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U.S. Securities and Exchange Commission

Washington, D.C.

Rel. No. 43479 / October 25, 2000

Admin. Proc. File No. 3-10052

In the Matter of the Application of

120 Montgomery Street, Suite 993
San Francisco, California 94104



For Review of Disciplinary Action Taken by the




      Violations of the Rules of Fair Practice

        Failure to Evaluate Training Needs and Develop Continuing Education Plan

        Failure to Maintain Supervisory Procedures

    Member firm of registered securities association and its president failed to comply with continuing education and supervision requirements. Held, association's findings of violation and its assessment of sanctions are sustained.


    Leslie U. Harris, for East/West Securities Co. and pro se.

    Alden S. Adkins, Susan L. Beesley, and Nancy C. Libin, for NASD Regulation, Inc.

Appeal filed: September 20, 1999
Last brief filed: February 1, 2000


East/West Securities Co., a member of the National Association of Securities Dealers, Inc. ("NASD"), and Leslie U. Harris, its chief operations officer and co-managing partner, (collectively, "Applicants") apply for review of an NASD disciplinary action. The NASD found that Applicants violated NASD Membership and Registration Rule 1120 and NASD Conduct Rules 2110 and 3010 by failing to evaluate East/West's continuing education needs and to develop a continuing education plan and by failing to maintain certain written supervisory procedures.

The NASD censured Applicants and fined them a total of $5,000, jointly and severally.1 We base our findings on an independent review of the record.


East/West is a discount commission broker with six registered representatives. Harris is a principal of the firm, and testified that he had responsibility for compliance with NASD rules and for reading NASD Notices to Members and determining their applicability to the firm and its registered persons.

In March 1995, the NASD amended its rules to include a mandatory continuing education requirement.2 The rule generally requires that registered persons of NASD member firms periodically complete a "Regulatory Element" Continuing Education Program ("CEP"), and that each NASD member firm annually conduct a training-needs analysis and design and implement a "Firm Element" CEP.3 Member firms were required to conduct a training-needs analysis and complete a written Firm Element CEP plan by July 1, 1995, and to implement the Firm Element CEP plan by January 1, 1996.4

The Regulatory Element requirement and the Firm Element requirement serve different purposes.5 The Regulatory Element is computer-based and administered by the NASD. It is intended to provide periodic training in broadly applicable regulatory matters, such as customer communications and suitabilityrequirements. 6 In contrast, the Firm Element is intended to be firm-specific. It requires firms to conduct an annual training-needs analysis and implement "ongoing programs . . . to keep employees up to date on job- and product-related subjects."7

In late 1995, our staff conducted a routine examination of East/West, and discovered that the firm had not conducted the required training-needs analysis. The staff sent East/West a letter on January 11, 1996, noting that East/West was required to have completed a training-needs analysis and written training plan pursuant to the "Firm Element" requirement by July 1, 1995, and to implement the plan by January 1, 1996. On February 9, East/West responded that it conducted its training-needs analysis and completed the Firm Element training plan after the examination was concluded, that East/West would implement the Firm Element CEP at its annual compliance meeting, and that East/West had "chosen to adopt as [its] Firm Element [CEP] the general outline developed by the Securities Industry Association for the 'Regulatory Element' [CEP]." Enclosed in this letter was a copy of East/West's Firm Element "training plan," which consisted of a brief overview of the firm's training objectives and schedule and a photocopy of NASD Notice to Members 95-13, "Content Outline for Regulatory Element." East/West's Firm Element CEP overview stated under a heading "Knowledge and Skills," that "[r]egulatory sales, trading and operations shall be reviewed. Review of the outline of the regulatory element shall be deemed [to meet] this requirement."

In March 1997, the NASD conducted a routine examination of East/West. The only documents found by the NASD examiner evidencing the firm's compliance with CEP requirements were the same one-page Firm Element "training plan" and photocopy of the NASD "Content Outline for Regulatory Element" that the Applicants had provided in response to the Commission staff's letter more than one year earlier.8 After a telephone conversation with NASD staff and a "Wells" letter from the NASD, East/West sent to the NASD the same one-page document and photocopy that it had earlier represented was its Firm Element CEP.

The NASD initiated proceedings against Applicants and found that, between January 1996 and March 1997, East/West, acting through Harris, had violated NASD continuing education and supervision rules. Applicants then appealed to the Commission.


Continuing Education Violations

NASD Membership and Registration Rule 1120 requires that registered persons of NASD member firms periodically complete a Regulatory Element CEP, and that member firms evaluate their training needs annually, develop a written Firm Element training plan, and implement that plan. As a part of the Firm Element, each member firm is required to "annually evaluate and prioritize its training needs and develop a written training plan," which "take[s] into consideration the member's size, organizational structure, and scope of business activities, as well as regulatory developments and the performance of covered registered persons in the Regulatory Element."9 The Firm Element CEP must, at a minimum, "cover the following matters concerning securities products, services and strategies offered by the member: (i) [g]eneral investment features and associated risk factors; (ii) [s]uitability and sales practice considerations; and (iii) [a]pplicable regulatory requirements."10

Applicants adopted the NASD's content outline of the Regulatory Element for the purpose of satisfying the more specific Firm Element requirements of Rule 1120. Applicants do not assert that they satisfied the Rule's requirements for developing and implementing a Firm Element CEP by adopting this general outline. Rather, they argue that they did not fully understand the Firm Element CEP requirement, and that the NASD did not give them appropriate guidance.11 Applicants assert that the CEP rules were vague and that they did not understand the difference between the Regulatory Element CEP requirement and the Firm Element CEP requirement until September 1997, when they received NASD Noticeto Members 97-66, containing examples of successful Firm Element CEPs.12

We believe that the NASD provided its members with ample guidance. Notice to Members 95-13, which was issued upon the rules' adoption, included, among other things, a summary and analysis of the continuing education requirement, a detailed "Content Outline for the Regulatory Element," and "Guidelines for Firm Element Training." Rule 1120 and Notice to Members 95-13 leave no doubt that the Firm Element and the Regulatory Element serve separate and distinct goals and that the two programs are not interchangeable.13

Supervisory Violations

NASD Membership and Registration Rule 1120 requires that NASD member firms not permit association of any registered personunless and until he has complied with the Regulatory Element CEP requirement. NASD Conduct Rule 3010(b) requires that NASD members establish, maintain, and enforce written procedures to supervise the activities of their registered representatives and associated persons "that are reasonably designed to achieve compliance with . . . the applicable Rules of the [NASD]." Rule 3010(b) also requires that NASD members "maintain on an internal record the names of all persons who are designated as supervisory personnel and the dates for which such designation is or was effective."

The NASD alleges that, between January 1996 and March 1997, Applicants violated Rule 3010 by failing to establish written supervisory procedures relating to CEPs. The NASD asserts specifically that Applicants did not have written supervisory procedures concerning (1) monitoring registered persons' compliance with the Regulatory Element CEP requirement, and (2) designation of a supervisor with responsibility for firm CEP issues.

Applicants argue that, because East/West is a small firm, the scope of its supervisory procedures was necessarily more limited than that of a larger firm. They assert that they supervised compliance with the Regulatory Element CEP rule through their receipt of notices from the NASD's Central Registration Depository ("CRD") system. CRD periodically would notify the firm concerning the firm's associated persons who were required to complete the Regulatory Element.14 We do not agree that the CRD notices satisfied Applicants' obligation to maintain written procedures reasonably designed to achieve compliance with the Regulatory Element CEP requirement. East/West needed to have written procedures stating, at a minimum, how it would monitor compliance with the Regulatory Element CEP rule and what action it would take against a registered person who failed to comply with the rule's requirement and whose registration thereby became inactive. East/West did not include these provisions in its written supervisory procedures and therefore violated Conduct Rule 3010.

With respect to the designation of a CEP supervisor, Applicants argue that they made such a designation in the one-page Firm Element training plan that Harris included in his February 9, 1996 letter to our staff and in his subsequent communications with the NASD, which states at the top, "Supervising Partner: Leslie U. Harris." We do not agree that the designation of Harris as "Supervising Partner" on the outline of East/West's Firm Element CEP satisfies Rule 3010's requirement that all NASD members maintain a written list of all supervisory personnel and the effective date of their designations. East/West's Firm Element CEP is not an integrated list of supervisory personnel and isundated.15 Although East/West maintained a unified list of supervisory personnel, this list did not include any supervisor responsible for the firm's compliance with continuing education requirements.16 We find that Applicants violated Conduct Rule 3010(b) by failing to designate a supervisor responsible for overseeing East/West's compliance with NASD continuing education requirements.


Harris argues that the NASD, by bringing this action, is trying to retaliate against him for criticizing the NASD. On this record, we can see no evidence that the NASD had an ulterior motive in prosecuting Applicants for these violations. The only evidence that Applicants submit on this point is Harris' assertion that in 1995 an unnamed peer warned him that the NASD was "out to get" him as a result of his views concerning proposed Commission over-the-counter trading rules and a then-pending antitrustlawsuit against the NASD. Harris also argues that the fact that his 51 percent partner in East/West, Charles Chen, was not named in this action demonstrates that the NASD's purpose in bringing this action was to retaliate against Harris. However, the only evidence in the record assigns Harris sole responsibility for East/West's compliance with the continuing education rules between January 1996 and March 1997.17

Applicants argue more generally that the NASD failed to deal with them fairly throughout this proceeding. Specifically, they contend that the NASD should have sent them a letter detailing their non-compliance with CEP rules and allowed them to remedy the situation prior to sending them a "Wells" letter in July 1997. We cannot find on this record that the NASD denied Applicants any process to which they are entitled by law or by NASD rule.18 Moreover, the NASD had discretion to institute informal remedial proceedings or formal disciplinary proceedings. Given the circumstances of this case, it evidently believed that formal proceedings were more appropriate.19


We uphold a sanction imposed by the NASD unless we find, having due regard for the public interest and the protection of investors, that the NASD's sanction is excessive or oppressive or imposes an unnecessary or inappropriate burden on competition.20 Applicants argue that their clean disciplinary record21 and their good faith effort to comply with rules that they believe are vague mitigate the violations in question here and merit a reduction or require a remission of the sanctions imposed by the NASD. We have considered each of these factors. The sanctions here are well within the NASD's Sanction Guidelines for the respective violations, and are not excessive or oppressive.22

An appropriate order will issue.23

By the Commission (Chairman LEVITT and Commissioners HUNT, CAREY, and UNGER).

Jonathan G. Katz

before the

Rel. No. 43479 / October 25, 2000

Admin. Proc. File No. 3-10052

In the Matter of the Application of

120 Montgomery Street, Suite 993
San Francisco, California 94104



For Review of Disciplinary Action Taken by the



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 East/West Securities Co. and Leslie U. Harris, and the Association's assessment of costs, be, and they hereby are, sustained.

By the Commission.

Jonathan G. Katz


1 The NASD also assessed costs.

2 Notice to Members 95-13 (March 8, 1995).

3 Rule 1120.

4 Notice to Members 95-13.

5 See id. (noting that program is designed as having two parts).

6 Id.

7 Id.

8 At some point after the NASD examination and at the suggestion of the NASD examiner, Harris amended the firm's supervisory procedures to list himself and his partner, Charles Chen, as the supervisors responsible for the firm's compliance with continuing education requirements.

9 Rule 1120(b)(2)(A).

10 Rule 1120(b)(2)(B).

11 Applicants state that, although the NASD promised instructional conferences on the new CEP requirements, no such conferences were held that were convenient to San Francisco, where East/West was located. They state further that they were unable to use the software offered in August 1996 by the NASD to its members to aid compliance with the Firm Element CEP requirements. The software was not compatible with the operating system that East/West was using at the time. See Notice to Members 96-55.

12 Applicants cite to certain cases in which we have set aside NASD sanctions because the rules in question did not clearly prohibit the conduct in question. Each of the cases on which Applicants rely, however, is inapposite. Applicants cite for support Eli B. Combs, 52 S.E.C. 737 (1996), Patrick J. O'Connor, 52 S.E.C. 327 (1995), and Matthew H. Fleeger, 52 S.E.C. 324 (1995), where we set aside statutory disqualifications. In each of these instances, the respondents were convicted of offenses not included among the offenses enumerated in the NASD's by-law as providing a basis for disqualifying persons from association with an NASD member.

Applicants also rely on two markup cases, where we set aside findings of violation because the NASD previously had not announced the appropriate application of its markup policy to certain transactions. See Partnership Exch. Sec. Co., 51 S.E.C. 1198 (1994) (markup of direct participation program securities); Kevin B. Waide, 50 S.E.C. 932 (1992) (markup of riskless principal transactions). The rule at issue in this case enunciated two distinct types of training and described the type of training that would satisfy each requirement.

13 Moreover, Applicants may not shift responsibility for their rule violations to the NASD for providing inadequate guidance. Participants in the securities industry have substantial responsibilities. See Kirk A. Knapp, 51 S.E.C. 115, 134 (1992). Non-compliance with regulatory requirements "cannot be excused for lack of knowledge, understanding or appreciation of these requirements." Id.

14 See Notice to Members 95-13 (stating that CRD will notify firms of non-compliance with Regulatory Element).

15 See Steven P. Sanders, Exchange Act Rel. No. 40600 (October 26, 1998), 68 SEC Docket 982, 994 (finding that an undated list of supervisory personnel is inadequate).

16 Applicants have submitted into evidence a document entitled "Supervisory Procedures" listing Harris and his partner Charles Chen as being responsible "for all compliance and regulatory matters, including the Continuing Education Program." Harris admits, however, that these "Supervisory Procedures" did not assign anyone responsibility for CEP compliance until Harris added his and Chen's names to the list at the suggestion of the NASD examiner. See supra n.8. The NASD has alleged that Applicants did not have adequate written supervisory procedures between January 1996 and March 1997. Applicants' modification of their written supervisory procedures after March 1997 is not relevant to our finding of liability, although it may be considered in assessing sanctions.

Harris contends that the NASD has tampered with evidence, because the copy of the firm's "Supervisory Procedures" that the NASD has introduced into evidence does not include the names of Harris or Chen as supervisors of the firm's continuing education requirements. We believe that the explanation for the disparity between the documents is more innocuous. It seems clear that the NASD introduced into evidence the "Supervisory Procedures" which their examiner uncovered in his March 1997 examination, while the "Supervisory Procedures" document introduced by Applicants is the copy modified by Harris after the examination at the examiner's suggestion.

17 The fact that Harris alone responded to each inquiry from our staff and the NASD about the firm's continuing education program demonstrates that he had primary responsibility for the program. Moreover, as discussed supra, the firm's one-page Firm Element training plan listed Harris as "Supervising Partner," and he testified that he is responsible for reading NASD Notices to Members and determining their applicability to the firm. Aside from the "Supervisory Procedures," see supra n.16, amended by Harris after March 1997 to include Charles Chen as a CEP supervisor, there is no evidence in the record that anyone other than Harris had any responsibility for East/West's compliance with continuing education rules between January 1996 and March 1997.

18 See generally Securities Exchange Act of 1934 Section 15A(h)(1), 15 U.S.C. § 78o-3(h)(1) (requiring that NASD proceedings be fair); NASD Code of Procedure (Rules 9100 et seq.) (setting forth procedural requirements for NASD disciplinary proceedings).

19 Jennet Leong, a member of the NASD staff, testified that in May 1997 she telephoned Harris to discuss East/West's CEP rule violations and that the conversation was lengthy and somewhat contentious. Although Leong told Harris that she would send a letter to him detailing East/West's violations, her supervisor believed that a letter would not be productive, given the tenor of the telephone conversation, and he elected instead to send a"Wells" letter.

Applicants also argue that the NASD "suppressed" evidence, citing one of the NASD's exhibits, which consists only of two blank pages, each marked "This Page Intentionally Left Blank." Applicants assert that the NASD removed evidence from the record and replaced it with these blank pages, but Applicants do not offer any explanation of what this removed evidence might have been. While other applicants have asserted that a self-regulatory organization withheld or failed to produce evidence, see, e.g., Timoleon Nicholaou, 51 S.E.C. 1215, 1221-22 (1994), aff'd, 81 F.3d 161 (6th Cir. 1996) (Table); Thomas Welch, 51 S.E.C. 229, 233 (1992), this appears to be the first case in which the applicants have not offered any description of the withheld evidence or how that evidence might be relevant to their defense. If Applicants believe that the NASD has failed to produce certain evidence, they must produce the evidence or at least state with some degree of particularity what that evidence is, to allow the NASD to respond to the claim and us to evaluate it. We also take official notice that we often receive records in which blank pages are identified as being "Left Blank Intentionally" to signify that the original from which the photocopy was made also was blank, and to put the fact-finder on notice that the document is, indeed, complete.

20 Exchange Act § 19(e)(2); 15 U.S.C. § 78s(e)(2).

21 Harris has been in the securities industry since 1969, and a principal of East/West since its founding in 1981, and has no disciplinary history.

22 Applicants were fined $2,500 jointly and severally for the continuing education violation and $2,500 jointly and severally for the supervisory violation. Both sanctions are at or below the low end of recommended sanctions. See NASD Sanction Guidelines at 12 (1996 ed.) (recommended sanction for Firm Element continuing education violation is $2,500 to $20,000 fine for firm and/or responsible principal); id. at 53 (recommended sanction for supervisory violation is $5,000 to $25,000, or higher, fine for firm and/or responsible individual).

Applicants argue that these fines are cumulative because they are each fined $2,500 jointly and severally. Applicants, however, may misunderstand the nature of the sanctions imposed upon them. The NASD imposed a $2,500 fine for each of two violations. Each of these separate fines is imposed on East/West and Harris jointly and severally. Thus, Applicants together must pay a total of $5,000.

23 We have considered all of the contentions made by the parties. We reject or accept their arguments to the extent that they are inconsistent or in accord with the views expressed in this opinion.