Exchange Act and Rules 10b-5 and 15c1-2 thereunder. E. ONESCO failed reasonably to supervise Gibson with a view to preventing his violations of the federal securities laws. As part of its failure to supervise, ONESCO failed to establish procedures, and a system for applying such procedures, which ---------FOOTNOTES---------- -[1]- The findings herein are made pursuant to ONESCO's Offer of Settlement and are not binding on any other person or entity in this or any other proceeding. ==========================================START OF PAGE 3====== would reasonably be expected to prevent and detect, insofar as practicable, such violations, in that: 1. ONESCO failed to clearly and effectively communicate to its personnel the assignment of, and the method for carrying out, its responsibilities for supervising Gibson; 2. ONESCO did not have in place adequate and effective procedures and systems for monitoring Gibson's outside business activities; and 3. ONESCO failed to adequately respond to facts and circumstances of which it had notice concerning Gibson's conduct. III. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in the Offer submitted by ONESCO. Accordingly, IT HEREBY IS ORDERED that: A. ONESCO be and hereby is, censured for its failure reasonably to supervise Gibson as described above in Section II., paragraph E. B. Onesco shall, within thirty days of the entry of this Order, pay a civil money penalty in the amount of $40,000 to the United States Treasury. Such payment shall be: (A) made by United States postal money order, certified check, bank cashier's check or bank money order; (B) made payable to the Securities and Exchange Commission; (C) hand-delivered to the Comptroller, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549; and (D) submitted under cover letter that identifies ONESCO 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, District Administrator, Securities and Exchange Commission, The Curtis Center, 601 Walnut Street, Suite 1005E., Philadelphia, Pennsylvania. C. The undertakings described below in sub-paragraphs 1 through 9, implemented prior to the date of this Order, shall be maintained: 1. ONESCO has adopted new procedures for inspection of its affiliated offices, including branch offices, non-branch offices and Offices of Supervisory Jurisdiction. The new inspection procedures require that each such office be inspected at least once within the first twelve months of its affiliation with ONESCO and once during the second year of affiliation with ==========================================START OF PAGE 4====== ONESCO; and offices and locations affiliated with ONESCO for more than two years will, at a minimum, be inspected once every three years except that Offices of Supervisory Jurisdiction will be inspected annually. Moreover, the new inspection procedures require that the activities of ONESCO's affiliated offices will be reviewed periodically and, as determined by ONESCO's Compliance Director, will be inspected more frequently than once every three years after the first two years of affiliation on an as-needed basis. Finally, the new inspection procedures require that offices and locations will also be inspected as determined by the Compliance Director or by ONESCO's senior management in response to "potential adverse developments" as defined in Section 10.25 of ONESCO's Equity Products Manual ("EPM") dated August 1995. 2. ONESCO has engaged the services of an additional auditor primarily dedicated to inspection of the offices and locations of ONESCO's registered representatives. 3. ONESCO has extended the scope of its office inspections to include a review of the business checking account records (or any other appropriate records maintained at or in connection with the operations of any ONESCO branch office or location) in order to determine whether representatives at that location may have engaged in private securities transactions without ONESCO's knowledge or without prior notice to ONESCO. Pursuant to such extended scope, inspectors must specifically inquire about private securities transactions and must make diligent efforts in the review of the files and records maintained at each location to determine whether or not unreported transactions may have occurred or may be occurring. 4. ONESCO has undertaken to send a customer confirmation letter on every 25th transaction processed through ONESCO for the purchase of mutual fund and limited partnership interests (other than periodic purchase payments for established accounts) or the purchase of variable annuities issued by non-affiliated companies. The confirmation letter requests that the purchaser confirm the product purchased and the amount of the purchase. In addition, a questionnaire included with the confirmation letter requests that the customers identify other products purchased from ONESCO during the past three months. Moreover, the questionnaire seeks information designed to help ONESCO determine that the customer's purchase met suitability requirements and that the customer was given appropriate information about the product being purchased. The procedures relative to this customer confirmation process require that the ONESCO Compliance Director diligently pursue responses to the confirmation letters and questionnaires and, promptly upon receipt, review the answers to the confirmation letters and questionnaires to confirm whether or not any non-ONESCO products may have been purchased by the customer. ==========================================START OF PAGE 5====== 5. ONESCO has been regularly updating the Compliance Section of the EPM as new developments dictate. A revision of the entire EPM was completed and distributed to all registered representatives in the third quarter of 1995. All new registered representatives who receive the EPM are required to complete a questionnaire demonstrating that they have reviewed and understand the compliance sections of the manual. The questionnaire requires responses which are narrative in form, detailed and handwritten. 6. ONESCO has established and follows written procedures for investigating "potential adverse developments". ONESCO has also established a regular schedule for meetings of the ONESCO Field Compliance and Disciplinary Committee. Meetings are held at least quarterly in addition to ad hoc meetings which may be necessary to deal with compliance and disciplinary matters requiring immediate action. Moreover, ONESCO procedures have been modified so as to require more forceful disciplinary actions when violations of ONESCO's rules and procedures are uncovered. 7. ONESCO is requiring all registered representatives to submit a detailed outside business activity form and has adopted the NASD's recommended form for this purpose. The new form is also used with all new registered representatives applying for registration with ONESCO. The ONESCO Compliance Director or other Principals of the firm as designated by the President are responsible for review of all such forms on a timely basis. Representatives are reminded at least annually during their annual compliance interview of the requirement to submit new outside business activity forms prior to engaging in any such activities. 8. ONESCO has begun, and will continue to conduct, continuing education sessions for all of its registered representatives and principals twice each year in conjunction with regional meetings. ONESCO's annual compliance meetings will be conducted in conjunction with one of those regional meetings. In addition, ONESCO has begun preparations for the publication of a quarterly newsletter which contains reports and information about compliance matters. Publication of the newsletter is planned to begin in the third quarter of 1996. D. ONESCO further shall comply with its agreement and undertakings as follows: 1. Create and maintain a supervisory manual, separate and apart from the EPM, which includes, among other things, specific procedures by which Registered Representatives, Compliance Interviews, Questionnaires and outside Business Activity forms are to be reviewed. ==========================================START OF PAGE 6====== 2. Add such additional audit and inspection capabilities as are necessary to meet the increased office inspection cycle described above in paragraph III. C. 1. 3. Within sixty (60) days of the date of the Order to be entered in this proceeding, ONESCO shall engage an Independent Consultant who is not unacceptable to the Commission's staff. Such Independent Consultant shall have his or her compensation and expenses borne exclusively by ONESCO. The Independent Consultant may retain such consultants as he or she shall deem necessary and appropriate for the task. 4. The Independent Consultant shall review ONESCO's existing policies and procedures to determine the adequacy of such policies and procedures to reasonably prevent and detect conduct of the kind that gave rise to this proceeding. Such review shall include without limitation, a review of the experience, training and adequacy of ONESCO's compliance staff in view of their respective duties. With respect to such policies and procedures the Independent Consultant shall: a. recommend the adoption and implementation of any new and/or revised procedures deemed necessary or appropriate; and b. recommend the adoption and implementation of any new and/or revised training programs deemed necessary or appropriate. 5. The Independent Consultant's recommendations shall be made in the form of a draft report submitted to the Chief Executive Officer and Board of ONESCO and the Commission's staff within sixty (60) days of the appointment of the Independent Consultant. a. Within thirty (30) days of receipt of the draft report submitted by the Independent Consultant, the Chief Executive Officer and Board of ONESCO shall, in writing, advise the Independent Consultant of those recommendations that ONESCO has determined not to accept because they are unduly burdensome or otherwise inappropriate for the structure of its operations. Regarding any recommendation ONESCO believes is unduly burdensome, or otherwise inappropriate, ONESCO shall undertake to propose an alternative policy or procedure designed to achieve the same result. ONESCO and the Independent Consultant shall then attempt in good faith to reach agreement on any policy and procedure as to which there is a dispute. b. If there is a dispute over a policy or procedure recommended by the Independent Consultant then the Independent Consultant shall, in good faith, evaluate ==========================================START OF PAGE 7====== ONESCO'S alternative policy or procedure. Subject to the foregoing sentence, ONESCO will, however, abide by the determination of the Independent Consultant with regard thereto and adopt those recommendations deemed appropriate by the Independent Consultant. c. The Independent Consultant shall complete the aforementioned reviews and submit a written final report thereon to ONESCO and the Commission's staff within sixty (60) days following the date of the draft report. 6. ONESCO shall cooperate fully with the Independent Consultant and shall provide such person with access to its files, books, records, and personnel as reasonably requested for the review by the Independent Consultant. 7. Subject to the provisions of subparagraph D.5. above, ONESCO shall take all necessary and appropriate steps to adopt and implement the recommendations contained in the report. 8. Within 60 days of receipt of the final report, ONESCO shall file an affidavit with the Commission's staff stating that ONESCO has put in place a system of policies and procedures reasonably designed to prevent and detect the conduct of the kind that gave rise to this proceeding or is in the process of so doing, providing a reasonable estimate not to exceed 30 additional days without approval of the Commission's staff, as to when implementation shall be completed. By the Commission. _____________________________ Jonathan G. Katz Secretary