UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
Securities Exchange Act of 1934
Release No. 38150 / January 10, 1997
Administrative Proceeding
File No. 3-9217
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:
In the Matter of : ORDER INSTITUTING PROCEEDINGS
: PURSUANT TO 15(b)(4) AND
NATIONAL FINANCIAL SERVICES : 21C OF THE SECURITIES
CORPORATION, : EXCHANGE ACT OF 1934,
: MAKING FINDINGS
: AND IMPOSING REMEDIAL
Respondent. : SANCTIONS
:
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I.
The Securities and Exchange Commission (the "Commission")
deems it appropriate and in the public interest that proceedings
be, and they hereby are, instituted against National Financial
Services Corporation ("NFSC" or "Respondent") pursuant to
Section 15(b)(4) and Section 21C of the Securities Exchange Act
of 1934 (the "Exchange Act").
II.
In anticipation of the institution of these administrative
proceedings, NFSC has submitted an offer of settlement which the
Commission has determined to accept. Solely for the purposes of
these proceedings and any other proceedings brought by or on
behalf of the Commission or in which the Commission is a party,
NFSC, without admitting or denying the findings and matters set
forth herein (except as to jurisdiction, which NFSC admits),
consents to the issuance of this Order Instituting Proceedings
Pursuant to Section 15(b)(4) and Section 21C of the Exchange Act,
Making Findings And Imposing Remedial Sanctions ("Order"), and to
the entry of the findings and imposition of the sanctions set
forth below.
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III.
FINDINGS
On the basis of this Order and Respondent's Offer of
Settlement, the Commission finds-[1]- the following:
A. FACTS
1. Respondent
NFSC is a Massachussetts corporation with its principal
place of business in New York, New York. Its principal business
is the execution, settlement and financing of correspondent and
correspondents' customer securities transactions, and it acts as
a clearing firm for more than 200 correspondent firms. At all
times relevant to these proceedings, NFSC was registered with the
Commission as a broker-dealer pursuant to Section 15(b) of the
Exchange Act and was a member of the New York Stock Exchange and
other exchanges.
2. NFSC's Extension of Credit on a Nonmargin Security
This matter involves violations of the margin requirement
provisions of the Exchange Act by NFSC. NFSC extended and
maintained approximately $3,000,000 of credit on purchases of
approximately 900,000 shares of the common stock of Vertex
Industries, Inc. ("Vertex"), held in approximately ninety-eight
retail accounts between March 2, 1993, and November 26, 1993.
Vertex stock was not a margin security under Regulation T during
this period. As a result, NFSC violated Section 7(c) of the
Exchange Act and Section 18(e) of Regulation T thereunder
(original version at Section 19(e)).
On or about March 2, 1993, NFSC erroneously designated the
common stock of Vertex Industries, Inc. ("Vertex") as a margin
security in NFSC's computer system. At the time, Vertex stock,
which was traded over-the-counter, was not designated as
qualified for trading in the NASDAQ National Market System, and
was not included in the list of margin securities published by
the Board of Governors of the Federal Reserve System (the
---------FOOTNOTES----------
-[1]- The findings herein are made pursuant to NFSC's
Offer of Settlement and are not binding on any
other person or entity named as a respondent in
this or any other proceeding.
==========================================START OF PAGE 3======
"Federal Reserve"). NFSC's records do not identify who made this
change or the reasons for it.-[2]-
Beginning in March 1993, NFSC extended credit on purchases
of Vertex stock to retail customers of certain of NFSC's
correspondent firms in approximately ninety-eight accounts.
Between March 2, 1993, and September 1, 1993, when NFSC
discovered its error, these customers purchased approximately
900,000 shares of the common stock of Vertex (approximately 20%
of the number of shares issued and outstanding) in margin
accounts. The amount of credit extended by NFSC on these retail
accounts in connection with these purchases was approximately
$3,000,000. Most of these accounts were customers of one of
NFSC's former correspondent firms ("Correspondent"), which was a
market maker in Vertex stock at all relevant times.
After discovering the error, NFSC officials treated the
continued extension and maintenance of credit on Vertex
securities as a house margin maintenance matter, and not as a
situation implicating Regulation T.-[3]- NFSC initially
contacted the principals of Correspondent and asked Correspondent
to require its customers with margined holdings of Vertex stock
to reduce their margin debits by selling securities or depositing
additional collateral.
NFSC never issued Regulation T margin calls to
Correspondent's customers. As of September 24, 1993, more than
three weeks after discovering the error, NFSC was still
maintaining at least $2,800,000 in margin credit extended on
purchases of Vertex. Furthermore, on September 14 and September
15, 1993, customers of Correspondent made three additional
purchases of Vertex stock totalling 15,500 shares in cash
accounts. When the customers did not pay for these cash account
purchases by settlement date, NFSC obtained Regulation T
extensions of the payment date for these purchases. On
September 29, 1993, these positions were sold. As of November
25, 1993, NFSC had failed to bring the Correspondent's customer
accounts into compliance with the credit extension requirements
of Regulation T. On November 26, 1993, Vertex stock was
registered on the Boston Stock Exchange and became a margin
---------FOOTNOTES----------
-[2]- After the events described here, NFSC adopted new
procedures for designating margin securities and
for documenting changes in designation.
-[3]- NFSC officials did not consult with an NFSC
compliance officer to determine whether NFSC was
complying with Regulation T. NFSC also could have
consulted the staff of the Commission, the Federal
Reserve or any self-regulatory organization on the
issue. They did not do so.
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security as defined in Section 2 of Regulation T, 12 C.F.R.
220.2.
B. APPLICABLE LAW
Section 7(c) of the Exchange Act provides in part:
It shall be unlawful for any member of a
national securities exchange or any broker or
dealer, directly or indirectly to extend or
maintain credit or arrange for the extension
or maintenance of credit to or for any
customer --
(1) on any security (other than an
exempted security), in
contravention of the rules and
regulations which the Board of
Governors of the Federal Reserve
System shall prescribe ... .
Regulation T, promulgated by the Federal Reserve, 12 C.F.R.
220.1, et seq., regulates matters relating to the extension and
maintenance of credit by and to brokers and dealers. Among other
things, Regulation T sets forth initial margin requirements and
rules concerning the maintenance of credit extended on securities
transactions. "Margin securities" are defined in Section 2, 12
C.F.R. 220.2, and include any over-the-counter ("OTC") stock
appearing on the Federal Reserve's periodically published list of
OTC margin stocks, any stock registered on a national securities
exchange, and any OTC security designated as qualified for
trading in the NASDAQ National Market System. OTC stocks which
do not meet one of these requirements are not margin securities.
Vertex stock did not meet one of these requirements until
November 26, 1993.
Section 18(e) of Regulation T, 12 C.F.R. 220.18(e)
(original version at Section 19(e) of Regulation T, 12 C.F.R.
220.19(e) (1996)), requires a margin of one hundred percent on
positions of non-margin securities. By extending and maintaining
credit on Vertex stock to customers prior to November 26, 1993,
NFSC allowed margins which were lower than one hundred percent.
NFSC continued to do so for some twelve weeks after discovering
that Vertex was not a margin security. As a result, NFSC
willfully violated Section 7(c) of the Exchange Act and Section
18(e) of Regulation T by extending and maintaining credit on an
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OTC equity security that was not a "margin security" under
Section 2 of Regulation T.-[4]-
IV.
ORDER
In view of the foregoing, the Commission deems it
appropriate and in the public interest to accept the Offer of
Settlement of Respondent and impose the sanctions specified
therein. Accordingly,
IT IS ORDERED that Respondent:
1. Be, and hereby is, censured;
2. Pay a civil money penalty, pursuant to Section
21B(a) of the Exchange Act, in the amount of
$50,000 to the United States Treasury. Such
payment shall be made within five business days of
the date of this Order and 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 U.S. Treasury; (c) hand-delivered
to the Office of the Comptroller, Securities and
Exchange Commission, 450 5th Street, N.W.,
Washington, D.C. 20549; and (d) submitted under
cover letter which identifies NFSC as the
Respondent in these proceedings, the file number
of these proceedings and the Commission's case
number (HO-2872), a copy of which cover letter and
money order or check will be sent to Gary N.
Sundick, Associate Director, Division of
Enforcement, Securities and Exchange Commission,
450 5th Street N.W., Mail Stop 4-1, Washington,
D.C. 20549; and
3. Cease and desist from committing or causing any
violations and any future violations of
Section 7(c) of the Exchange Act and Regulation T
thereunder.
By the Commission.
---------FOOTNOTES----------
-[4]- "Willfully" as used in this Order means
intentionally committing the act which constitutes
the violation. There is no requirement that the
actor also be aware that he is violating one of
the Rules or the Acts. See Tager v. SEC, 344 F.2d
5, 8 (2d Cir. 1965).
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Jonathan Katz
Secretary