UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 40765 / December 9, 1998 Administrative Proceeding File No. 3-9785 ____________________________________ : In the Matter of : ORDER INSTITUTING PUBLIC : PROCEEDINGS PURSUANT TO FSC SECURITIES CORPORATION, : SECTIONS 15(b) AND 19(h) : OF THE SECURITIES EXCHANGE Respondent. : ACT OF 1934, MAKING FINDINGS ____________________________________: AND IMPOSING SANCTIONS I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be instituted against FSC Securities Corporation ("FSC") pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act"). In anticipation of the institution of these administrative proceedings, FSC has submitted an Offer of Settlement ("Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission or in which the Commission is a party, FSC, without admitting or denying the findings set forth herein, except as contained in Section II. A., below, and as to the jurisdiction of the Commission over it and over the subject matter of these proceedings, which are admitted, consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934, Making Findings and Imposing Sanctions ("Order"). The Commission has determined that it is appropriate and in the public interest to accept FSC's Offer and accordingly is issuing this Order. II. FACTS On the basis of this Order and FSC's Offer, the Commission finds[1] the following: A. At all times relevant hereto FSC has been a broker- dealer registered with the Commission, and a member of the National Association of Securities Dealers. FSC is headquartered in Atlanta, Georgia, is engaged in a general securities business, primarily through small branch offices; and operates almost exclusively through registered representatives who are independent contractors. B. Between January 1, 1992, and December 31, 1995 ("the relevant time period"), a registered representative of FSC who operated a one-person Office of Supervisory Jurisdiction ("OSJ") as an independent contractor ("the Registered Representative") engaged in sales practice abuses including improper mutual fund switching and the sale of securities that were unsuitable investments for certain of the customers to whom they were sold. Thus, the Registered Representative violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder; C. During the relevant time period, FSC did not generate for its supervisory personnel an automated exception report that could reliably detect mutual fund switching; D. During the relevant time period, each of FSC's OSJs was supervised by a Principal. Principals were the primary supervisors of the activities of the registered representatives who worked for them. These principals, in turn, had business and customers of their own. No OSJ Principal's own business was supervised by any other single designated individual in the FSC organization. This system of supervising the OSJ Principals' own production was inadequate; E. FSC failed to implement procedures sufficient to assure that compliance auditors would examine a sufficient number of customer accounts during audits of OSJs. As a result, with regard to audits of the Registered Representative's OSJ, FSC cannot document that it reviewed an adequate number of accounts for evidence of sales practice abuse; and F. FSC, by the actions alleged in paragraphs B through E above, failed reasonably to supervise the Registered Representative with a view to preventing violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, within the meaning of Section 15(b)(4)(E) of the Exchange Act. III. In view of the foregoing, it is in the public interest to impose the sanctions specified in the Offer. Accordingly it is hereby ordered that: A. FSC is censured; B. FSC shall, within ten (10) days of the entry 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 that identifies FSC as a respondent in these proceedings, the file number of these proceedings, a copy of which cover letter and money order or check shall be sent to Richard P. Wessel, District Administrator, Securities and Exchange Commission, 3475 Lenox Road, Suite 1000, Atlanta, GA 30326; and C. FSC will comply with its undertaking: 1. To retain, within 60 days of the date of this Order, at its expense, an Independent Consultant not unacceptable to the Commission's staff. The Independent Consultant shall conduct a review of FSC's supervisory, compliance, and other policies and procedures to address: (a) FSC's policies and procedures for OSJ branch audits and, specifically, the extent to which those policies and procedures require that examiners review an adequately large sample of customer accounts; (b) the adequacy of FSC's system of exception reports; (c) FSC's protocol for reviewing and monitoring the suitability of transactions recommended to clients (including, but not limited to, purchases of mutual fund Class "B" shares); and (d) FSC's system for supervising the personal production of OSJ Principals. As part of its review, the Consultant shall also determine the extent to which recommendations set forth in the Consultant's report recently issued to a broker- dealer entity affiliated with FSC need to be substantially implemented at FSC. FSC shall cooperate fully with the Consultant and shall provide the Consultant with access to its files, books, records, and personnel as reasonably requested for the review. 2. At the conclusion of that review, which in no event shall be more than 180 days after the date of this Order, the Consultant shall submit to FSC and to the Atlanta District Office of the Securities and Exchange Commission ("Atlanta District Office") an Initial Report. The Initial Report shall address the matters delineated in Section III. C. 1. above, and shall include the Consultant's recommendations thereon. 3. Within 210 days of the date of this order, FSC shall in writing advise the Consultant and the Atlanta District Office of the recommendations from the Initial Report that it has determined to accept and the recommendations that it considers to be unduly burdensome. With respect to any recommendation that FSC deems unduly burdensome, FSC may propose an alternative policy or procedure designed to achieve the same objective or purpose. 4. With respect to any recommendation or proposal with which FSC and the Consultant do not agree, FSC and the Consultant shall attempt in good faith to reach agreement. In the event the Consultant and FSC are unable to agree on an alternative proposal, FSC shall abide by the recommendation of the Consultant. 5. Within 270 days of the date of this Order, FSC shall in writing advise the Consultant and the Atlanta District Office of the recommendations and proposals that it is adopting. 6. The Consultant shall complete the aforementioned review and submit a written Final Report thereon to FSC and the Atlanta District Office within one year after the date of this Order. The Final Report shall recite the efforts the Consultant undertook to review FSC's supervisory functions, compliance mechanisms, and other policies and procedures, set forth the Consultant's recommendations and FSC's proposals, and describe how FSC is implementing those recommendations and proposals. 7. FSC shall take all necessary and appropriate steps to adopt and implement all recommendations contained in the Consultant's Final Report. 8. No later than one year after the date of the Consultant's Final Report, unless extended pursuant to paragraph 9 below, FSC shall submit to the Atlanta District Office an Affidavit setting forth the details of its efforts to implement the recommendations contained in the Consultant's Final Report and stating whether it has achieved compliance. 9. For good cause shown, and upon receipt of a timely application from the Consultant or FSC, the Atlanta District Office may extend any of the procedural dates set forth above. 10. To ensure the independence of the Consultant, FSC: (1) shall not have the authority to terminate the Consultant, without the prior written approval of the staff of the Atlanta District Office; (2) shall compensate the Consultant, and persons engaged to assist the Consultant, for services rendered pursuant to the Order at their reasonable and customary rates; (3) shall not, without prior written consent of the staff of the Division of Enforcement, enter into any legal, business, or other financial relationship with the Consultant, any firm with which he or she is affiliated or of which he or she is a member, or any person engaged to assist the Consultant in the performance of his or her duties under the Order, during the period of their engagements and for a period of two years following the completion of their duties described in the Order; and (4) shall not be in and shall not have an attorney-client relationship with the Consultant and shall not seek to invoke the attorney-client or any other doctrine or privilege to prevent the Consultant from transmitting any information, reports, or documents to the Commission or its staff. By the Commission. Jonathan G. Katz Secretary **FOOTNOTES** [1]: The findings herein are pursuant to FSC's Offer of Settlement and are not binding on any other person in this or any other proceeding.