UNITED STATES OF AMERICA
|In the Matter of
CAPITAL MARKETS RESEARCH
COMPANY and PAUL EDWARD HOLL
ORDER INSTITUTING PUBLIC PROCEEDDINGS, MAKING FINDINGS, IMPOSING REMEDIAL SANCTIONS, AND ISSUING CEASE-AND-DESIST ORDER
The Securities and Exchange Commission (the "Commission") deems it appropriate and in the public interest to institute public administrative and cease-and-desist proceedings pursuant to Sections 203(e), (f) and (k) of the Investment Advisers Act of 1940 (the "Advisers Act") to determine whether Capital Markets Research Company ("CMR") and Paul Edward Holl ("Holl") (collectively referred to as "Respondents") willfully violated Sections 204, 206(1), 206(2) and 207 of the Advisers Act and Rule 204-2(a)(2) thereunder .
In anticipation of these proceedings, Respondents have submitted a Joint Offer of Settlement ("Offer") 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, and without admitting or denying the findings contained herein, except that Respondents admit the jurisdiction of the Commission over them and over the subject matter of these proceedings, Respondents consent to the issuance of this Order Instituting Public Proceedings, Making Findings, Imposing Remedial Sanctions, and Issuing a Cease-and-Desist Order ("Order").
Accordingly, IT IS ORDERED that administrative and cease-and-desist proceedings pursuant to Sections 203(e), (f), and (k) of the Advisers Act be, and hereby are, instituted.II.
On the basis of this Order and the Respondents' Offer, the Commission makes the following findings:1
A. Nature of Proceedings
This proceeding concerns a conflict of interest created by the failure to disclose the receipt of commissions by CMR, a registered investment adviser. Between May 1994 and December 1997, CMR obtained the commissions in connection with the referral of clients to another investment adviser whose role was to manage the clients' funds. Holl, who is CMR's sole owner and president, arranged for CMR to obtain the commissions. CMR and Holl failed to disclose to clients whom CMR advised that CMR was receiving commissions in connection with that advice. CMR therefore willfully violated, and Holl caused and willfully aided and abetted CMR's violations of, Sections 206(1) and 206(2) of the Advisers Act.
At Holl's direction, in July 1998 CMR submitted a false general ledger to the Division during its investigation. CMR therefore willfully violated, and Holl caused and willfully aided and abetted CMR's violations of, Section 204 of the Advisers Act and Rule 204-2(a)(2) thereunder.
CMR and Holl did not disclose the commissions in CMR's Forms ADV filed with the Commission in March 1994 and March 1997, which were therefore false and misleading. CMR and Holl therefore willfully violated Section 207 of the Advisers Act.
Capital Markets Research Company, a California corporation located in San Francisco, California, has been registered with the Commission as an investment adviser since March 1994. As of July 1998, CMR provided consulting services to 11 clients with assets of approximately $31,500,000.
Paul Edward Holl, 39, resides in Kentfield, California, and since May 1994 has been the president of CMR.
C. CMR'S Failure to Disclose Receipt of Commissions
CMR does not manage client funds. Instead, it provides consulting services, which include advice as to which investment advisers should manage client funds. Holl performed the advisory services for CMR's clients. By early 1997, Holl had referred at least nine of CMR's 14 clients to a particular registered investment adviser (the "investment adviser").
In November 1993, Holl became associated as a registered representative with a broker-dealer (the "broker-dealer"). When Holl referred clients to the investment adviser, he asked the investment adviser to trade whenever possible through the broker-dealer and to designate commissions to Holl's registered representative number.
In approximately May 1994, Holl asked CMR's vice-president to take over the position of registered representative at the broker-dealer, and he assumed Holl's registered representative number. Holl instructed CMR's vice-president to give the commission checks to CMR, and to record the commissions as income in CMR's books. Between May 1994 and February 1997, CMR's vice-president received $125,747 in commissions and gave all of those commissions to CMR. From March through December 1997, CMR's vice-president continued to receive commissions amounting to $4,937. At Holl's direction, he kept the commissions and CMR reduced his salary by the amount of the commissions.
CMR failed to disclose to clients the receipt of these commissions from trades made through an investment adviser with whom CMR had advised clients to invest at least part of their portfolios. CMR's receipt of the commissions was a material fact because it created a possible conflict of interest for CMR. CMR, through Holl, was reckless in failing to disclose this material conflict of interest to its clients. Holl knew that CMR's vice-president was a conduit through which CMR received commissions. He also knew, or was reckless in not knowing, that CMR's Forms ADV contained no disclosure about the commission arrangement.
D. CMR'S Production to the Division of a False Ledger
During the investigation by the Division, CMR produced to the Division a false general ledger for the period January 1, 1997 through July 13, 1998. In approximately July 1998, Holl directed a CMR employee to alter the ledger, which had credited the commissions as income to CMR, in order to support Holl's false contention that CMR's vice-president gave the commissions to CMR to purchase an equity interest in CMR. The ledger contained three entries relating to "[CMR's vice-president] Commissions," crediting them to an "Owner's Investment" account.
E. CMR'S False and Misleading Forms ADV
In its March 1994 and March 1997 Forms ADV, CMR failed adequately to disclose material information relating to its receipt of commissions for trades executed by the broker-dealer for which CMR's vice-president was a registered representative. Part II, Item 13.A. of the Form ADV asks whether "applicant or a related person have any arrangements, oral or in writing, where it is paid cash by or receives some economic benefit (including commissions, equipment or non-research services) from a non-client in connection with giving advice to clients." In CMR's March 1994 and March 1997 Forms ADV, CMR answered "No" to Item 13.A., despite the fact that CMR was receiving commissions for trades executed through the broker-dealer. Part II, Item 9.B. of the Form ADV asks whether applicant or a related person "as broker or agent effects securities transactions for compensation for any client." CMR failed to check this item in its March 1994 and March 1997 Forms ADV. The March 1994 Form ADV remained in effect until it was amended in its entirety in March 1997. Holl prepared and signed the March 1994 Form ADV. He reviewed the March 1997 Form ADV before it was submitted to the Commission.III.
Based on the foregoing, CMR willfully violated Sections 204, 206(1), 206(2), and 207 of the Advisers Act and Rule 204-2(a)(2) thereunder. Holl willfully violated Section 207 of the Advisers Act, and caused and willfully aided and abetted CMR's violations of Sections 204, 206(1), and 206(2) of the Advisers Act and Rule 204-2(a)(2) thereunder.IV.
In view of the foregoing, the Commission deems it appropriate and in the public interest to impose the sanctions specified by Respondents in their Offer.
Accordingly, IT IS HEREBY ORDERED that:
A. Pursuant to Section 203(k) of the Advisers Act, CMR shall, effective immediately, cease and desist from committing or causing any violation and any future violation of Sections 204, 206(1), 206(2), and 207 of the Advisers Act and Rule 204-2(a) thereunder;
B. Pursuant to Section 203(k) of the Advisers Act, Holl shall, effective immediately, cease and desist from committing or causing any violation and any future violation of Sections 204, 206(1), 206(2), and 207 of the Advisers Act and Rule 204-2(a) thereunder;
C. CMR and Holl shall, within thirty (30) days of the date of this Order, pay a civil money penalty in the amount of $50,000 to the United States Treasury. Such payment shall be : (1) made by United States postal money order, certified check, bank cashier's check or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter which identifies CMR and Holl as Respondents in these proceedings, and states the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Helane L. Morrison, Assistant District Administrator, San Francisco District Office, Securities and Exchange Commission, 44 Montgomery Street, Suite 1100, San Francisco, CA 94104; and
D. CMR and Holl shall comply with their undertaking to mail a copy of this Order, together with a cover letter, in a form acceptable to the staff of the Commission's San Francisco District Office, to each of its existing clients by certified mail, return receipt requested, within 30 days from the date of this Order. From the date of this Order until the expiration of 12 months, CMR and Holl shall provide a copy of this Order to all prospective investment advisory clients not less than 48 hours prior to entering into any written or oral investment advisory contract (or no later than the time of entering into such contract, if the client has the right to terminate the contract without penalty within five business days after entering into the contract). Also, within 30 days from the date of this Order, CMR and Holl shall execute and deliver to the staff of the Commission's San Francisco District Office an affidavit that it has provided this Order to its existing clients in accordance with the terms of this Order. Within 13 months from the date of this Order, CMR and Holl shall execute and deliver to the staff of the Commission's San Francisco District Office an affidavit that it has provided this Order to its prospective clients in accordance with the terms of this Order.By the Commission.
|1||The findings herein are made pursuant to Respondents' Offer and are not binding on any other person or entity in this or any other proceeding.|
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