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SEC Approves Return To Wall Street Of Statutorily Disqualified Broker
Written: November 26, 2012

Seal of the U.S. Securities and Exchange Commi...

Between 1987 and January 1995, Gregory L. Bowen was associated with four broker-dealers, including a stint with Government Securities Corporation (“GSC”) from July 1987 to December 8, 1997, at which date the firm’s Uniform Request for Broker-Dealer Withdrawal (“Form BDW”) was deemed effective. Since 1999, Bowen has worked for various mortgage firms as a mortgage broker; and he currently conducts a mortgage origination business.

1999 SEC Bar

On October 27, 1999, the Securities and Exchange Commission (the “SEC”) issued an Order Instituting Administrative Proceedings that resulted in Bowen’s Bar from association with any broker or dealer, with the right to reapply for association after two years.  Bowen was further ordered to pay a $33,664 disgorgement, $31,258 in interest, and a $5,000 civil penalty. (“1999 Bar Order”).

The SEC had alleged that while employed with GSC from March 1989 through March 1994, Bowen willfully violated Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, by misrepresenting and omitting material information in his communications with clients in order to induce them to purchase high-risk collateralized mortgage obligations (“CMOs”). SeeExchange Act Release No. 42063 (Oct. 27, 1999).  As a result of the 1999 Bar Order, Bowen was deemed statutorily disqualified under Section 3(a)(39)(B) of the Exchange Act.

SIDE BAR:  Section 3(a)(39)(B) of the Exchange Act:

(39) A person is subject to a “statutory disqualification” with respect to membership or participation in, or association with a member of, a self-regulatory organization, if such person—

. . .

(B) is subject to—
(i) an order of the Commission, other appropriate regulatory agency, or foreign financial regulatory authority—
(I) denying, suspending for a period not exceeding 12 months, or revoking his registration as a broker, dealer, municipal securities dealer, government securities broker, government securities dealer, security-based swap dealer, or major security-based swap participant or limiting his activities as a foreign person performing a function substantially equivalent to any of the above; or
(II) barring or suspending for a period not exceeding 12 months his being associated with a broker, dealer, municipal securities dealer, government securities broker, government securities dealer, security-based swap dealer, major security-based swap participant, or foreign person performing a function substantially equivalent to any of the above;
(ii) an order of the Commodity Futures Trading Commission denying, suspending, or revoking his registration under the Commodity Exchange Act (7 U.S.C. 1 et seq.); or
(iii) an order by a foreign financial regulatory authority denying, suspending, or revoking the person’s authority to engage in transactions in contracts of sale of a commodity for future delivery or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent thereof; . . .

FINRA Application

In response to and following its consideration of the submission of a Membership Continuance Application (the “MC-400″) concerning Bowen from First Liberties Financial, the Financial Industry Regulatory Authority (“FINRA”) filed a notice containing an application (“Application”) with the SEC seeking consent for Bowen to associate with First Liberties as a general securities representative. In the Application, FINRA and First Liberties represented that non-registered person Bowen would be employed as a general securities representative on the firm’s institutional sales desk and compensated on a commission basis.

SIDE BAR: First Liberties, a FINRA member firm since 1983, services retail and institutional customers through its New York City home office and seven branches, where it employs 34 registered representatives and 13 registered principals.

In submitting its request to FINRA for permission to register Bowen, First Liberties proposed that:

  • William Hoover, Senior Managing Director based in the Houston, TX branch office, will be Bowen’s direct supervisor. Hoover has been registered as a general securities representative since 1987, and as a general securities principal since March 1996.
  • In the event of Hoover’s unavailability, Hilary Bergman, First Liberties President based in the NYC home office and a registered principal since 1991, will assume the role of backup supervisor.

In the Application, FINRA sought an order declaring that, notwithstanding Bowen’s statutory disqualification, the SEC would not:

  • institute proceedings pursuant to Sections 15(b) and 19(h) of the Exchange Act, solely on the basis of Bowen’s association as a general securities representative with First Liberties pursuant to the representations contained in theApplication; and
  • direct FINRA to bar the proposed association, as provided in Section 15A(g)(2) of the Exchange Act.

18-Point Plan

In seeking to ensure the SEC that First Liberties was prepared to meaningfully supervise Bowen’s proposed activities, the Application represented, among other things, that:

    1. First Liberties will amend its written supervisory procedures to state that Hoover is the primary supervisor responsible for Bowen;
    2. Bowen will not maintain discretionary accounts;
    3. Bowen will not act in a supervisory or principal capacity;
    4. Bowen will not conduct retail business or be involved with any retail clients;
    5. Hoover will supervise  Bowen on-site at the firm’s Houston, TX branch office;
    6. Bowen will only be permitted to transact business with institutional accounts and other FINRA member firms (with whom First Liberties has a dealer-to-dealer relationship);
    7. Bowen will not be permitted to contact any public fund prospective account or to transact business with any public fund prospective account;
    8. Bowen will not be permitted to transact business in Interest-Only Strips (“IOs”), Inverse IOs, and Inverse Floaters;
    9. Any transaction by Bowen in CMOs must be reviewed and approved by Hoover. Hoover must document the basis for his decisions regarding the transaction, including documenting the account paperwork with the date and his signature. Hoover will maintain copies of the paperwork and keep them segregated for ease of review during any statutory disqualification or other examination or regulatory inquiry;
    10. Hoover will review and approve each institutional account prior to Bowen’s opening the account. Hoover will document the account paperwork as approved, with the date and his signature, and maintain the paperwork at the firm’s home office.  Hoover will maintain copies of the paperwork and keep them segregated for ease of review during any statutory disqualification audit;
    11. Hoover will review and approve Bowen’s orders after execution, on a “T + 1” basis. Hoover will evidence his review by initialing the trade reports; and Hoover will maintain copies of the trade reports and keep them segregated for ease of review;
    12. Bowen will not be permitted to engage in outside securities-related sales activities. Bowen will be permitted to continue his mortgage origination business, as long as he fully discloses it to Hoover as an outside business activity and does not engage in any outside securities-related sales or business activities;
    13. Hoover will review Bowen’s incoming written correspondence (including email communications) immediately upon their arrival and prior to  Bowen’s receipt;  Hoover will also review and approve Bowen’s outgoing correspondence before they are sent;
    14. For the purposes of client communication, Bowen will only be allowed to use an email account that is held at the firm, with all emails being filtered through the firm’s email system. If Bowen receives a securities-related email message in another email account outside the firm, he will immediately deliver that message to the firm’s email account. Bowen will also inform the firm of all outside email accounts that he maintains. Hoover will conduct a weekly review of all email messages that are either sent to or received by Bowen. Hoover will maintain the emails and keep them segregated for ease of review during any statutory disqualification audit;
    15. All complaints pertaining to Bowen, whether verbal or written, will be immediately referred to the firm’s Chief Compliance Officer (“CCO”), or his designee. The firm’s compliance department will prepare a memorandum to the file as to what measures were taken to investigate the merits of the complaint and the resolution of the matter, and will maintain documents pertaining to these complaints and keep them segregated for ease of review. The CCO will make Hoover aware of any and all complaints filed against Bowen;
    16. If Hoover is on vacation or out of the office, Bergman will act as Bowen’s interim supervisor;
    17. For the duration of Bowen’s statutory disqualification, the firm must obtain prior approval from FINRA’s Member Regulation if it wishes to change  Bowen’s responsible supervisor from Hoover to another person; and
    18. Hoover must certify quarterly (March 31st, June 30th, September 30th, and December 31st of each year) to the Firm’s compliance department that he and Bowen are in compliance with all of the above conditions of heightened supervision to be imposed upon Bowen.

Decision

The SEC Division of Trading and Markets (the “Division”) reviewed theApplication and the record before FINRA, and the Division concluded that it was appropriate for the SEC to approve the Application, which was so approved.  In the Matter of the Application of the Financial Industry Regulatory Authority, Inc. For An Order Granting the Approval of Gregory L. Bowen As A General Securities Representative With First Liberties Financial (ORDER APPROVING APPLICATION FOR RELIEF FROM A STATUTORY DISQUALIFICATION, Securities Exchange Act of 1934 Rel. #68266, November 19, 2012).

Bill Singer’s Comment

Wall Street’s Scarlet Letters: the SD of statutory disqualification, also known as the regulatory sanction that keeps on giving.  Long after certain underlying violations or administrative actions seems a dim shadow of ancient history, former industry participants find their re-entry to the biz blocked by the activation of 3(a)(39).  Although that barred door of re-entry sometimes seems permanently closed, in fact, there are ways to knock and gain entrance.

During my three decades on the Street, if I haven’t seen it all when it comes to SD, I’ve sure as hell seen a lot.  As Bowen demonstrates, there are many factors that often come into play during applications for registration for disqualified individuals. First, there’s the nature of the underlying disqualifying event and whether the subject individual has shown remorse and avoided recurrences of similar misconduct. Second is the consideration of how long ago the misconduct occurred. Then there is the nature of the SD’s proposed business. Also under consideration is the pedigree of the sponsoring brokerage firm and the proposed supervisors.  Finally, the regulators scrutinize how the whole shebang is likely to come together: where will the SD be located, how will oversight occur, who will be the supervisor, are there assurances of adequate time and assets set aside to supervise, and what restrictions will be in place from day one?

Is there life after the death of being deemed an SD? — according to this case and others, “Yes.”  On the other hand, the costs and perceived reputational risks associated with standing up on behalf of an SD are significant, and many broker-dealers are unwilling to incur that downside for anyone, no matter your explanations or the circumstances.  Merrill Lynch, Morgan Stanely, UBS, JP Morgan, Goldman Sachs, Wells Fargo . . . good luck trying to get them to sponsor you on an MC-400.  Impossible? No. Unlikely? Quite often.  As you go to regionals and independents, you may find more flexibility; however, you may also be asked to cover the regulatory and legal costs of the MC-400 and subsequent steps.  And if your path remains blocked after making the rounds of wirehouses, regionals, and indies, should you then dive into the cesspool and give it a shot with some pennystock shop or boiler room?  Tell you what, look at the 18 undertakings set forth above and tell me how likely a banged up stockbroker’s chances are of getting an MC-400 through if the sponsor BD has an extensive industry rap sheet and the proposed supervisor is walking wounded.

For a review of some prior statutory disqualification applications,READ


See a blank MC-400


ALSO READ


 
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