SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37952 \ November 15, 1996 Admin. Proc. File No. 3-8962 ------------------------------------------------: In the Matter of the Application of : : WILLIAM S. MENTIS : 11439 N. 56th Street : Scottsdale, Arizona 85254 : : For Review of Disciplinary Action Taken 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 Conduct Inconsistent with Just and Equitable Principles of Trade Failure Properly to Designate a Registered Principal Where a registered principal of a member firm of registered securities association failed properly to designate an appropriately-registered principal with authority to carry out the firm's supervisory responsibilities for trading, held, association's finding of violation and the sanctions it imposed sustained. APPEARANCES: H. Thomas Fehn, for William S. Mentis. Alden S. Adkins and Susan L. Beesley, for NASD Regulation, Inc. Appeal filed: February 20, 1996 Briefing completed: May 16, 1996 ==========================================START OF PAGE 2====== I. William S. Mentis, formerly the financial and operations principal and a general securities principal of Franklin-Lord, Inc. (the "Firm"), a former member firm of the National Association of Securities Dealers, Inc. (the "NASD"), appeals from NASD disciplinary action. -[1]- The NASD found that, during September and October 1992, Mentis and the Firm violated Article III, Sections 1 and 27 of the NASD Rules of Fair Practice (the "Rules") by failing properly to designate an appropriately- registered principal with authority to carry out the Firm's supervisory responsibilities for trading. -[2]- The NASD censured Mentis, fined him and the Firm $10,000 jointly and severally, and required that he requalify as a principal. ---------FOOTNOTES---------- -[1]- The Firm, also a respondent in these proceedings, applied to the Commission for review of the NASD decision but subsequently withdrew its application. -[2]- The NASD recently revised and renumbered the Rules; no substantive changes were made to the particular rules at issue here. Article III, Section 1 [new Rule 2110] requires that members "observe high standards of commercial honor and just and equitable principles of trade." Article III, Section 27(a)(2) [new Rule 3010(a)(2)] requires that a member firm's supervisory system provide, at a minimum, for "the designation, where applicable, of an appropriately registered principal(s) with authority to carry out the supervisory responsibilities of the member for each type of business in which it engages for which registration as a broker/dealer is required." Section 27(b)(2) [new Rule 3010(b)(2)], in turn, specifies that "[t]he member's written supervisory procedures shall set forth the supervisory system established by the member pursuant to Paragraph (a) above, and . . . [t]he member shall 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." Section 27(b)(2) [new Rule 3010(b)(2)] further provides that "[s]uch record shall be preserved by the member for a period of not less than three years, the first two years in an easily accessible place." ==========================================START OF PAGE 3====== -[3]- Our findings are based on an independent review of the record. II. By letter dated August 4, 1993, in response to a customer complaint regarding trading activity during September and October 1992, the NASD staff asked Mentis to identify the person or persons whom the Firm had designated to supervise trading during September and October 1992. The NASD's letter also directed Mentis to provide "any and all documentation supporting such supervisory designation." Mentis responded by providing the NASD with an undated document that identified, by name, supervisors of the Firm's various registered representatives. Mentis also informed the NASD that Michael Pinsler was the "trader in charge." Pinsler, however, was not registered with the NASD as a principal for most of the two-month period. Thus, his designation as the registered principal supervising the Firm's trading was improper. In response to a second NASD investigatory letter, sent in November 1993, that requested "[a] complete copy of the firm's written Supervisory Procedures" that were in place between July and November 1992, Mentis furnished the NASD with another undated document titled "Designation of Supervisory Duties." This document indicated that Mentis had "[d]esignated" (but for no specified period) Pinsler to oversee "Order Entry" and "P/S Blotter Review." Mentis advised the NASD that this designation was "in place beginning at the inception of the Firm and continuing through the desired time period." 4/ Subsequently, in their February 1994 answer to the NASD's complaint, Mentis and the Firm confirmed that Pinsler had been designated during the period at issue as "the individual responsible for its trading department." 5/ Thereafter, during the District Business Conduct Committee (the "District Committee") hearing, the attorney representing Mentis and the Firm admitted: "We didn't, in writing, designate a principal [to oversee trading]." The attorney contended, however, "We had one. He was doing the job. We just didn't write it down." This time, ---------FOOTNOTES---------- -[3]- The NASD also assessed costs. 4/ This document does not satisfy Section 27's specified requirements for designation of supervisory personnel; Mentis and the Firm have not contended otherwise. 5/ These respondents nonetheless defended the failure properly to designate an appropriately-registered principal on the ground that the Firm had been "unaware" that this failure constituted a violation of Section 27. ==========================================START OF PAGE 4====== the respondents claimed that another Firm employee, Richard Whelan, was the designated principal during the relevant period. III. The Firm's supervisory system was in disarray during the period at issue. As the District Committee found, the record in this matter "evidences the confusion that results from the failure to designate" in accordance with Section 27 of the NASD Rules. Before us, Mentis does not challenge the NASD's finding that the Firm failed properly to designate an appropriately- registered principal to oversee trading. 6/ We conclude that this finding is supported by the record, and that the failure, during September and October 1992, properly to designate an appropriately-registered principal with authority to carry out the Firm's supervisory responsibilities for trading constitutes a violation of Article III, Sections 1 and 27 of the Rules. IV. Mentis disputes the NASD's determination that he shares responsibility for this violation. Mentis claims that there is no record evidence that he was in a position to control the Firm's compliance with the NASD's supervision rules or that he was in any way responsible for such compliance. Mentis asserts that John E. Cathcart, who was not named as a respondent in this matter, was the Firm's owner and president during this period. Mentis accordingly suggests that Cathcart, not he, is the individual responsible. 7/ The issue before us on this appeal, however, is not whether Mentis was the president during the period in question. It is whether, during September and October 1992, Mentis' Firm responsibilities included designation of supervisors in accordance with Section 27 of the Rules. We find, on our de novo review of the record, that Mentis had this compliance responsibility. As indicated supra, the internal Firm document 6/ With respect to the substance of the charge, Mentis contends before us only that he did not stipulate before the District Committee that a violation had occurred. 7/ Mentis specifically claims that the District Committee and National Business Conduct Committee (the "National Committee") decisions are "predicated on the falsity that Mentis was the firm's president. He was not." Mentis reads the decisions too narrowly. He disregards both the District Committee's finding that, as of September 1992, Mentis "had become in effect the firm's chief executive" and the National Committee's comment on "the firm's lack of a president" during the relevant period. ==========================================START OF PAGE 5====== that Mentis furnished to the NASD, in response to its follow-up inquiry in November 1993, identifies Mentis as the designator of the supervisory personnel named in the document. Given Mentis' representation that this document reflected the Firm's supervisory system during "the desired time period [September- October 1992]," we find, as did the NASD, Mentis responsible for the Firm's non-compliance with the NASD's supervision rules. ==========================================START OF PAGE 6====== V. The supervision requirements contained in Section 27 of the Rules provide safeguards against misconduct by firms and their employees. Section 27 explicitly states that these requirements are intended to be the minimum components of each member's supervisory system. The fine of $10,000, assessed by the NASD against Mentis jointly and severally with the Firm, is within the range set forth in the NASD's Sanction Guidelines, as is the requirement that Mentis requalify as a principal. 8/ Under all the circumstances, we find the sanctions imposed by the NASD neither excessive nor oppressive. An appropriate order will issue. 9/ By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary 8/ NASD Sanction Guidelines at 53 (1996). 9/ 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. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37952 \ November 15, 1996 Admin. Proc. File No. 3-8962 : In the Matter of the Application of : : WILLIAM S. MENTIS : 11439 N. 56th Street : Scottsdale, Arizona 85254 : : For Review of Disciplinary Action Taken 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 William S. Mentis, and its assessment of costs, be, and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary