SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 38029 / December 9, 1996 Admin. Proc. File No. 3-8936 -------------------------------------------------- : In the Matter of the Application of : : BRADFORD JOHN TITUS : 1055 40th Street : West Des Moines, Iowa 50311 : : and : : MARCIE ANNE MILNER : 1550 East Thunderbird Road, #3019 : Phoenix, Arizona 85022 : : 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 Failure to Establish, Maintain, and Enforce Required Supervisory Procedures Where both compliance director, who was also senior registered options principal, and compliance registered options principal of member firm of registered securities association were responsible for firm's failing to establish, maintain, and enforce required supervisory procedures, held, association's findings of violation and the sanctions it imposed sustained. APPEARANCES: Edwin J. Tomko, of Baker & Botts, L.L.P., for Bradford John Titus and Marcie Anne Milner. T. Grant Callery and Norman Sue, Jr., for the National Association of Securities Dealers, Inc. Appeal filed: January 5, 1996 Briefing Completed: May 1, 1996 I. Bradford John Titus, who at all relevant times was registered as a general securities principal and was the compliance director and senior registered options principal ("SROP") of Dickinson & Co., Inc. ("Dickinson" or the "Firm"), a member of the National Association of Securities Dealers, Inc. ("NASD" or the "Association"), and Marcie Anne Milner, who at all relevant times was registered as a general securities principal and was the compliance registered options principal ("CROP") of Dickinson, appeal from NASD disciplinary action. The NASD found that Titus and Milner violated Article III, Sections 1 and 27 of the NASD's Rules of Fair Practice ("Rules") in that Titus and Milner were responsible for failing to establish, maintain, and enforce supervisory procedures. The NASD censured Titus and Milner and fined them $15,000 jointly and severally with Dickinson. The NASD suspended Titus for ten days in all capacities. Our findings are based on an independent review of the record. II. On June 1, 1991, George Henry McComas became a registered representative at Dickinson. McComas operated as an "independent contractor" from a two-person "non-branch" office in Dallas, Texas. McComas paid some or all of his own office expenses and was responsible for various clerical and administrative recordkeeping duties in addition to his responsibilities as a registered representative. McComas was subject to supervision by Dickinson's home office in Des Moines, Iowa. Susan Akins had been a customer of McComas at LaSalle St. Securities, Inc. ("LaSalle"). In August 1991, Akins opened an Individual Retirement Account ("IRA") at Dickinson in which she deposited money intended for her son's college education. As noted, at this time Milner was Dickinson's CROP. In this capacity Milner reviewed Akins' new account form, which reflected that Akins had no experience trading options and only limited experience trading equity securities. Akins also indicated on that form an approximate net worth of $50,000 and an annual income of approximately $25,000. Despite Akins' lack of trading experience and financial status, on August 12, 1991, Milner approved Akins' account for both options writing and trading covered options. McComas had held discretionary trading authority over Akins' account at LaSalle. When McComas became associated with Dickinson, he was informed by Dickinson compliance personnel that the Firm had a policy against discretionary trading. When Akins opened her Dickinson account, she asked that McComas exercise discretionary authority over that account. Milner noted on Akins' account opening form that the Firm would not permit McComas to exercise discretion over Akins' account. Notwithstanding Dickinson's policy and Milner's disapproval of discretionary authority, McComas encouraged Akins to write a letter to Dickinson in September 1991, requesting that her account be treated as a discretionary account. Michael Sherzan, then a consultant to Broker/Dealer Services, wrote to McComas, again instructing him that no discretionary trading would be allowed. McComas responded with a letter confirming that he would not make discretionary trades. Despite this express instruction from Dickinson and his own reassurances, McComas in fact continued to make discretionary trades in the Akins account until the account was closed for lack of funds in April 1992. Between August 1991 and April 1992, McComas traded exclusively in options, primarily in S & P Index put and call options, in the Akins account. The investment in index options was not consistent with Akins' financial condition and investment goals. McComas' handling of the Akins account resulted in sizable losses in September and October 1991, the first two full months that McComas directed trading in her account at Dickinson. The account's activity did not come to the attention of Titus or Milner until November 1991, when Milner received a report from Dickinson's clearing firm identifying those customer accounts that incurred cumulative options losses greater than $5,000 in the prior month. This report noted that the losses from Akins' options trading exceeded $5,000 in the aggregate for September and October 1991. In fact, Akins' account had a cumulative loss of $7,004 for this period, as well as a sharp increase in the account's turnover rate from 4.0 in September to 7.2 in October 1991. Upon receipt of the report, Milner reported Akins' high volume of options trades and increasing losses to Titus. Titus instructed her to inform McComas that he was to "slow down" the level of trading in Akins' account and that Dickinson would not continue to accept such a high level of options trading from Akins. Milner informed McComas of Titus' instructions. McComas, however, falsely represented to Milner that Akins had greater financial resources than had been previously disclosed on Akins' new account form and options agreement. Milner told McComas that, unless Akins provided Dickinson with an updated options agreement reflecting these additional financial resources, her activity level would be considered excessive. In the face of these warnings from Milner, McComas continued to make excessive and unsuitable trades in the Akins account. By April 1992, McComas depleted the remaining principal of $10,583 in Akins' account through commissions and substantial trading losses. While her account was open at Dickinson, Akins paid $4,758 in commissions, which represented approximately 44% of the equity in her account for the period. Neither Milner, who, as head of Dickinson's options trading desk, executed the majority of McComas' trades, nor Titus, who reviewed daily options trading blotters, made any attempt to follow up their initial warnings to McComas to decrease the options activity in Akins' account. Nor did Milner or Titus contact Akins to determine her suitability to invest in index options or to follow up on their previous requests to McComas for additional financial information from Akins. Milner and Titus also failed to determine from Akins whether McComas was complying with the Firm's previous admonition not to make discretionary trades. In the summer of 1992, Akins retained an attorney and filed a complaint with Dickinson concerning her account losses. Neither Titus nor Milner took or directed any action with respect to McComas or the Akins account until September 1992. At that time, Titus conducted a routine inspection of McComas' office. During this inspection, Titus had only a brief discussion with McComas about Akins' complaint and requested McComas' correspondence files. McComas was unable to produce any customer correspondence files or other documents relevant to customer complaints. Neither Titus nor Milner contacted any of McComas' customers to determine whether they were satisfied with McComas. Dickinson took no action against McComas concerning the Akins account prior to his resignation in December 1992. There is further evidence that Titus and Milner failed to establish, maintain, and enforce Dickinson's supervisory procedures governing McComas. Contrary to Dickinson's written compliance guidelines, McComas opened new customer accounts without prior approval from supervisors at Dickinson. On at least two new account opening documents, McComas signed as "supervisor," even though he was never qualified by examination to act in such capacity, had never been appointed by Dickinson to serve in such capacity, and could not "supervise" himself. Moreover, in various documents during this period, including options agreements, McComas referred to himself as "location manager" or "department supervisor" without any apparent authority from Dickinson. No Dickinson personnel ever raised concerns about McComas' signing of documents as a "manager" or "supervisor," including Milner, who was required to review and approve new options accounts. As a result of the foregoing, the NASD concluded that Titus and Milner violated Article III, Sections 1 and 27 of the Rules for failing to supervise McComas. III. Article III, Section 27 of the NASD Rules requires that a member firm must establish, maintain, and enforce a written system to supervise the activities of registered representatives that is reasonably designed to achieve compliance with applicable securities laws and regulations. We have long stressed the importance of proper supervision over off-site representatives. During 1991 and 1992, both Titus and Milner had direct supervisory responsibilities with respect to McComas' options activities under Dickinson's Options Guidelines. Under Dickinson's guidelines, Milner, as CROP, and Titus, as SROP and compliance director, were required to investigate and address potential compliance problems and to take steps to address identified compliance problems with registered representatives. Milner and Titus, however, failed to respond to numerous "red flags" that would have indicated that McComas was without proper supervision and that he was derelict in his handling of the Akins account. Milner and Titus failed to detect McComas' excessive trading in the Akins account until the Options Loss Report was issued, fully four months after Akins transferred her account to Dickinson. At that point, Titus merely directed Milner to instruct McComas to "slow down" his trading and to obtain additional financial information from Akins. Daily blotters, which both Titus and Milner reviewed, would have reflected that McComas did not, in fact, decrease his trading activity. The fact that index option trading predominated in the Akins account should have put Milner and Titus on notice that McComas' trading was unsuitable for Akins. Milner was on notice when the account was opened in August 1991 that Akins had no options trading experience and had a modest net worth and annual income. Milner, moreover, did not question McComas prior to November 1991 about the suitability of trading S & P Index options in Akins' account. Milner overlooked another red flag about the potential unsuitability of these trades when McComas failed to provide the additional financial information requested from Akins that would have disclosed her unsuitability for index options trading. Neither Milner nor Titus did anything to inquire further as to why such information was not forthcoming. After Akins filed her complaint with Dickinson, Titus did only a cursory inspection of McComas' office. These red flags were particularly significant because McComas had no line supervisor. When Broker/Dealer Services began to shut down in late 1991, the Applicants should have been on notice that supervision over McComas' activities would be critical. Titus contends that he should not be held responsible for Dickinson's failure to fill the supervisory vacuum created by the departure of Broker/Dealer Services. As discussed above, however, Titus failed to fulfill his responsibilities as SROP and compliance director. We have previously rejected the assertion that a firm's change in corporate structure or supervisory systems provides a defense for abdicating obligations. As compliance officer, Titus was responsible for enforcing adequate supervisory procedures. Yet, after Viggers left the Firm and Broker/Dealer Services was disbanded, Titus did not approach senior management to provide replacement supervision. Titus and Milner point to several instances where McComas misled them, as well as Dickinson and Akins. Titus and Milner contend that they should not be disciplined for accepting McComas' representations, particularly when he had no prior disciplinary history. McComas may have been deceptive in his dealings with Dickinson supervisors and with his customers. However, both Titus and Milner had indications prior to November 1991 that there were problems in the Akins account, notwithstanding McComas' various representations, and they knew McComas had no primary line supervisor. Where there are ample indications of irregularities and misconduct by a registered representative, such as are displayed here, we have held that it is "especially imperative" that those in authority "exercise particular vigilance" over the registered representative. Such vigilance includes monitoring compliance with a supervisor's instructions, particularly where the representative is located in a distant branch location. Titus claims that he had insufficient personnel to manage 60,000 accounts effectively. He does not suggest that he brought this lack of adequate staff to the attention of Dickinson's senior management. We sustain the NASD's findings of violations of Article III, Sections 1 and 27 of the Rules by Titus and Milner. IV. Both Titus and Milner assert that the NASD's sanctions and costs are excessive. We find no reason to modify the sanctions imposed on Titus and Milner by the NASD. As compliance director and SROP, Titus failed to establish, maintain, and enforce adequate compliance procedures, failed to ensure supervision over non-branch locations, and ignored indicia of McComas' misconduct. Titus failed to ensure that McComas' compliance with Firm instructions was monitored and enforced. When the Firm retained a clearing broker, he did not see to it that Dickinson received sufficient information to carry out the Firm's compliance program. As CROP, Milner failed to enforce written procedures and ignored signs of unsuitability and other misconduct by McComas. Milner also failed to monitor McComas' compliance with Firm instructions and failed to exercise the necessary level of supervision. In the face of red flags, Milner and Titus took no steps to contact Akins, allowing McComas to continue his deceptions and to deplete Akins' account. We therefore find that the sanctions imposed by the NASD as to Titus and Milner are neither excessive nor oppressive. An appropriate order will issue. By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-38029 Admin. Proc. File No. 3-8936 : In the Matter of the Application of : : BRADFORD JOHN TITUS : 1055 40th Street : West Des Moines, Iowa 50311 : : and : : MARCIE ANNE MILNER : 1550 East Thunderbird Road, #3019 : Phoenix, Arizona 85022 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY NATIONAL SECURITIES EXCHANGE 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 Bradford John Titus and Marcie Anne Milner, and the Association's assessment of costs, be and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary