SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 39297 / November 5, 1997 Admin. Proc. File No. 3-9253 : In the Matter of the Application of : : ROBERT L. DEN HERDER : 4119 Wolverine : Helena, MT 59601 : : For Review of Disciplinary Action 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 Unsuitable Recommendation Failure to Obtain for Customer Sales Load Discount Issuance of Guarantee Against Loss Registered representative of member firm of registered securities association made an unsuitable recommendation and failed to obtain for his customer a sales load discount in connection with the purchase of mutual fund shares, and guaranteed that customer against loss. Held, association's findings of violations and sanctions are sustained. APPEARANCES: Linda M. Deola, of Reynolds, Motl and Sherwood, for Robert L. Den Herder. Alden S. Adkins and Carla J. Carloni, for NASD Regulation, Inc. Appeal filed: February 19, 1997 Last brief received: May 14, 1997 I. Robert L. Den Herder, a former registered representative of Schneider Securities, Inc. ("Schneider"), a member firm of the National Association of Securities Dealers, Inc. ("Association" or "NASD"), appeals from NASD disciplinary action. The NASD found that Den Herder violated the Association's Rules of Fair Practice by (1) making an unsuitable recommendation to a customer in connection with, and failing to obtain for that customer a sales load discount on, the purchase of mutual fund shares, and (2) guaranteeing that customer reimbursement for losses in connection with certain other investments. <(1)> The NASD censured Den Herder, fined him $27,549.41, suspended him in all capacities for 30 business days, and required him to requalify by examination before acting in any capacity requiring qualification. We base our findings on an independent review of the record. II. The NASD issued its complaint against Den Herder in October 1995. <(2)> Den Herder received the complaint, as well as a second notice of complaint, but failed to answer it. Den Herder's failure to answer permitted the District Business Conduct Committee ("District Committee") to <(1)> Article III, Section 1 (now Conduct Rule 2110) states that a member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade. Article III, Section 2 (now Conduct Rule 2310) states that a member, in recommending a security to a customer, must have reasonable grounds for believing that the recommendation is suitable on the basis of the facts, if any, disclosed by the customer as to the customer's other securities holdings and financial situation and needs. Article III, Section 19(e) (now Conduct Rule 2330(e)) provides in relevant part: "No . . . person associated with a member shall guarantee a customer against loss in any securities account of such customer carried by the member or in any securities transaction effected by the member with or for such customer." <(2)> Den Herder was not associated with an NASD member when the complaint issued. Den Herder left Schneider in March 1994. The NASD retained jurisdiction over Den Herder pursuant to Article IV, Section 4 of the NASD By-Laws, which states, in part, that for a period of two years after the effective date of the termination of registration, the NASD may initiate a proceeding based on conduct which commenced prior to the termination. ======END OF PAGE 2====== deem the allegations set forth in the complaint as admitted. <(3)> The disciplinary action here is based on those allegations and on the documentary evidence submitted by the NASD's prosecutorial staff in support of the charges. <(4)> In this appeal, Den Herder disputes neither the facts nor the findings of violation. We summarize the relevant evidence as follows. In February 1991, Den Herder became registered as a general securities representative with Del Mar Securities ("Del Mar"). Thereafter, Orlan Wood, a fifty-eight year old retiree with a monthly retirement income of $1,000, opened an account with Den Herder. In February 1992, Wood transferred $130,000 from his IRA account into his Del Mar account. Through Den Herder, Wood then invested a total of $90,000 of these funds in two mutual funds, and paid front-end sales charges in connection with these purchases. The investment objectives of these funds were long-term investment growth and capital appreciation, respectively. In March 1992, Den Herder offered Wood an opportunity to invest in high-risk equity securities. Wood explained that he could not afford the risk. Den Herder responded by personally guaranteeing that Wood would not lose money on the investment. Wood then agreed to invest approximately $38,000 in the securities. In September 1992, Den Herder left Del Mar for Schneider, and Wood transferred his account from Del Mar to Schneider. In early 1993, Den Herder advised Wood that his $90,000 was invested in the "wrong" mutual funds. Den Herder counselled Wood to redeem his shares and put a total of approximately $60,000 into shares of Putnam U.S. Government Income Trust, Putnam Income Fund, and Putnam High Yield Trust ("Putnam") so that Wood <(3)> See Article II, Section 3(c) of the NASD's Code of Procedure (now NASD Procedural Rule 9216(c)). <(4)> After the District Committee's decision issued, Den Herder appealed it to the National Business Conduct Committee, ("National Committee"). Den Herder sought a remand to the District Committee on the ground that he had waived a hearing before the District Committee solely because he understood -- mistakenly -- that the NASD would not seek to collect any fine imposed in this proceeding. The National Committee denied the remand request, reviewed this matter on the written record, and sustained the disciplinary action imposed by the District Committee. Compare James M. Russen, 51 S.E.C. 675, 678 n.12 (1993) (noting that NASD's introduction and evaluation of record evidence in case where respondent failed to answer complaint afforded this Commission a basis for discharging our review function under Section 19 of the Securities Exchange Act of 1934). ======END OF PAGE 3====== could receive regular income. Each of these funds assessed front-end sales charges <(5)> and had as its investment objective high current income. On March 30, 1993, Den Herder purchased for Wood $39,986 in Putnam shares. The following day, March 31, 1993, Den Herder invested for Wood another $19,999 in Putnam shares. Wood's total investment of over $50,000 in Putnam shares entitled him to a breakpoint (sales load) discount. Den Herder, however, failed either to aggregate the purchases or to secure and furnish to Putnam a letter of intent in order to obtain for Wood the benefit of the discount. Wood paid approximately $2,550 in sales charges in connection with the Putnam purchases. In October 1993, Wood learned that the value of his investments in the high-risk securities had decreased significantly. At that time, Wood reminded Den Herder of the personal guarantee. Den Herder responded by executing a promissory note securing the payment of $38,927. We find that these undisputed facts support the NASD's findings of violation of the rules charged. Den Herder put his own interest before that of his customer. He caused Wood to incur approximately $2,550 in additional sales charges, and he failed to aggregate the two Putnam purchases or to secure and furnish to Putnam a letter of intent to obtain for Wood the benefit of the available breakpoint discount. Den Herder thus received increased commissions at his customer's expense. <(6)> In an apparent effort to keep Wood's business, he also executed a promissory note payable to Wood to make good on Den Herder's earlier guarantee that Wood would not incur investment losses in connection with the high-risk securities Den Herder had recommended and sold to Wood. <(7)> <(5)> Wood recounts in his declaration that, in discussing the recommendation with Wood, Den Herder assured him that the sales charges would be waived, "due to [Den Herder's] connections and volume of business." <(6)> Compare Harold R. Fenocchio, 46 S.E.C. 279, 282-83 (1976). We find that Den Herder's assurance to Wood that Den Herder would arrange for waiver of Putnam's sales charges reflects Den Herder's recognition that, under the circumstances here, these funds were not suitable for Wood unless the sales charges were waived, which they were not. <(7)> See Curtis I. Wilson, 49 S.E.C. 1020, 1024 (1989). ======END OF PAGE 4====== III. In imposing its sanctions, the NASD took into account both the nature of Den Herder's misconduct and Den Herder's lack of any previous disciplinary history. While Den Herder claims that he does not intend to reenter the securities industry, this representation does not serve as a basis for reducing the sanctions imposed against him. We find these sanctions neither excessive nor oppressive for Den Herder's varied misconduct. <(8)> Den Herder asserts that the NASD sanctions should be overturned because, he claims, Wood recently has settled with Den Herder and withdrawn his complaint against him. <(9)> Den Herder posits that there accordingly is "no reason for the NASD or the SEC to continu[e] pursuing" Den Herder. Nevertheless, Wood's purported determination to withdraw his complaint does not affect this disciplinary proceeding. <(10)> In <(8)> The NASD's sanction guideline for excessive trading violations, which specifically covers "mutual fund- related violations, including switching and failure to take advantage of break points," suggests consideration of a requirement of requalification by examination, and a fine representing the amount of any commissions, concessions, or profits to the respondent and the firm and an additional $5,000 to $50,000. That guideline also suggests that suspension in all capacities for up to 60 days should be considered when the violation is with respect to one customer's account. NASD Sanction Guidelines at 10 (1996). The applicable guideline for Den Herder's additional misconduct -- guaranteeing a customer against loss -- suggests that the respondent be fined a minimum of $2,500, plus the amount of commissions earned. <(9)> Den Herder asserts that his purported settlement with Wood sufficiently "punished" Den Herder and adequately compensated Wood. <(10)> Compare Bernard D. Gorniak, Securities Exchange Act Rel. No. 35996 (July 20, 1995), 59 SEC Docket 2523, 2325 n.5 ("The NASD's power to enforce its rules is independent of a customer's decision not to complain, which may be influenced by many factors."). We accordingly decline to adduce as additional evidence, pursuant to Rule 452 of our Rules of Practice, the document that Den Herder has appended to his brief. That document purports to reflect a settlement between Wood and Den Herder reached after the NASD decision in this matter. Compare, e.g., Joseph H. O'Brien, 51 S.E.C. 1112, 1115 n. 9 (1994) (continued...) ======END OF PAGE 5====== accordance with its self-regulatory responsibilities, the NASD must discipline its members and persons associated with its members for violations of applicable regulatory requirements. The NASD's obligations in this regard exist regardless of Wood's purported settlement with Den Herder or his purported willingness to withdraw his complaint. Den Herder also suggests that we should reverse the fine imposed because its enforcement will "negatively impact" the alleged settlement between Wood and Den Herder. Den Herder fails to state how enforcement of the NASD's fine will "negatively impact" his settlement with Wood, and does not explain why this negative impact should affect our decision. <(11)> An appropriate order will issue. By the Commission (Chairman LEVITT and Commissioners JOHNSON AND HUNT). Jonathan G. Katz Secretary <(10)>(...continued) (finding "immaterial" a late-filed letter from a complaining customer seeking "unconditionally" to withdraw her complaint against respondent on the ground that any settlement between the respondent and the complaining witness was not controlling as to the NASD's disciplinary action). <(11)> The NASD theorizes that Den Herder is asserting that enforcement of the fine imposed here may jeopardize Den Herder's ability to honor his monetary settlement with Wood. As the NASD points out, Den Herder has not sought to introduce (before the NASD or this Commission) any support for a claimed inability to pay. Moreover, the NASD makes available an installment plan which would permit Den Herder to pay over time. See Ramiro Jose Sugra¤es, Securities Exchange Act Rel. No. 35311 (Feb. 1, 1995), 58 SEC Docket 2045, 2048 n.7; John A. Malach, 51 S.E.C. 618, 620 n.2 (1993). All of the arguments advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed in this opinion. ======END OF PAGE 6====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 39297 / November 5, 1997 Admin. Proc. File No. 3-9253 : In the Matter of the Application of : : ROBERT L. DEN HERDER : 4119 Wolverine : Helena, MT 59601 : : For Review of Disciplinary Action by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION 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 Robert L. Den Herder, and the Association's sanctions imposed, be, and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary