SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37835 / October 17, 1996 Admin. Proc. File No. 3-8761 _________________________________________________ : In the Matter of the Application of : : LARRY IRA KLEIN : 6685 Shepherd Canyon : Oakland, California 94611 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : _________________________________________________: OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS Violations of Rules of Fair Practice Conduct Inconsistent with Just and Equitable Principles of Trade Material Misstatements and Omissions of Material Fact Unsuitable Recommendations Where registered representative of member firm made material misstatements and omitted to state material facts in connection with the sale of securities and made unsuitable recommendations to customers, held, association's findings of violation and sanctions sustained. APPEARANCES: R. David Mishel and James J. Ficenec, of Titchell, Maltzman, Mark, Bass, Ohleyer & Mishel, for Larry Ira Klein. T. Grant Callery and Susan L. Beesley, for the National Association of Securities Dealers, Inc. Appeal filed: July 25, 1995 Last brief received: December 8, 1995 ==========================================START OF PAGE 2====== I. Larry Ira Klein, formerly a general securities representative with Great Western Financial Securities Corporation ("GWFSC"), a member firm of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. The NASD found that Klein made material misstatements and omitted to state material facts in connection with the sale of securities, in violation of Article III, Section 1 of the NASD's Rules of Fair Practice (the "Rules"). -[1]- It also found that Klein made unsuitable recommendations to three customers, in violation of Article III, Sections 1 and 2 of the Rules. -[2]- The NASD censured Klein, fined him $150,000, and suspended him in all capacities for six months. -[3]- Our findings are based on an independent review of the record. - [4]- ---------FOOTNOTES---------- -[1]- Article III, Section 1 requires adherence to "high standards of commercial honor and just and equitable principles of trade." -[2]- Article III, Section 2 provides, in pertinent part: In recommending to a customer the purchase, sale or exchange of any security, a member shall have reasonable grounds for believing that the recommendation is suitable for such customer upon the basis of the facts, if any, disclosed by such customer as to his other security holdings and as to his financial situation and needs. -[3]- The NASD also assessed costs. -[4]- Klein makes a series of motions to adduce additional evidence. Among other things, he seeks to adduce GWFSC's customer account files for the customers whose transactions are at issue here, as well as documents related to the approval by GWFSC supervisory personnel of various "bond" lists prepared by Klein. Klein also renews his request, first made before the National Business Conduct Committee (the "National Committee"), to adduce the GWFSC file for an earlier account opened by Carol James, one of the customers involved in this proceeding. Although there is some question as to Klein's diligence in earlier attempting to secure from GWFSC the above-described evidence, we believe it is helpful to our consideration of this matter. We note, among other things, that the NASD has questioned whether Klein's "bond" lists in fact were approved by GWFSC. Accordingly, we admit this evidence as part of the record (continued...) ==========================================START OF PAGE 3====== II. During his employment as a GWFSC representative, Larry Klein was based at the Rockridge branch office of Great Western Bank ("GW Bank"), a GWFSC affiliate, although he offered securities in as many as eight other GW Bank branch offices. Klein testified that most GW Bank depositors were sixty-two years of age or older. Many of Klein's clients were referred to him by GW Bank tellers. Klein solicited additional clients through mailings to older individuals with certain levels of income and net worth. In connection with his marketing activities, Klein created at least two so-called "bond" lists of products that he recommended -- one of high-yield corporate debt securities (the "High-Yield Bond List") and another of high-yield corporate debt securities payable in Australian and New Zealand currencies (the "Foreign Currency Bond List"). Although he had no experience as a securities or foreign currency analyst, Klein both researched the various debt securities and drafted the lists. Klein was compensated solely by commissions. III. Article III, Section 1 of the Rules sets out in broad terms the ethical standard against which the conduct of securities professionals is measured. -[5]- We find that Klein violated this standard by failing to inform three customers about the risks of the investments that he was recommending to them. We further find that Klein made material misstatements to two of those customers concerning the safety of the securities that he was recommending. A. Myrtle Frampton Myrtle Frampton is a retired accountant who is legally blind. At the time of the events at issue, Frampton was eighty- ---------FOOTNOTES---------- -[4]-(...continued) herein. Klein also seeks to adduce into evidence a copy of the Equitec Siebel Fund Group prospectus. The NASD, although questioning whether Klein has shown good cause for failing to adduce the prospectus earlier, does not object, and the prospectus is admitted. See infra note 40. -[5]- See Timothy L. Burkes, 51 S.E.C. 356, 360 (1993), aff'd, 29 F.3d 630 (9th Cir. 1994) (in disciplinary proceedings under Article III, Section 1, concern is with the ethical implications of the applicant's conduct). ==========================================START OF PAGE 4====== three years old and able to read only with a magnifier. Her annual income from Social Security, interest, and dividends was approximately $27,000. Her net worth was $200,000. Frampton's new account form reported that her investment objective was income, that she wanted good quality investments, and that she had little knowledge of stocks, bonds, and mutual funds. At some time prior to May 1988, Frampton received a general solicitation letter from Klein regarding debt securities that offered higher yields than certificates of deposit ("CDs"). Frampton met twice with Klein. At the first meeting, Klein talked generally about the debt securities he was recommending. At the second meeting, Klein read aloud to Frampton the names of foreign currency debt securities he was recommending and their rates of interest. Based solely on her familiarity with the companies' names, Frampton invested $15,629.40 in McDonalds 17-1/4% and Eastman Kodak 17% corporate notes. The funds she invested had been invested previously in CDs. Before purchasing the notes, Frampton told Klein that she had never owned securities before and asked repeatedly whether she would get her full principal back. Klein assured her that, in addition to receiving the stated interest payments, she would recover the full amount of her initial investment upon maturity. Klein never informed Frampton that these debt securities were payable in New Zealand dollars and, consequently, were subject to risks associated with currency fluctuations. Frampton did not discover that she had purchased debt securities denominated in a foreign currency until the McDonalds notes were redeemed in February 1990. -[6]- Frampton testified that she would not knowingly have purchased foreign currency debt securities because she knew nothing about exchange rates and because she was not in a position to "gamble" with her money. On appeal, Klein contends that he informed Frampton of the risks associated with her investment. He also challenges Frampton's testimony that she did not know that she had purchased debt securities denominated in a foreign currency, arguing that Frampton received trade confirmations and account statements showing both that the investment was payable in New Zealand dollars and that its value would be affected by changes in the currency exchange rates. However, Frampton would not necessarily have known of the risk of currency fluctuations to her principal or income simply by looking at the trade confirmations. The two ---------FOOTNOTES---------- -[6]- Frampton received $5,910 upon redemption, losing approximately $2,000 of her initial investment. She lost an additional $2,000 of her investment when the Eastman Kodak notes were redeemed. ==========================================START OF PAGE 5====== confirmations merely stated the name of the security, followed by "NZD," apparently to designate that the notes were payable in New Zealand dollars. Listed separately was the security's price, followed by "exchange rate .6920." Klein claims that he also discussed the risks of the investment with Frampton's son, Terry, who was a joint tenant on the account. -[7]- Klein asserts that Terry Frampton is an experienced investor familiar with foreign currency securi- ties -[8]- and that Terry Frampton approved the purchase of the McDonalds and Eastman Kodak notes for his mother's account. The record is unclear as to whether Klein in fact spoke with Terry Frampton. We conclude, however, that, if he spoke to Terry Frampton, Klein did not inform him that the notes were denominated in a foreign currency. -[9]- In any event, Klein cannot rely on this alleged approval of the investment by Terry Frampton, since Myrtle Frampton explicitly told Klein that she wanted to make this investment decision without her son's assistance. -[10]- ---------FOOTNOTES---------- -[7]- Frampton testified that her three children were named as joint tenants so that they would own the account upon her death. -[8]- We do not agree that Terry Frampton's investments in domestic securities options necessarily indicate that he was knowledgeable about foreign currency-denominated securities and the risk of exchange rate fluctuations on an investment in debt securities. -[9]- Handwritten notes in Frampton's customer file suggest that Klein spoke with Terry Frampton approximately three weeks before Frampton made her investment. Terry Frampton testified that, although he could not recall whether he had spoken with Klein, he is certain that he never discussed foreign currency-denominated debt securities and the risk of currency fluctuations with Klein. Terry Frampton further testified that he had assumed that the McDonalds and Eastman Kodak notes were payable in United States dollars because the issuers are American companies. -[10]- Klein asserts that he wished to speak with Frampton's son because he was concerned about Frampton's understanding of the investment. Frampton testified that, when Klein asked her permission to do so, she informed Klein that it was her money and that she alone would make the investment decision. ==========================================START OF PAGE 6====== Klein claims that he read the contents of the Foreign Currency Bond List to Frampton and gave her a copy of the list. The District Business Conduct Committee (the "District Committee") credited Frampton's testimony that Klein neither read that list to her nor provided her with a copy of it. Klein challenges the District Committee's credibility finding, citing alleged inconsistencies in Frampton's and her son's testimony as to whether Frampton had sought her son's advice about this investment. Having considered the record as a whole, we see no basis to question the District Committee's assessment. -[11]- Moreover, even if we credited Klein's assertion that he had provided the Foreign Currency Bond List to Frampton, we nonetheless would conclude that Klein's disclosure of risk to Frampton was inadequate. The list does not adequately disclose the risk of foreign currency fluctuations to the principal amount invested. -[12]- There was a risk of such fluctuation here because the entire investment was denominated in the foreign currency. Klein further contends that he cannot be held responsible for the quality of disclosure because the Foreign Currency Bond ---------FOOTNOTES---------- -[11]- The credibility determination of an initial fact- finder is entitled to considerable weight and deference, since it is based on hearing the witnesses' testimony and observing their demeanor. E.g., Keith L. DeSanto, Securities Exchange Act Release No. 35860 (June 19, 1995) 59 SEC Docket 1784, 1787, aff'd (summary order), No. 95-4127 (2d Cir. Mar. 22, 1996) and cases cited therein. GWFSC found a copy of the Foreign Currency Bond List in Frampton's complaint file immediately prior to the District Committee hearing. This fact does not establish that Frampton received the list from Klein and then forwarded it to GWFSC with her letter of complaint. Indeed, when the NASD obtained a copy of the file during its investigation of Klein, the Foreign Currency Bond List was not among its contents. -[12]- The list states, in pertinent part: The principal and interest [of the listed debt securities] are payable in Australian or New Zealand currency as indicated (the U.S. investor of course receives U.S. dollars). However, currency fluctuations will affect the actual yield. Over the last two years, the U.S. dollar has weakened producing capital gains as well as interest on similar bonds. If the U.S. dollar strengthens, the actual yield will be less than stated. ==========================================START OF PAGE 7====== List was approved by his supervisors. Klein, however, compiled the list as a marketing tool, notwithstanding his lack of training as a securities or foreign currency analyst. -[13]- As a registered securities professional and the author of the list, he is responsible for its contents. -[14]- B. Carol James In May 1989, Carol James, a fifty-five year old part-time receptionist, sought Klein's help in reinvesting the proceeds from maturing CDs in her Individual Retirement Account ("IRA"). -[15]- At the time, James was supporting two children and had an annual income of $12,000 and a net worth of no more than $100,000. She told Klein that she wanted both to supplement her minimal income and to preserve her initial investment. On her new account form, James requested good quality investments and indicated that she had little knowledge about bonds. Although James had disclosed to Klein that her income was $12,000, Klein reported James' income as $50,000-75,000. Klein testified that he had "normalized" James' salary to $25,000 or $30,000, claiming that she was working part-time only on a temporary basis. Klein did not explain the remaining discrepancy between this "normalized" salary and the amount that he reported. Klein offered James a copy of the High-Yield Bond List that he had created and asked if she would like to invest in one of the debt securities listed. The list stated, in pertinent part: "Your interest and face value at maturity are guaranteed by the ---------FOOTNOTES---------- -[13]- See Donald T. Sheldon, 51 S.E.C. 59, 88 n.130 (1992), aff'd, 45 F.3d 1515 (11th Cir. 1995) (obligations of registered securities professional cannot be abridged by failure on the part of his supervisors). -[14]- In any event, evidence proffered by Klein, and accepted by this Commission, suggests that Klein's supervisors did not grant final approval of the Foreign Currency Bond List until sometime after the transactions at issue. -[15]- This was the second time James received investment advice from Klein. About two and one-half years earlier, James had sold her home and realized a gain of approximately $90,000. Klein recommended that James invest approximately $60,000 in a high-yield bond fund and the remainder in a utilities fund. ==========================================START OF PAGE 8====== issuing corporation." -[16]- Klein did not disclose any credit ratings for the various listed debt securities. Klein gave James no additional information about the particular securities on the list, nor did he inform her generally of the risks associated with investment in high-yield debt securities. -[17]- James decided to purchase $13,265.75 in Trans World Airlines ("TWA") 17-1/4% senior corporate notes because she was familiar with the company name and because the High-Yield Bond List stated that her investment was "guaranteed." The notes later lost much of their value when TWA entered bankruptcy proceedings. The District Committee credited James' testimony that Klein failed to inform her of the risks of investing in the TWA notes, and we see no basis to question this assessment. -[18]- Nor do we accept Klein's contention that James' earlier investment, and her signing of a disclosure form in connection with that investment, prove that James "knew what a bond was and knew the risks of bonds." Klein challenges the National Business Conduct Committee's (the "National Committee") conclusion that the High-Yield Bond List given to James was "clearly designed to mislead" customers unfamiliar with corporate debt securities. He asserts that, having sought and received his supervisors' approval of the list, he used it in good faith and thus cannot be found to have violated just and equitable principles of trade. We conclude that Klein was at least reckless in his drafting of the list. Given his level of education and his expertise in the securities ---------FOOTNOTES---------- -[16]- The list was printed on GWFSC letterhead, which had the words "Great Western" in large boldface letters in the upper left corner. Underneath, in much smaller print, were the words "Great Western Financial Securities, A Great Western Financial Company." James testified that the list gave her the impression that the recommended debt securities had "some backing" from GW Bank. She also believed "guaranteed" meant that she would receive the return of at least her principal. -[17]- Although James signed a so-called "acknowledgement of risk" form during her meeting with Klein, the District Committee credited James' testimony that she did not read the form before signing it. -[18]- See supra note 11. ==========================================START OF PAGE 9====== industry, -[19]- Klein should have known that the "guarantee" language -- and the absence of any information about the debt securities' ratings -- was misleading, particularly to a relatively unsophisticated investor such as James. Klein argues that he submitted the High-Yield Bond List to his GWFSC supervisors for approval. However, we again reject Klein's attempt to shift responsibility to GWFSC for the content of a document that he himself created. -[20]- C. Lillian Towster In early 1989, shortly before her retirement from teaching at age eighty, Lillian Towster met with Klein at the recommendation of a friend. Towster wanted to reinvest $108,000 in tax-deferred annuities from her retirement fund. She informed Klein that her objective was capital preservation. She also told Klein that she wanted good quality securities and knew little about mutual funds. Towster repeatedly stressed that she needed a safe and secure investment. -[21]- Her new account form reported an annual income of $25,000-35,000 and a net worth of over $100,000. Klein recommended that Towster "diversify the risk" by investing $54,000 in the Equitec Siebel government bond fund and $54,000 in the Equitec Siebel high-yield bond fund. -[22]- Klein disclosed both that the high-yield bond fund could decline in value and that it was not as safe as U.S. government securities. However, when Towster asked if this investment package would be safe, Klein replied that he "wouldn't recommend ---------FOOTNOTES---------- -[19]- Klein received a masters of business administration degree from Harvard University and previously had been registered as a securities principal. -[20]- See supra note 13 and accompanying text. The record suggests, moreover, that Klein failed to make certain changes to the High-Yield Bond List as requested by his supervisors during the approval process. These changes would have cautioned that securities investments are not federally insured, as are bank deposits, and would have suggested that investors read the prospectus carefully before deciding whether to purchase a particular security. -[21]- Towster told Klein that she had lost money with a broker before and could not afford to do so again. -[22]- Klein testified that this package was designed so that declines in the value of one fund "hopefully" would be offset by increases in the other, thus offering "a relatively consistent income without a lot of volatility." ==========================================START OF PAGE 10====== it if it wasn't." He also told Towster repeatedly "not to worry" about her investment. On the basis of Klein's representations, and because she believed Klein had her best interests at heart, Towster agreed to invest in the two funds. -[23]- Around October 1990, Towster discovered that the value of the high-yield bond fund had declined. She thereupon sold her holdings in that fund for approximately $47,000. Klein asserts that he delivered a prospectus to Towster that disclosed the risks of investing in a high-yield bond fund. He claims that Towster read the prospectus, that she did not ask him questions about its contents, and that he had "no reason to believe" that Towster, a retired teacher, did not understand the prospectus. -[24]- Klein's delivery of a prospectus to Towster does not excuse his failure to inform her fully of the risks of the investment package he proposed. -[25]- Klein knew that Towster was very concerned about the safety of her retirement funds. He should have told Towster that investment in a high-yield bond fund meant she might not receive a full return of principal. Moreover, Klein told Towster that he would not recommend an investment that was not safe, and he repeatedly admonished Towster "not to worry" about her investment. IV. The NASD's suitability rule, Article III, Section 2, is based upon the "fundamental responsibility for fair dealing" that is implicit in the relationship between a registered ---------FOOTNOTES---------- -[23]- At some point, Towster received a prospectus discussing these and other Equitec Siebel funds. -[24]- The District Committee credited Towster's testimony that she did not understand the prospectus. Klein points to three letters that Towster sent him concerning questions about unrelated investments. While Towster's questions were clear, we do not believe they necessarily evidence a particular level of investor sophistication. -[25]- Indeed, it is unclear from the record whether Towster received the prospectus before deciding to follow Klein's recommendations. See  5(b)(2) of Securities Act of 1933, 15 U.S.C.  77e(b)(2) (prospectus need not proceed but may accompany delivery of a security after sale). ==========================================START OF PAGE 11====== representative and his customers. -[26]- Compliance with the rule requires the representative to "make a customer-specific determination of suitability and . . . tailor his recommendations to the customer's financial profile and investment objectives." -[27]- When Klein made the recommendations at issue to Frampton, James, and Towster, he knew that these customers had little or no investment experience. Moreover, none of them was in a position to risk principal. Frampton and Towster were retired, and James earned little income and supported two children. Nevertheless, Klein suggested that they use their funds -- which previously had been invested in CDs or a tax-deferred retirement fund -- to purchase debt securities, or in the case of Towster, a high-yield bond fund, carrying greater risk than any of them reasonably could shoulder. In challenging the NASD's findings of unsuitability, Klein argues that Frampton, James, and Towster all wanted to earn a higher yield than that offered by CDs. We would not be surprised if these relatively unsophisticated investors, not adequately informed by Klein of the link between risk and return, had expressed interest in earning a higher yield. In any event, each of them had additional investment objectives. James requested "good quality" investments, and both Frampton and Towster emphasized the need for safety and a full return of principal. A representative may make "only such recommendations as would be consistent with [his customer's] financial situation and needs." -[28]- This Klein failed to do. Klein asserts that he acted in good faith to achieve his customers' investment objectives. We disagree. Klein should have realized that the degree of risk associated with the debt ---------FOOTNOTES---------- -[26]- John M. Reynolds, 50 S.E.C. 805, 809 n.13 (1991) (citing Fair Dealing with Customers, Policy Statement of the Board of Governors, NASD Manual (CCH) 2152). -[27]- F.J. Kaufman & Co. of Va., 50 S.E.C. 164, 168 (1989). -[28]- Eugene J. Erdos, 47 S.E.C. 985, 989 (1983) (quoting Philips & Co., 37 S.E.C. 66, 70 (1956)), aff'd, 742 F.2d 507 (9th Cir. 1984). Klein argues that his recommendation to James on her earlier investment in a high-yield bond fund somehow supports the suitability of his recommendation to her of the TWA notes. We previously have rejected this argument. Douglas Jerome Hellie, 50 S.E.C. 611, 613 (1991) (prior transactions irrelevant in suitability determination). ==========================================START OF PAGE 12====== securities that he recommended made them inappropriate for customers whose overriding need was for safety of principal. We also cannot agree with Klein's suggestion that his recommendations were suitable because they involved only a small portion of each customer's total investment portfolio. The investments that Frampton, James, and Towster made on the basis of Klein's recommendations in fact represented a sizable share of their total investment dollars. In any event, we have stated that suitability relates to whether a specific securities transaction is appropriate for a particular investor, not whether that individual can afford to lose the money invested. -[29]- Klein argues that the NASD made no finding as to the reasonableness of Klein's belief that his recommendations were suitable for each customer and, instead, substituted its own judgment on the issue of suitability. It is clear from the record that any belief by Klein in the appropriateness of his recommendations was in fact unreasonable. -[30]- Accordingly, we find that Klein violated Article III, Sections 1 and 2 of the Rules. V. A. Klein contends that this proceeding must be dismissed under the doctrine of laches. He asserts that, because the conduct at issue occurred five to six years before the NASD issued its complaint, his ability to mount a successful defense was severely prejudiced. Specifically, Klein claims that the witnesses' memories were "severely impaired" by the passage of time. He also claims that, because GWFSC was unable to locate timely certain documents needed for his defense, the NASD both decided the case upon an incomplete record and made negative inferences concerning the missing documents. Finally, Klein claims that there is no evidence of NASD investigative activity between late 1991 and mid-1993. ---------FOOTNOTES---------- -[29]- David Joseph Dambro, 51 S.E.C. 513, 517 (1993). We also reject Klein's contention that Towster would have made a profit had she not sold her shares in the high-yield bond fund against his recommendation. Eugene Erdos, 47 S.E.C. at 988 n.10 (recommendation not made suitable because it results in profit to customer). -[30]- Further, even if Klein's "bond" lists were approved by his supervisors for general use, Klein cannot use that general approval as a substitute for an individual determination that any of the listed securities were suitable for Frampton or James. ==========================================START OF PAGE 13====== A successful laches defense requires the applicant to show both a lack of diligence by the party against whom the defense is asserted and prejudice to the applicant. -[31]- We conclude that the NASD staff did not display the requisite lack of diligence in taking three years to investigate numerous customer complaints against Klein. -[32]- We also conclude that Klein was not prejudiced by the length of the NASD's investigation. The record does not reflect that Frampton, James, or Towster had difficulty in recalling the salient details of their dealings with Klein. Further, we have reviewed the documents that Klein did not adduce before the NASD. We have admitted certain of these documents as helpful to our consideration of this matter, and we have refused to admit the remaining documents as not material to the transactions at issue. -[33]- Based upon our review, we have determined that the documents not adduced before the NASD do not contain evidence exculpating Klein from the violations found by the NASD and sustained here. B. Klein contends that, pursuant to 28 U.S.C.  2462, -[34]- the charges relating to Frampton must be dismissed because the conduct at issue occurred more than five years before the NASD issued its complaint. We do not believe that this statute applies to disciplinary proceedings brought by a self- regulatory organization ("SRO"). Unlike 3M Company v. Browner, -[35]- on which Klein relies, SRO proceedings are not ---------FOOTNOTES---------- -[31]- Robert E. Kauffman, 51 S.E.C. 838, 840 n.7 (1993) (citing Hecht v. Harris, Upham & Co., 430 F.2d 1202, 1208 (9th Cir. 1970)), aff'd, 40 F.3d 1240 (3d Cir. 1994). -[32]- The record contains several complaints from other Klein customers. -[33]- See supra note 4 and infra note 40. -[34]- The statute provides: Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon. -[35]- 17 F.3d 1453, 1455 (D.C. Cir. 1994) (28 U.S.C.  2462 applies to administrative proceedings brought by the Environmental Protection Agency for enforcement of civil penalties). The D.C. Circuit (continued...) ==========================================START OF PAGE 14====== initiated by a government agency, nor does their initiation require our approval. -[36]- We do not participate in the disciplinary proceeding before the SRO, and we do not control when the SRO begins or concludes its determination. Our sole responsibility in this context arises when an SRO imposes a final disciplinary sanction on a person who seeks review of the SRO's ---------FOOTNOTES---------- -[35]-(...continued) Court of Appeals recently ruled that  2462 also applied to a Commission administrative proceeding in which a branch manager was censured and suspended in a supervisory capacity for six months for failure to supervise a registered representative who allegedly stole more than $114,000 from his customers. Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996), reh'g denied (August 28, 1996). -[36]- SROs are private organizations that operate subject to a scheme of government regulation. Many courts and this Commission have determined that SROs are not subject to the requirements applicable to a government agency. See, e.g., Shultz v. SEC, 614 F.2d 561, 569 (7th Cir. 1980) (Chicago Board Options Exchange not "authority of the government" and thus not governed by the Administrative Procedure Act); United States v. Solomon, 509 F.2d 863, 868-71 (2d Cir. 1975) (self-incrimination privilege does not apply to questioning in New York Stock Exchange proceeding); Daniel Turov, 51 S.E.C. 235, 238 (1992) (Fifth, Sixth, and Seventh Amendments to United States Constitution do not apply to New York Stock Exchange, which is not a government agency); Sumner B. Cotzin, 45 S.E.C. 575, 578 (1974) (NASD not a federal agency subject to strictures of the Administrative Procedure Act). But cf. Austin Municipal Securities, Inc. v. NASD, 757 F.2d 676, 692 (5th Cir. 1985) (NASD entitled to absolute immunity for its role in disciplining its members and their associated persons). The independent exercise by SROs of their disciplinary responsibilities contrasts, for example, with citizen suits brought under the environmental laws, in which the individual citizen "stands in the shoes" of the federal government. See, e.g., Sierra Club v. Chevron U.S.A., Inc., 834 F.2d 1517, 1522 (9th Cir. 1987). ==========================================START OF PAGE 15====== determination from this Commission. -[37]- Moreover, enforcement of the sanctions imposed will be the direct responsibility of the SRO, and any fine will be payable to the SRO, not the United States Treasury. C. Klein claims that the District Committee did not meet its burden of proof. We find, following de novo review, that the NASD met its burden of demonstrating these violations by a preponderance of the evidence. D. Klein claims that the NASD's complaint failed to state a cause of action. Specifically, he asserts that the complaint did not identify the alleged omissions and did not allege that the purported material misstatements or omissions were made with scienter. We find this argument to be without merit. We note that Klein was able to file a lengthy answer to the complaint and that he vigorously defended the charges at issue. -[38]- Further, scienter is not a prerequisite to finding an Article III, Section 1 violation. -[39]- Rather, as we already have stated, Article III, Section 1 sets forth the ethical standard to which members of the securities industry must adhere. The record clearly demonstrates that Klein's conduct fell short of this standard. -[40]- ---------FOOTNOTES---------- -[37]- E.g., Bradley A. Kanode, 50 S.E.C. 409, 410 (1990) (failure to appeal District Committee decision to NASD Board of Governors precludes Commission consideration of application for review). See also  19(e) of Securities Exchange Act of 1934 (authorizing Commission review of final disciplinary action by SRO). -[38]- Cf. James L. Owsley, 51 S.E.C. 524, 528 (1993) (defect in administrative pleading can be cured if respondent understood the issue and was afforded sufficient opportunity to defend against the charges made). -[39]- Kauffman, 51 SEC at 839 n.5. -[40]- Klein seeks to adduce into evidence additional documents, including marketing materials prepared by Klein but unrelated to the transactions at issue, GWFSC marketing material not prepared by Klein, a list of recommended debt securities that Klein used in 1990 for a subsequent employer, a chart showing the performance of the Equitec Siebel high-yield bond fund after Towster sold her shares in that fund, and affidavits by former GWFSC coworkers and supervisors. These documents are not material to the transactions at issue. (continued...) ==========================================START OF PAGE 16====== VI. Klein argues that the sanctions imposed by the NASD are "draconian" and "grossly disproportionate" to the violations found. He asserts, among other things, that the sanctions are far more severe than those imposed in comparable cases; -[41]- that he is being "punished" for intentional misrepresentation although he was not charged with a violation of Article III, Section 18, the antifraud provision of the Rules; that the NASD made no findings of bad faith by Klein or of damage to customers; that he has no record of prior misconduct; and that he acted in good faith by submitting proposed marketing materials to his supervisors for approval. -[42]- Klein knew that his customers were not experienced or sophisticated investors and that they could not afford to gamble with their limited savings. Klein had a duty to recommend securities suitable for his customers and to explain accurately his recommendations, particularly with regard to risk. The record demonstrates, however, that Klein recommended risky investments to customers who did not understand those investments and that he misstated and omitted material facts about those investments when recommending them. We thus conclude that the sanctions imposed on Klein are neither excessive nor oppressive. -[43]- ---------FOOTNOTES---------- -[40]-(...continued) Moreover, Klein has not shown sufficient reason for his failure to produce the 1990 list, the fund performance chart and the affidavits before the NASD. Accordingly, we deny Klein's request. -[41]- It is well settled that the appropriate sanction depends on the facts and circumstances of each particular case and cannot precisely be determined by comparison with action taken in other proceedings. See Butz v. Glover Livestock Commission Co., Inc., 411 U.S. 182, 187 (1973); Hiller v. SEC, 429 F.2d 856, 858-859 (2d Cir. 1970); First Choice Securities Corporation, 50 S.E.C. 1167, 1172 (1992). -[42]- But see supra notes 13-14, 20 and accompanying text. -[43]- We further find that the sanctions do not impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the securities laws.  19(e)(2) of Securities Exchange Act of 1934. ==========================================START OF PAGE 17====== An appropriate order will issue. 44/ By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary 44/ All of the contentions advanced by the parties have been considered. The contentions are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. Admin. Proc. File No. 3-8761 _________________________________________________ : In the Matter of the Application of : : LARRY IRA KLEIN : 6685 Shepherd Canyon : Oakland, California 94611 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : _________________________________________________: ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION On the basis of the Commission's opinion issued this day, it is ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against Larry Ira Klein, and its assessment of costs with respect to him, be, and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary