UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION March 7, 1996 SECURITIES EXCHANGE ACT OF 1934 Release No. 36937 / March 7, 1996 ADMINISTRATIVE PROCEEDING File No. 3-8970 -------------------------- In the Matter of : ORDER INSTITUTING : PROCEEDINGS, MAKING FAIC SECURITIES, INC. : FINDINGS AND IMPOSING : REMEDIAL SANCTIONS : -------------------------- I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest to institute public administrative proceedings pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 ("Exchange Act") against FAIC Securities, Inc. ("FAIC"). II. In anticipation of the institution of these proceedings, the Respondent has submitted an Offer of Settlement 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 in which the Commission is a party, prior to a hearing pursuant to the Commission's Rules of Practice [17 C.F.R.  201.1 et seq.], without admitting or denying the findings contained herein, except that Respondent admits the jurisdiction of the Commission over it and over the subject matter of these proceedings and the findings contained in paragraph III.A. (below), Respondent consents to the entry of this Order Instituting Public Administrative Proceedings, Making Findings and Imposing Remedial Sanctions ("Order") as set forth below.-[1]- Accordingly, IT IS ORDERED that administrative proceedings pursuant to Sections 15(b) and 21C of the Exchange Act, be, and hereby are, instituted. ---------FOOTNOTES---------- -[1]- The findings herein are made pursuant to FAIC'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 2====== III. On the basis of this Order and Respondent's Offer of Settlement, the Commission finds that: Background A. At all times relevant to this proceeding, FAIC Securities, Inc. ("FAIC") was a broker-dealer registered with the Commission pursuant to Section 15 of the Securities Exchange Act of 1934 ("Exchange Act") and was a municipal securities dealer within the meaning of Section 3(a)(30) of the Exchange Act. Between August 21, 1995, and January 8, 1996, FAIC twice filed with the Commission a Form BDW, whereby it sought to withdraw its registration as a broker-dealer. In each instance, after discussions with the staff, FAIC withdrew the pending Form BDW before it went effective. The most recent Form BDW was withdrawn pending resolution of this matter. B. At all times relevant to this proceeding, the Chairman of FAIC's Executive Committee and the Chairman of FAIC's Board of Directors were "municipal finance professionals" (hereinafter "FAIC's municipal finance professionals") subject to rules and regulations promulgated by the Municipal Securities Rulemaking Board ("MSRB"), as further described in paragraph H, below. C. At all times relevant to this proceeding, FAIC's municipal finance professionals had financial stakes and controlling interests in a variety of corporate entities (hereinafter, collectively, the "FAIC-Affiliated Companies"). D. Prior to 1993, FAIC's business consisted of, primarily, brokering Certificates of Deposit (CDs) and acting as a finder for customers wanting to purchase CDs with the highest rate of return. During 1993, the market for brokered CDs declined. At about that time, FAIC entered the municipal securities underwriting business. Applicability of MSRB Rules E. In April of 1994, MSRB rule G-37 became effective, and FAIC became subject to its provisions. F. Rule G-37, and several companion recordkeeping provisions, including amendments to rules G-8 and G-9, were enacted to ensure that the high standards and integrity of the municipal securities industry are maintained, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to perfect a free and open market and to protect investors and the public interest. The rules were also designed to remove any possibility of an appearance that decisions by municipalities in awarding ==========================================START OF PAGE 3====== negotiated underwriting business might have been influenced by political contributions. Rule G-37 was therefore drafted and is applied as a broad prophylactic measure, and a violation does not require a particularized showing of an actual "quid pro quo." G. Subsection (b) of rule G-37 provides that no broker, dealer or municipal securities dealer shall engage in municipal securities business with an issuer within two years after any contribution to an official of such issuer made by (i) the broker, dealer or municipal securities dealer; (ii) any municipal finance professional associated with such broker, dealer or municipal securities dealer; or (iii) any political action committee controlled by the broker, dealer or municipal securities dealer or by any municipal finance professional, unless the contribution is exempted by the rule. For purposes of rule G-37, a contribution triggers the two-year prohibition if it is made to any person (or election committee for that person) who was at the time of the contribution, an incumbent, candidate, or successful candidate for elective office of the issuer if the office is directly or indirectly responsible for, or can influence the outcome of, the hiring of a broker, dealer or municipal securities dealer for the issuer's municipal securities business or for any elective office of a state or political subdivision which office has authority to appoint an official to an office of an issuer if the office is directly or indirectly responsible for, or can influence the outcome of, hiring a broker, dealer or municipal securities dealer for the issuer's municipal securities business. H. Rule G-37 defines a municipal finance professional to include, among other things, any associated person who is a member of the broker, dealer, municipal securities dealer, executive or management committee or similarly situated officials, if any. Thus, under rule G-37, political contributions by either FAIC, as a municipal securities dealer, or by FAIC's municipal finance professionals, would trigger the two-year prohibition on FAIC engaging in, or seeking to engage in, certain municipal securities business. I. At all times relevant, FAIC was subject to rule G-37(c), which provides that no broker, dealer or municipal securities dealer, or any municipal finance professional, shall solicit or coordinate contributions to an official of an issuer with which the broker, dealer, or municipal securities dealer is engaging or is seeking to engage in municipal securities business. J. Rule G-37(d) states that no broker, dealer, or municipal securities dealer or any municipal finance professional shall, directly or indirectly, through or by any other person or means, do any act which would otherwise result in a violation of rule G-37. Thus, pursuant to operation of subsection (d) of rule G- 37, "indirect" contributions by FAIC or any of FAIC's municipal ==========================================START OF PAGE 4====== finance professionals would also invoke the two-year prohibition on FAIC engaging in, or seeking to engage in, certain municipal securities business. K. FAIC also became subject to MSRB rules requiring periodic reports to the MSRB of political contributions (MSRB rule G-37(e)), and to certain MSRB rules requiring the maintenance of internal recordkeeping of such contributions, as well as an identification of the municipalities with which the municipal securities dealer was engaged in, or sought to engage in, business (MSRB rules G-8 and G-9). The requirements of rules G-8 and G-9 were, among other purposes, designed to keep certain relevant information readily available in order to facilitate compliance examinations of municipal securities dealers by the staff of the Commission, with the goal of promoting investor confidence in the integrity of the municipal securities market. Violative Conduct L. At all times relevant to this proceeding, FAIC's municipal finance professionals controlled, directed, and were ultimately responsible for, political contributions of the FAIC- Affiliated Companies to candidates for office who could influence the awarding of municipal securities business by the State of Florida and by Dade County, Florida. Indeed, the FAIC-Affiliated Companies were not authorized to make any political contributions without the approval of FAIC's municipal finance professionals. M. After the effective date of MSRB rule G-37, until in or about November 1994, FAIC's municipal finance professionals continued, through the FAIC-Affiliated Companies, to make political contributions to various candidates for elected office in Dade County and the State of Florida who could influence the awarding of municipal securities business. All told, FAIC's municipal finance professionals coordinated and directed the payment of thousands of dollars of contributions to candidates for elected office in those jurisdictions. N. Nonetheless, well within the two-year prohibited period following political contributions to persons who could influence the awarding of municipal securities business by the State of Florida and by Dade County, Florida, FAIC sought, and was selected to participate in, three negotiated underwritings of certain municipal securities by both Dade County, Florida, and a state agency, the Florida Housing Finance Authority ("FHFA") (hereinafter, collectively, the "underwritings"). O. The underwritings included (i) a $240 million offering of Metropolitan Dade County Aviation Revenue Bonds, Series 1995 B and C, which went effective in or about March 1995; (ii) an $84.2 million offering of FHFA Single Family Mortgage Revenue Refunding Bonds, Series 1995 A, which went effective in or about February ==========================================START OF PAGE 5====== 1995; and (iii) a $54.9 million offering of FHFA Multi-Family Revenue Bonds, which went effective in or about January 1995. P. In total, the underwritings represented sales to the public of approximately $379 million in securities issued by Dade County, Florida and the FHFA. For its roles in the underwritings, FAIC received $224,205.00 in fees. Q. FAIC willfully violated MSRB rule G-37(b) in that FAIC, as a municipal securities dealer, engaged in municipal securities business with issuers within two years after FAIC's municipal finance professionals directed political contributions to an elected official (or candidate for office) who could influence the awarding of municipal securities business by such issuers. R. FAIC willfully violated MSRB rule G-37(c), in that FAIC, as a municipal securities dealer directly, or indirectly through the FAIC-Affiliated Companies, solicited and coordinated political contributions for elected officials (or candidates for such offices) of issuers, who could influence the awarding of municipal securities business, while FAIC was engaging or seeking to engage in municipal securities business. S. FAIC willfully violated MSRB rule G-37(e), in that FAIC, as a municipal securities dealer, failed to file, on a quarterly basis, a Form G-37, setting out for the reporting period (i) all political contributions, whether direct or indirect, to elected officials (or candidates for such offices) of issuers by FAIC, and its municipal finance professionals, and (ii) an identification of all issuers with which FAIC engaged in municipal securities business. T. FAIC willfully violated MSRB rule G-8 in that FAIC, as a municipal securities dealer, failed to keep current and accurate records which show, among other things: (i) the states in which it was engaging, or was seeking to engage, in underwriting business, and (ii) for the current and two prior years, all political contributions, whether direct or indirect, to elected officials or candidates for office by FAIC, and its associated municipal finance professionals. U. FAIC willfully violated MSRB rule G-9, in that FAIC, as a municipal securities dealer, failed to preserve, records described in paragraph T, above, for a period of not less than six years. V. FAIC willfully violated MSRB rule G-17 in that FAIC, as a municipal securities dealer, failed to deal fairly with all persons and failed to refrain from engaging in any deceptive, dishonest, or unfair practice, in that in certain of its conduct with respect to political contributions and subsequent attempts to engage in municipal securities business, FAIC misled ==========================================START OF PAGE 6====== municipalities, the investing public, and possibly others, by failing to disclose its non-compliance with, and by affirmatively misrepresenting its compliance with, certain state regulations. W. FAIC willfully violated Section 15B(c)(1) of the Exchange Act, in that it made use of the mails or other means or instrumentalities of interstate commerce to effect transactions in, or to induce or attempt to induce the purchase or sale of, any municipal security in contravention of MSRB rules G-37, G-8, G-9, and/or G-17. Summary of Violations X. As a result of the foregoing described conduct, FAIC willfully violated Section 15B(c)(1) of the Exchange Act and MSRB rules G-37, G-8, G-9, and G-17. IV. In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified in FAIC's Offer of Settlement. Accordingly, IT IS HEREBY ORDERED that: A. Pursuant to Section 21C of the Exchange Act, FAIC is ordered to cease and desist from committing any violation or future violation of Section 15B(c)(1) of the Exchange Act and MSRB rules G-37, G-8, G-9, and/or G-17. B. FAIC's registration under Section 15 of the Exchange Act as a broker-dealer is hereby revoked. C. FAIC shall pay disgorgement in the amount of $224,205.00, plus $15,754.74 in prejudgment interest, to the United States Treasury within sixty days from the date of this Order. Such payment shall be: (i) made by United States postal money order, certified check, bank cashier's check or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) transmitted to the Comptroller, U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549; and (iv) submitted under cover of a letter which identifies FAIC as the 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 Charles V. Senatore, Esq., Regional Director, Securities and Exchange Commission, Southeast Regional Office, 1401 Brickell Avenue, Suite 200, Miami, Florida 33131. D. Pursuant to Section 21B of the Exchange Act, FAIC shall pay a civil money penalty in the amount of $200,000 to the United ==========================================START OF PAGE 7====== States Treasury within sixty days from the date of this Order. Such payment shall be: (i) made by United States postal money order, certified check, bank cashier's check or bank money order; (ii) made payable to the Securities and Exchange Commission; (iii) transmitted to the Comptroller, U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549; and (iv) submitted under cover of a letter which identifies FAIC as the 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 Charles V. Senatore, Esq., Regional Director, Securities and Exchange Commission, Southeast Regional Office, 1401 Brickell Avenue, Suite 200, Miami, Florida 33131. By the Commission. Jonathan G. Katz Secretary