UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION INVESTMENT ADVISERS ACT OF 1940 Release No. 1607 / January 21, 1997 ADMINISTRATIVE PROCEEDING File No. 3-9226 ___________________________________ : ORDER INSTITUTING In the Matter of : ADMINISTRATIVE AND CEASE- : AND-DESIST PROCEEDING NORMAN L. YU & CO., INC. : PURSUANT TO SECTIONS and NORMAN L. YU, : 203(e), 203(f), AND : 203(k) OF THE INVESTMENT Respondents. : ADVISERS ACT OF 1940, ___________________________________: MAKING FINDINGS AND IMPOSING REMEDIAL SANCTIONS AND CEASE-AND- DESIST ORDER I. The Securities and Exchange Commission (the "Commission") deems it appropriate that a public administrative and cease-and- desist proceeding be instituted pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 ("Advisers Act") against Respondents Norman L. Yu & Co., Inc. ("NLY") and Norman L. Yu ("Yu"). Accordingly, IT IS HEREBY ORDERED that said proceeding be, and hereby is, instituted. II. In anticipation of the institution of the administrative proceeding, NLY and Yu have submitted an Offer of Settlement ("Offer") to the Commission, which the Commission has determined to accept. Solely for the purpose of this proceeding and any other proceeding 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 NLY and Yu admit the jurisdiction of the Commission over them and over the subject matter of this proceeding, NLY and Yu consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceeding Pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940, Making Findings and Imposing Remedial Sanctions and Cease-and-Desist Order ("Order"). ==========================================START OF PAGE 2====== III. On the basis of this Order and the Offer, the Commission makes the following findings: A. The Respondents Norman L. Yu & Co., Inc. (File No. 801-5773) ("NLY"), is a California corporation located in Newport Beach, California, which has been registered with the Commission as an investment adviser since 1969. In 1992, NLY had 683 client accounts and approximately $210 million under management. Norman L. Yu ("Yu") is the President and sole shareholder of NLY. He oversees all aspects of NLY's business and has been the President of NLY since incorporating NLY in 1969. B. NLY's and Yu's Violations of the Advisers Act 1. Advertisement of False Performance Figures In 1991, 1992 and 1993, NLY, by use of the mails or any means or instrumentality of interstate commerce, willfully violated and violated the antifraud provisions of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)- 1(a)(5) thereunder. As part of the conduct violative of Sections 206(1), 206(2), 206(4) of the Advisers Act and Rule 206(4)- 1(a)(5) thereunder, NLY published, circulated and distributed false and misleading advertisements that overstated its performance figures for the period of 1985 through 1991. For example, NLY published, circulated and distributed advertisements stating its performance for 1990 as 6.6% to 23.9%, when in fact, its performance for 1990 was -6.65%. Similarly, NLY represented its 1989 performance was 55.9%, when its actual performance for 1989 was 38.14%. By publishing, circulating and distributing these overstated performance return figures, NLY received publicity on its remarkable performance record. Yu willfully aided and abetted and caused NLY's violations of Sections 206(1), 206(2) and 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder. Yu, NLY's President, reviewed and ultimately approved all of NLY's advertisements and their contents before they were published, circulated and distributed. Furthermore, Yu performed marketing functions for NLY, including preparing and making oral presentations and distributing marketing brochures to prospective clients and brokers. 2. Failure to Make and Keep Records NLY violated and willfully violated Section 204 of the Advisers Act and Rule 204-2(a)(16) thereunder, which require investment advisers to make and keep all accounts, books, ==========================================START OF PAGE 3====== internal working papers, and any other records or documents that are necessary to form the basis for or demonstrate the calculation of the performance or rate of return on any or all managed accounts or securities recommendations in any notice, circular, advertisement, newspaper article, investment letter, bulletin or other communication that an investment adviser circulates or distributes, directly or indirectly, to 10 or more persons. NLY violated and willfully violated Section 204 of the Advisers Act and Rule 204-2(a)(16) thereunder by failing to make and keep records or documents that were necessary to form the basis for or demonstrate the calculation of its performance for the period 1985 through 1991. Yu willfully aided and abetted and caused NLY's violations of the record keeping provisions. Yu oversaw all operations for NLY, including retention of all records to support its performance record. Yu maintained NLY's performance materials in his office and determined which documents should be maintained and preserved and which ones should be discarded. 3. Failure to Establish Written Policies and Procedures NLY violated and willfully violated Section 204A of the Advisers Act which requires every investment adviser, subject to Section 204 of the Advisers Act to establish, maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of such investment adviser's business, to prevent the misuse of material, non-public information by such investment adviser or any person associated with such investment adviser. NLY did not establish any written policies designed to prevent the misuse of material, non-public information until May 1993 and, up until that time, was in violation of Section 204A of the Advisers Act. In May 1993, NLY had approximately 15 employees and prior to that time, no written policies existed to prevent the misuse of material non-public information. Yu willfully aided and abetted and caused NLY's violation of Section 204A of the Advisers Act. Yu supervised approximately 15 NLY employees at a time and as President of NLY, Yu permitted NLY to operate without the necessary written procedures in violation of Section 204A of the Advisers Act. Based upon the foregoing, the Commission finds that NLY violated and willfully violated Sections 204, 204A, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(16) and 206(4)-1(a)(5) thereunder and that Yu willfully aided and abetted and caused violations of Sections 204, 204A, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(16) and 206(4)-1(a)(5) thereunder. ==========================================START OF PAGE 4====== IV. Based on the foregoing, the Commission deems it appropriate to accept the Offer of NLY and Yu and accordingly, IT IS HEREBY ORDERED that: A. Pursuant to Section 203(k) of the Advisers Act: (1) NLY shall cease and desist from committing or causing any violation and any future violation of Sections 204, 204A, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204-2(a)(16) and 206(4)-1(a)(5) thereunder; and (2) Yu shall cease and desist from committing or causing any violation and any future violation of Sections 204, 204A, 206(1), 206(2) and 206(4) of the Advisers Act and Rules 204- 2(a)(16) and 206(4)-1(a)(5) thereunder. B. Pursuant to Sections 203(e) and 203(f) of the Advisers Act, NLY and Yu are censured. C. Pursuant to Section 203(i) of the Advisers Act, NLY shall pay a civil money penalty in the amount of $100,000 and Yu shall pay a civil money penalty in the amount of $50,000. The payments shall be paid within thirty (30) days following the date of the Order, made by United States postal money order, certified check, or bank cashier's check; shall be made payable to the U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, under cover of a letter that identifies the Respondents and the Administrative Proceeding file number. A copy of the cover letter shall be simultaneously transmitted to Sandra J. Harris, Associate Regional Director, Pacific Regional Office, 5670 Wilshire Blvd., Suite 1100, Los Angeles, CA 90036. D. Pursuant to Section 203(k) of the Advisers Act, NLY and Yu shall comply with the following undertakings: 1. Except as provided in sub-paragraph D.4. below, for the next five (5) years from the date of the Order, NLY shall not advertise, publish, disclose or disseminate any performance figures until: (i) such figures have been audited in accordance with the requirements of sub-paragraph D.2. below; and (ii) such figures have been reviewed and approved by the special review person as set forth in sub-paragraph D.5. below. Audits 2. For calendar years 1997 through and including 2002, NLY will have its performance figures audited no less frequently than semi-annually by independent certified ==========================================START OF PAGE 5====== public accountants who are not unacceptable to the Commission. The certified public accounts' compensation and expenses shall be borne exclusively by NLY. The audits shall be performed in accordance with the standards which are not unacceptable to the staff of the Commission and such audits shall be completed within one hundred and fifty (150) days of December 31 and within ninety (90) days of June 30. For any particular calendar year, NLY shall, no earlier than three (3) months prior to the commencement of that year, notify the staff of the Commission's Pacific Regional Office of the standards NLY intends to use for the audits to be conducted with respect to that year, and the staff shall, within thirty (30) days of the date of such notice, inform NLY in writing of any objections the staff has to the proposed standards. If the staff does not object in writing to the standards proposed by NLY within the allotted thirty (30) day period, the proposed standards shall be deemed to be acceptable to the staff. NLY shall arrange for the accounting firm to provide a copy of each such audit to the staff of the Commission's Pacific Regional Office within thirty (30) days of each semi-annual audit's completion. 3. NLY shall provide the staff of the Commission, no later than thirty (30) days from the entry of the Order, with a copy of an engagement letter detailing the scope of the accountants' responsibilities pursuant to sub- paragraph D.2. above. 4. Notwithstanding the provisions of sub-paragraph D.1. above, beginning with its performance figures for the first quarter of 1997, NLY may provide to its consultants and/or its clients interim performance figures, prior to the completion of an audit thereof, provided, however, that: (i) the interim performance figures are calculated in accordance with the same standards employed for the audited periods; (ii) NLY shall prominently disclose both that such figures are preliminary and unaudited and that audited performance figures will be provided when available; (iii) NLY shall not provide unaudited performance figures for any period as to which an audit has been completed; and (iv) if unaudited figures are provided in accordance with this sub-paragraph, NLY shall provide audited performance figures to all recipients of such unaudited figures within fifteen (15) days of NLY's receipt of the audited figures. If the recipients of unaudited figures have requested not to receive the audited figures, NLY shall be relieved of its obligation to provide audited figures to them. ==========================================START OF PAGE 6====== Special Review Person 5. NLY shall retain, for the next five (5) years, the services of a special review person who is not unacceptable to the staff of the Commission. Such special review person shall be retained by NLY and his or her compensation and expenses shall be borne exclusively by NLY. NLY shall arrange for the special review person to annually review NLY's advertisements of performance for compliance with the terms of this order and to annually review and make recommendations concerning NLY's policies and procedures regarding advertising and the maintenance of books and records, as such books and records relate to advertising. 6. NLY shall provide the staff of the Commission, no later than thirty (30) days from the entry of the Order, with a copy of an engagement letter detailing the scope of the special review person's responsibilities pursuant to sub-paragraph D.5. above. 7. NLY shall arrange for the special review person, for the next five (5) years, to make his or her recommendations in the form of an annual report which shall set forth in detail the nature and scope of the review conducted, as well as the recommendations of the special review person. NLY shall cooperate fully with the special review person and shall provide such person with access to its files, books, records, and personnel as reasonably requested for such person's review. 8. NLY shall take all necessary and appropriate steps to adopt and to implement all recommendations of the special review person, provided, however, as to any of the special review person's recommendations that NLY determines are unduly burdensome or impractical, NLY may suggest an alternative procedure designed to obtain the same objective, submitted in writing to the special review person and to the staff of the Commission. The special review person shall reasonably evaluate NLY's alternative procedure and approve the alternative if it is not unreasonable. NLY will abide by the special review person's determination with regard thereto and adopt those recommendations deemed appropriate by the special review person. 9. NLY shall compile a compliance manual containing the policies and procedures adopted and implemented pursuant to the recommendations made by the special review person, along with existing policies and procedures to the extent that the special review person has not recommended that the latter be revised. NLY ==========================================START OF PAGE 7====== shall make available copies of the compliance manual to its employees and familiarize them with the policies and procedures set forth in this compliance manual. In addition, for the next five (5) years, NLY shall maintain and make available at NLY's offices for inspection by the Commission's staff, a copy of the NLY compliance manual. 10. NLY shall require the special review person to complete the annual review and to submit the annual report described in sub-paragraph D.7. above to NLY no later than ninety (90) days from the entry of the Order and annually for the following five (5) years. NLY may apply to the staff of the Commission for an extension for whatever time period it deems appropriate, but in no event shall the review be completed and the report submitted to NLY more than one hundred thirty-five (135) days from the date of the Order and annually for the following five (five) years. 11. NLY shall arrange for the special review person to return to NLY no later than ninety (90) days after the date the annual special review report was issued to ensure that all recommendations have been implemented. NLY shall arrange for the special review person to provide to the staff of the Commission's Pacific Regional Office, no later than thirty (30) days from the date of such annual follow-up review, a written certification that the annual and follow-up reviews have been completed and the recommendations have been implemented. In addition, for the next five years, NLY shall maintain and make available at NLY's offices for inspection by the Commission's staff copies of the special review person's annual reports. Other Undertakings 12. NLY shall appoint a vice president of compliance and shall define the duties of such officer. 13. Yu shall attend at least one continuing professional education course in each of the next three (3) years. By the Commission. Jonathan G. Katz Secretary