INITIAL DECISION RELEASE NO. 111 ADMINISTRATIVE PROCEEDING FILE NO. 3-8854 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________ : In the Matter of : : VALICENTI ADVISORY : INITIAL DECISION SERVICES, INC., and : July 2, 1997 VINCENT R. VALICENTI : _________________________ APPEARANCES: James J. Tyne, Karim G. Lynn, and Jason Sabot for the Division of Enforcement, Securities and Exchange Commission Michael R. Wolford and Steven E. Cole for Respondents Valicenti Advisory Services, Inc., and Vincent R. Valicenti BEFORE: Carol Fox Foelak, Administrative Law Judge I. INTRODUCTION The Securities and Exchange Commission (Commission) instituted this proceeding on September 29, 1995, pursuant to Sections 203(e), 203(f), and 203(k) of the Investment Advisers Act of 1940 (Advisers Act). The Order Instituting Proceedings (OIP) alleges that Valicenti Advisory Services, Inc., (VAS), willfully aided and abetted by Vincent R. Valicenti, willfully violated Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rules 206(4)-1(a)(2) and 206(4)-1(a)(5) thereunder. I held a hearing in Washington, D.C., on January 16 through 19, 1996, (the January hearing), and on April 23, 1996, (the April hearing).<(1)> At the January hearing, the Division of Enforcement (Division) called six witnesses, including Respondent Valicenti, and Respondents called five, <(1)> References to the January hearing transcript will be cited as (Tr. __), and references to the April hearing transcript will be cited as (Apr. Tr. __). ======END OF PAGE 1====== including Respondent Valicenti. At the April hearing,<(2)> Respondents called two, and the Division, one, expert witnesses. A number of exhibits were received into evidence.<(3)> I considered the following post hearing pleadings: i) the Division s Post-Hearing Memorandum, dated June 7, 1996; ii) Respondents Proposed Findings of Fact and Conclusions of Law and Post- Hearing Memorandum, dated June 6, 1996; iii) the Division s Post-Hearing Reply Memorandum and Reply to Respondents Proposed Findings of Fact, dated June 28, 1996; and iv) Respondents Post-Hearing Reply Memorandum, dated June 27, 1996. ALLEGATIONS The OIP alleges that, from approximately mid-1992 to approximately December 1993, VAS, willfully aided and abetted by Mr. Valicenti, willfully violated Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder, by distributing and causing to be distributed, to clients and prospective clients, charts and bar graphs that falsely and misleadingly portrayed the Respondents performance. The OIP also alleges that, from approximately 1992 to approximately December 1993, VAS, willfully aided and abetted by Mr. Valicenti, willfully violated Section 206(4) of the Advisers Act and Rules 206(4)-1(a)(2) and 206(4)-1(a)(5) thereunder, by distributing and causing to be distributed, to clients and prospective clients, a hypothetical customer portfolio, the M.R. Sample, that misleadingly showcased some, but not all, of the Respondents recommended securities, and was also misleadingly suggestive of performance for those securities. BACKGROUND Historically, investment advisers have been less closely regulated than other industries under the Commission s jurisdiction. There are fewer, less detailed, rules concerning investment advisers than, for example, investment companies. For example, Rule 482, (promulgated under the Securities Act of 1933), 17 C.F.R.  230.482, contains detailed requirements concerning performance advertising by investment companies. By contrast there is no comparable specification of requirements for performance advertising by investment advisers. Advisers Act Rule 206(4)- 1, 17 C.F.R.  275.206(4)-1, involved in this case, pertains generally to advertisements by investment advisers. In recent years the number of investment advisers and assets under management have increased greatly, as have the number of unsophisticated clients. Investment Advisers, General Accounting Office, at 10 (1990). House and Senate hearings in 1992 and 1993 on proposed investment adviser <(2)> I reopened the hearing to receive expert testimony related to issues raised by the Division s expert witness at the January hearing. <(3)> References to Division exhibits will be cited as (Div. Ex. __), and references to Respondents exhibits will be cited as (Resp. Ex. __). ======END OF PAGE 2====== legislation described such problems as investment advisers misappropriating client funds or putting them in unsuitable investments, conflicts of interest and failure to disclose them, as well as the growth in the number of investment advisers and unsophisticated clients.<(4)> Also noted were inadequate Commission resources to conduct inspections of investment advisers. Subsequently legislation<(5)> was passed, and on April 4, 1997, the Commission announced the creation of the Task Force on Investment Adviser Regulation that is charged with, inter alia, developing proposals to modernize investment adviser regulations in light of developments in the market place, the investment advisory industry, and the new legislation. Press Statement 97-30 (April 4, 1997). This case involves alleged inaccurate performance advertising, not one of the abuses noted above. It developed from a Commission compliance examination of VAS conducted from December 7 through 16, 1993.<(6)> (Tr. 14, 54-55, 824-27.) II. FINDINGS OF FACT<(7)> <(4)> Investment Adviser Industry Reform: Hearings Before the Subcomm. on Telecommunications and Finance of the House Comm. on Energy and Commerce, 102d Cong. (1992); House Comm. on Energy and Commerce, Investment Adviser Regulatory Enhancement and Disclosure Act of 1992 (to accompany H.R. 5726), H. Rep. No. 102- 883 (1992); Investment Adviser Industry Reform: Hearing on H.R. 578 Before the Subcomm. on Telecommunications and Finance of the House Comm. on Energy and Commerce, 103d Cong. (1993); SEC Oversight of Investment Advisers: Hearing Before the Subcomm. on Securities of the Senate Comm. on Banking, Housing, and Urban Affairs, 102d Cong. (1992); Senate Comm. on Banking, Housing, and Urban Affairs, The Investment Adviser Oversight Act of 1992 (to accompany S. 2266), S. Rep. No. 102-312 (1992); Senate Comm. on Banking, Housing, and Urban Affairs, The Investment Adviser Oversight Act of 1993 (to accompany S. 423), S. Rep. No. 103-177 (1993). <(5)> National Securities Markets Improvement Act of 1996, Title III, Investment Advisers Supervision Coordination Act, Pub. L. No. 104-290, 110 Stat. 3416, 3436-40 (codified as amended in scattered sections of 15 U.S.C.  80b-1 et seq.). <(6)> The examination resulted from a complaint from a former VAS client concerning an unrelated issue that was not disclosed in this proceeding. VAS was awarded, and collected, a money judgment in satisfaction of a debt against the former client. (Tr. 52, 830-32.) <(7)> My findings and conclusions are based on the record. I applied preponderance of the evidence as the applicable standard of proof. I have considered all proposed findings and (continued...) ======END OF PAGE 3====== RESPONDENTS Vincent Valicenti has a bachelor s degree in finance and management from the State University of New York at Albany. (Tr. 816; Div. Ex. 7 at 30.) He has been in the securities business since 1968. (Tr. 818.) He was employed in the trust department at the Marine Midland Bank until 1984, when he founded VAS with a partner in Elmira, New York; he became sole owner in December 1985. (Tr. 462.) VAS has been registered with the Commission as an investment adviser from 1984 to the present. (Tr. 463, 817.) Mr. Valicenti is the president and a director of VAS, oversees the firm s operations, and manages most of the VAS client portfolios. (Tr. 462-64.) At the end of 1984 VAS had about $14 or $15 million under management. (Tr. 817.) At the end of 1987 it had about $48 million; 1991, $86 million; and 1992, $102 million. (Div. Ex. 9.) In 1994, VAS had about 640 accounts, with an average size of $150,000 to $200,000. (Tr. 468-71.) At the time of the hearing, VAS had approximately 300 clients, with about 650 accounts. (Tr. 818-19.) Most of VAS clients are individuals. (Tr. 469.) VAS gets clients through referrals; it does not engage in mass mailings or telemarketing. (Tr. 302-03, 783-86, 818.) The accounts are discretionary, but VAS deals with clients individually and seeks to ascertain and accommodate a client s preferences, as well as taking account of such constraints as tax considerations and illiquid assets. (Tr. 417-18, 819, 837-39.) To ascertain a new client s objectives Mr. Valicenti considers such information as the client s tax returns, net worth, stage in life, and any expected windfalls or extraordinary expenses. (Tr. 840, 483-85; Div. Ex. 7 at 4, 17-20.) He plans for the client s income needs from fixed income securities. (Tr. 840, 486.) Then he evaluates the possibilities for growth; a client who can afford risk will have more stock than one who can afford less risk. (Tr. 841, 486.) An account s objectives may change over time. (Tr. 842.) Mr. Valicenti s and VAS philosophy is risk-averse; he relates this to his being in the business during a lengthy market decline in 1973-74. (Tr. 841; Div. Ex. 7 at 3.) His approach is to use fundamental analysis and invest for the long term; he refrains from such speculative practices as short term purchases, trading, short sales, or margin transactions. (Tr. 464; Div. Ex. 7 at 25.) Mr. Valicenti invests client funds in securities he selects; others at the firm who manage client portfolios and invest client funds must choose from the supervised list, a list of securities approved by Mr. Valicenti to be bought, held, or accumulated in a customer s account.<(8)> (Tr. 472-73, 822-23.) <(7)>(...continued) conclusions and all contentions, and I accept those that are consistent with this decision. <(8)> As a normal practice, VAS did not reveal to clients the securities contained on the supervised list, or offer to show to clients or prospective clients a list of all securities it was buying or holding. (Tr. 554, 877-78.) VAS did not have a (continued...) ======END OF PAGE 4====== VAS assesses its management fee according to the market value of the account: 1%, annually, of the market value for the first $300,000; 0.75% on the next $500,000; and 0.50% on anything above $800,000. (Tr. 475-77, 819- 20; Div. Ex. 7 at 29.) VAS collects the fee quarterly, at the end of the quarter to which it applies, based on the account s value at that time. (Tr. 475-77, 819-20; Div. Ex. 7 at 29.) The Division attempted to depict Mr. Valicenti as an unreliable witness and impeach his testimony by pointing to alleged inconsistencies between his testimony at trial and his investigative testimony, alleged statements to other witnesses, and various documents he signed. (See e.g., Tr. 555-60; Div. Post-Hearing Memorandum at 6-10.) Examination of the alleged inconsistencies shows that many are either meaningless or not inconsistencies. For example, Who chose the accounts? refers to the composite of 22 accounts used to show VAS performance. (Div. Post-Hearing Memorandum at 7.) The Division asserts that Mr. Valicenti testified at the hearing that he chose the accounts but had previously stated, including in investigative testimony, that he did not. Yet the Division s illustration of Mr. Valicenti s alleged inconsistent investigative testimony is actually a statement by a Division attorney. (Tr. 911.) Additionally, it is clear throughout the record that, from the beginning of the investigation, Mr. Valicenti held himself out as being responsible for the choice of accounts. (See, e.g., Tr. 36.) Another example, What is DX. 25? refers to Division Exhibit 25, which is a list of VAS accounts on which the 22 accounts chosen for the composite are circled. (Div. Post-Hearing Memorandum at 8.) The Division argues that Mr. Valicenti s testimony that it was not he who actually circled the accounts is inconsistent with his testimony at Tr. 844-60 as to why he chose the circled accounts. It is not clear where the inconsistency lies. Again, the record shows that Mr. Valicenti always held himself out as being responsible for the choice of accounts. VAS EMPLOYEES Peter Mark Marchese was employed at VAS as marketing manager from December 1991 to January 1993. (Tr. 150, 288-89, 502, 869.) Mr. Marchese s duties at VAS focused on marketing and included calculating the performance of VAS accounts and creating a marketing tool for presenting the results. (Tr. 151-52, 502-03, 834-35; Div. Ex. 7 at 7; Div. Ex. 88.) He had an MBA with a concentration in finance from the State University of New York at Binghamton, but no previous experience with calculating rates of return or performance information. (Tr. 150, 252-57, 261.) Mr. Marchese resigned as of January 1993 to avoid signing a confidentiality/non-compete agreement. (Tr. 150, 303-04.) When he left he signed an exit document stating that he had not kept any VAS materials, although he had, in fact, retained copies of materials he had prepared which he had taken home throughout 1992. (Tr. 246-51.) His explanation for this was that he was concerned with the methodology being used in <(8)>(...continued) supervised list, per se, for bonds. (Tr. 553.) ======END OF PAGE 5====== calculating performance information and felt threatened by Mr. Valicenti. (Tr. 245-46.) He did not recall, however, whether he had communicated any concern about the methodology to Mr. Valicenti and acknowledged that Mr. Valicenti s threat was not connected with preparing performance information. (Tr. 267-68.) At the hearing, his responses were cautious, bordering on evasive. (See, e.g., Tr. 247-50, 254-57, 259-268, 270-75, 280-82, 286-88, 309-11.) David Reidy was employed at VAS from November 1989 to January 1994 as a securities analyst and, later, a portfolio manager. (Tr. 426-27; Div. Ex. 7 at 6, 30.) He reviewed securities, put trades in with brokers, reviewed portfolios, and met with clients. (Tr. 426-27.) He has animus against Mr. Valicenti, resulting from Mr. Valicenti s controlling management style and insistence on a covenant not to compete, which forced him to leave Elmira, against his wishes, after he left VAS in January 1994. (Tr. 146, 440-41.) He did, however, consider Mr. Valicenti to be a sound investment adviser, serving his clients interests and his animus is tempered by his satisfaction with the job he eventually obtained in Atlanta in June 1994. (Tr. 425, 441, 454.) Joseph Valicenti (Mr. J. Valicenti) works at VAS and is Mr. Valicenti s son. (Tr. 711, 795.) Mr. J. Valicenti was hired as a securities analyst in May 1991, was later promoted to assistant portfolio manager, and, in 1993, was promoted to portfolio manager. (Tr. 712-14, 795-96; Div. Ex. 7 at 6, 30.) Joan Leto Rogers was employed at VAS from 1990 to 1994, first as a receptionist; in early 1992 her duties evolved into marketing support, including compiling the blue folder that was given to prospective clients. (Tr. 118-20, 136, 436-37.) Diane Rockwell is, and was at the time of the events in question, employed by VAS as an administrative assistant. (Tr. 666-67.) Nancy Lehman has been employed by VAS since June 1993; during 1993 her position was receptionist at VAS satellite Corning, New York, office;<(9)> it was staffed by her full time, and by one of the portfolio managers on rotation; if a portfolio manager had a client meeting in Corning, her duties included making sure that materials, including the blue folder, were ready for him. (Tr. 686-92.) THE BLUE FOLDER In late 1991 or early 1992, VAS developed a presentation and marketing packet, the blue folder, that was given out to prospective clients. (Tr. 479, 482-83, 715-16, 718; Div. Ex. 7.) The blue folder may have typically included Mr. Valicenti s business card; a staff profile with pictures; M.R. SAMPLE documents; a personal planning questionnaire; Form W-9; Form ADV; and pages titled Company Overview, Investment Process, Performance, Client Reports, and Service Agreement. (Tr. 477-79; Div. Ex. 7.) When included, performance materials that are the subject of this proceeding -- the 1991 Chart (Div. Ex. 3) and the 1991 Bar Graph (Div. Ex. 5A) -- were placed at the end of the material in the blue folder. (Tr. <(9)> The Corning office was opened in approximately October 1992. (Tr. 303.) ======END OF PAGE 6====== 126, 137.) The items were assembled in the blue folder in a particular order that Mr. Valicenti required and that he demonstrated to all employees at a staff meeting. (Tr. 123, 125-26.) Before a meeting with a prospective client, some items might be added or removed. (Tr. 670-71.) VAS staff did not routinely provide the blue folders to walk-ins or callers; they were not provided in person or through the mail without an interview with a portfolio manager, usually Mr. Valicenti.<(10)> (Tr. 130-31, 143-46, 717-18, 784-86.) As to the Corning office, at least from June to December 1993, no blue folders were mailed out and the 1991 Chart and the 1991 Bar Graph were not included in the blue folders or requested by a portfolio manager. (Tr. 689-91.) THE M.R. SAMPLE The M.R. Sample was used as an example of a typical quarterly report sent to clients. (Tr. 555, 720-21; Div. Ex. 7 at 10-16; Div. Ex. 7A.) It reflected holdings and transactions in a hypothetical account, named M.R. Sample, which had a portfolio of some of the equity securities on VAS supervised list. (Tr. 552-553, 721-22, 822-23.) It demonstrated such transactions as deposits, withdrawals, dividends, purchases, sales, and splits. (Div. Ex. 7 at 10-16; Div. Ex. 7A.) VAS used it to explain its quarterly reports to prospective clients. (Tr. 555, 720-21.) The Client Reports page in the blue folder explained the components of VAS client reports as shown in the M.R. Sample; it does not mention performance. (Div. Ex. 7 at 8.) Nor could the M.R. Sample be used to calculate performance because it did not include the date of purchase. (Tr. 571, 823; Div. Ex. 7A.) Mr. Valicenti used the M.R. Sample from late 1990 until December 1993. (Tr. 552, 821, 823-24.) Kenneth D. Gartrell, Ph.D., a Certified Public Accountant (CPA) and partner in Putnam, Hayes and Bartlett, a consulting firm with a large percentage of work in the areas of litigation support and public policy, testified as an expert witness in Respondents direct case. (Tr. 916-20, 970-71; Resp. Ex. 65). He was offered as an expert in the areas of financial economics, accounting, organizations and markets, and statistics. He gave opinion testimony on several topics including the response of a reasonable investor to the M.R. Sample. (Tr. 921.) Dr. Gartrell opined that a reasonable investor would view the M.R. Sample as a sample client report and nothing more. (Tr. 968.) THE 1991 CHART AND 1991 BAR GRAPH In early 1992, Mr. Valicenti wanted a method of showing prospective clients VAS performance; he wished to bid for the account of the Chemung County Foundation, which required a five year rate of return to be included in a bid. (Tr. 152, 491-92, 513-15, 833-35.) He selected 22 accounts, from the approximately 500 accounts under VAS management at the time, and told Mr. Marchese to begin compiling the information necessary for calculating <(10)> Ms. Rogers mailed some, maybe between 20 and 100, blue folders at the direction of Mr. Valicenti or another portfolio manager. (Tr. 131.) ======END OF PAGE 7====== performance.<(11)> (Tr. 155-57, 247-49, 265, 516-17, 858; Div. Ex. 25; see also Div. Ex. 9.) Mr. Marchese spent most of his time from January to April 1992 on the project. (Tr. 158, 286-88.) It was a lengthy, manual, process because data from before 1991 was not available in VAS computer system; Mr. Marchese had to obtain it from paper copies of clients quarterly statements that VAS had archived. (Tr. 157, 515, 735-38.) Mr. Marchese eventually created a chart (the 1991 Chart) entitled ANNUALLY-COMPOUNDED TIME-WEIGHTED RATES OF RETURN. <(12)> (Tr. 152-55; Div. Ex. 3.) It showed TOTAL PORTFOLIO, BOND PORTFOLIO, and EQUITY PORTFOLIO rates of return of a composite of discretionary accounts with a balanced objective <(13)> over a five year period, from 1987 through 1991, with subsequent compounded returns for two, three, four, and five year periods. (Tr. 152-55; Div. Ex. 3.) Mr. Marchese also created a bar graph (the 1991 Bar Graph) that compared VAS PERFORMANCE COMPOSITE to THE CDA UNIVERSE (a sample of money managers ). (Tr. 214-18; Div. Ex. 5A.) The Composite Mr. Valicenti set two overall goals for creating the VAS performance materials: (i) that the performance results be representative of the performance of the firm; and (ii) that the selected composite of accounts have assets representing 20% to 25% of the assets under management. (Tr. 835-36, 846, 856-58, 894; see Resp. Ex. 16.) Additionally, Mr. Valicenti stated that VAS had always been risk averse and that he wanted to approach an asset mix of 50%/50% stocks and bonds. (Tr. 856-57.) The criteria Mr. Valicenti used for choosing accounts for the composite, and meeting these overall goals, were articulated somewhat differently at different times. Additionally, there was a confusion between accounts with a balanced <(11)> There is some dispute as to whether Mr. Valicenti was the person who circled the 22 accounts on Division Exhibit 25. Mr. Marchese claims that Mr. Valicenti circled the accounts. (Tr. 155-56.) Mr. Valicenti denies that he circled the accounts. (Tr. 837, 888.) Regardless of who circled the accounts, Mr. Valicenti selected the accounts to include in the account composite. <(12)> A time-weighted rate of return measures investment performance . . . as a percentage of capital at work, effectively eliminating the effects of additions and withdrawals of capital and their timing. JOHN DOWNES & JORDON ELLIOT GOODMAN, BARRON S DICTIONARY OF FINANCE AND INVESTMENT TERMS 607 (4th ed. 1995). <(13)> This phrase appears as a footnote. The asterisk referring the reader to the footnote appears next to TOTAL PORTFOLIO. (Div. Ex. 3; See also Tr. 515-16.) It is clear from the context that the BOND and EQUITY components of the TOTAL PORTFOLIO are based on the composite as well. ======END OF PAGE 8====== objective (where balanced refers to the client s objective) and balanced accounts (where balanced refers to the asset mix of equities and fixed income securities). (Compare, e.g., Tr. 485-86, with Tr. 487.) The criteria included that: (i) the account have over $100,000 in assets; (ii) the account be fully discretionary; in other words, that there were no restrictions placed on the account by the client or that there were no holdings in the account which made it less than fully discretionary; (iii) the account be included for the five year period represented on the composite; and (iv) the investment goals of the account be both income and capital appreciation. (Tr. 534-38; 837-39; see 844-57, 879-80; Div. Ex. 61.) Mr. Valicenti believed that the composite of accounts underlying the 1991 Chart (the 1991 composite) was representative of the VAS accounts under management. (Tr. 865-66.) Mr. Valicenti explained in detail the reasons, unrelated to performance, that he included and excluded accounts from the composite. (Tr. 844-55, 859-60.) At the time he selected the 22 accounts that were circled to be used in the 1991 composite, he was not aware of the rate of return that any of the accounts had earned over the previous five years. (Tr. 847.) His testimony to this effect is credible because the rates of return had to be computed from data extracted manually from paper copies of archived client reports; the data was not available on VAS computer system. (Tr. 157, 515, 735-38.) Therefore, the evidence does not show that Mr. Valicenti cherry-picked the best performing of the 500 accounts under management to comprise the composite. A client with a mixture of income and growth as an investment objective could be broadly described as having a balanced investment objective, according to Mr. Valicenti. (Tr. 485.) Prior to the investigation Mr. Valicenti had never written down his definition of a balanced account. (Tr. 841.) He testified that a balanced account had to have some mixture of stocks and bonds, not more than 70% of either, with some exceptions to the rule; he considers a 70%-30% split as a guideline. (Tr. 487-91, 841-42; see Div. Ex. 61.)<(14)> Some of the accounts in the 1991 composite do not meet Mr. Valicenti s criteria.<(15)> (Tr. 880-81; see also Tr. 899-900; Div. Ex. 61.) Mr. Valicenti knew, or would have known had he reviewed Mr. Marchese s work carefully, that the composite did not contain data for all of the selected accounts for all five years. (Tr. 882-86.) There were other balanced accounts at VAS that were not included in the composite. (Tr. 519; Div. Ex. <(14)> Mr. Valicenti considered preferred stock a fixed income asset, and included the Ziff account in the composite, even though it contained no bonds, because it contained a ratio of approximately 70% common stock to 30% preferred stock. (Tr. 901- 02, 912-13.) See DOWNES & GOODMAN, supra note 12, at 195. <(15)> For example, the Benedictine Foundation of New York and James E. Collins accounts did not exist at VAS for the full five year period. (Tr. 880-81.) ======END OF PAGE 9====== 9.) Some of the accounts included in the composite were not balanced as defined by Mr. Valicenti. (Div. Ex. 9.) It was Mr. Valicenti s intent to lump all of the accounts in the composite together and have the group of accounts, as a whole, fit into the 70/30 balanced definition. (Tr. 528- 29.) The evidence described above shows that Mr. Valicenti intended to have a composite that was representative of accounts under management but that he did not decide on precise criteria in advance and follow them strictly in choosing the accounts. He had criteria but applied them flexibly to achieve his goal of a composite that was representative. Dr. Gartrell gave opinion testimony concerning the methods by which VAS chose the accounts included in the composite. (Tr. 921.) He opined that the selection criteria were fair and reasonable. (Tr. 959-62.) The 1991 Chart At the start of the project Mr. Valicenti showed Mr. Marchese how to calculate quarterly returns and provided him with material produced by the American Institute of Management Research (AIMR), an industry group; Mr. Marchese also studied other books and materials concerning calculating rates of return. (Tr. 158, 257-61; see also Tr. 317; Div. Ex. 40.) After pulling the files for the 22 accounts, Mr. Marchese undertook a three-step process in calculating the rates of return for those accounts: (i) he took handwritten notes of data from the files; (ii) he formatted the data so that he could enter the information into VAS Portia computer system; and (iii) he entered the information into Portia and calculated rates of return. (Tr. 157-58, 165-74; Div. Ex. 103.) Mr. Marchese then inputted the Portia results into a spreadsheet to calculate the annual rates of return used in the 1991 Chart and the 1991 Bar Graph. (Tr. 174-81; Div. Exs. 42, 43, 44; see also Tr. 233-35; Div. Ex. 48.) Mr. Marchese generated interim spreadsheets with results that were not used in creating the 1991 Chart. (Tr. 187-88, 195; see, e.g., Div. Exs. 26, 27, 28, 29.) These interim runs excluded or added accounts, or excluded or added information regarding an account.<(16)> (Tr. 187-97, 318-22; compare Div. Exs. 42, 43, 44, with Div. Exs. 26, 27, 28, and Div. Ex. 29.) Mr. Marchese created these different versions at the direction of Mr. Valicenti. (Tr. 187-97.) Mr. Valicenti reviewed Mr. Marchese s worksheets and decided which performance results would be used in the presentation materials. (Tr. 159, 177, 519; see Div. Ex. 42, 43, 44.) Three of the original 22 circled accounts were not included at all on the final spreadsheet used to create the 1991 Chart: Chemung County Historical Endowment, Jean B. Shull, and Josephine Ambrose. (Tr. 183-87, 275-80, 318-22, 859-60; Div. Exs. 25, 42, 43, 44.) Mr. Valicenti excluded those accounts because they did not meet his selection criteria. (Tr. 859- <(16)> The account mix for all these runs contained combinations of the original 22 accounts. No new accounts were added. (Tr. 187- 97, 275-80, 318-22; compare Div. Exs. 42, 43, 44, with Div. Exs. 26, 27, 28, and Div. Ex. 29.) ======END OF PAGE 10====== 60.) Several accounts that were included in the spreadsheet did not have data for all five years.<(17)> (Tr. 183-87; Div. Exs. 42, 43, 44.) Mr. Valicenti testified that he did not tell Mr. Marchese to eliminate any accounts because of the poor rates of return the accounts had earned. (Tr. 859.) The record does not show that Mr. Valicenti systematically tested the effect on the total rate of return of including or excluding each individual account of the 22. (Tr. 294-95.) During the process of creating the chart, however, he would have become aware of the effect on the performance calculations of those that were included or eliminated in the interim spreadsheets. <(18)> After calculating the final performance numbers, (see Div. Exs. 42, 43, 44), Mr. Valicenti directed Mr. Marchese to analyze the information to determine the percentage of equities and bonds in the accounts and in the composite. (Tr. 197-98, 498-99; Div. Ex. 51.) Mr. Valicenti then asked Mr. Marchese to create a model to present the information, but he rejected all of Mr. Marchese s suggestions.<(19)> (Tr. 199-202, 317, 513-14; see Div. Exs. 32, 40, 100.) Finally, Mr. Marchese prepared the 1991 Chart after Mr. Valicenti provided him with an example of how he wanted the performance results to be presented. (Tr. 202-03, 513-14, 861.) The 1991 Bar Graph The 1991 Bar Graph depicted the five year rate of return numbers from the chart against a benchmark that was based on a sample of money managers. (Tr. 214-18, 492.) Mr. Valicenti instructed Mr. Marchese to order, from CDA Investment Technologies, Inc. (CDA), data that showed industry performance results for accounts with a ratio of 50% equities to 50% bonds (the CDA Universe). (Tr. 218-20, 492, 497.) Mr. Marchese then prepared the 1991 Bar Graph, plotting VAS performance against the selected industry group. (Tr. 214-15, 491-94.) The five year rate of return numbers from the 1991 Chart were indicated by asterisks placed in reference to three columns reflecting the CDA information.<(20)> <(17)> The result, therefore, was that performance represented in the 1991 Chart and the 1991 Bar Graph was based on nineteen accounts for 1991, 1990, and 1989; seventeen accounts for 1988; and 13 accounts for 1987. (Tr. 882-83; Div. Ex. 39.) <(18)> Division Exhibit 29 contains Mr. Valicenti s handwriting which shows that he was trying to get a feel for what the five year return was on this run. (Tr. 196-97; Div. Ex. 29.) <(19)> Mr. Marchese s rejected models provided more disclosure and included more information than the 1991 Chart and the 1991 Bar Graph. (Tr. 199-202, 204-05, 317; compare Div. Exs. 3, 5A, with Div. Exs. 32, 40, 100.) <(20)> The 14.27% return for VAS TOTAL PORTFOLIO result from the 1991 Chart is indicated on the 1991 Bar Graph with an asterisk in (continued...) ======END OF PAGE 11====== Over the five year period, however, equities comprised 54.4%, not 50%, of VAS total asset mix.<(21)> (Tr. 220-22, 505-08; Div. Exs. 40, 51.) Division Exhibit 51 shows that equities were 54.4%, bonds were 38.6%, and the remainder was cash/other, so that the ratio of equities to bonds, without including cash/other, was approximately 58.5% to 41.5%. Cash could, however, have been attached to bonds in the calculations. (Tr. 346.) It was therefore reasonable for VAS and Mr. Valicenti to assume the composite had 54.4% equities. When a customer orders data from CDA, CDA asks for the desired percentage of equities; it does not ask for a percentage of fixed income. (Tr. 761-64.) Mr. Valicenti knew that CDA would supply information for other than 50/50, but he did not know the increments. (Tr. 510-12.) Mr. Valicenti stated that 50/50 is the norm in the banking industry, where he had spent the first 16 years of his career. (Tr. 500.) He testified that he chose 50/50 because 50/50 connotes balance, because VAS is risk averse, and for five years of VAS performance, 50/50 was appropriate. (Tr. 222, 861-64; Div. Exs. 40, 51.) He took a quick average of the composite s equity percentages for the five years when he asked Mr. Marchese to order 50/50; he did not make a careful calculation. (Tr. 503- 05.) Mr. Valicenti acknowledged at the hearing that the VAS asterisk on the 1991 Bar Graph did not represent the performance of a composite that had a ratio of 50% equities to 50% bonds, but still believed the fifty- fifty ratio was a proper measurement of comparison. (Tr. 497-99, 862-64; see also Tr. 220-22; Div. Exs. 40, 51.) The evidence above shows that Mr. Valicenti chose the 50/50 benchmark in good faith based on the VAS composite s containing 54% equities. However, more painstaking review and inquiry would have led him to consider the proportion of bonds, the allocation of cash and the availability of varying increments, specifically between 50/50 and 60/40, from CDA. The 1991 Bar Graph suggested that, when compared to a universe of similar money managers, VAS was ranked in the top 5% as a manager of accounts with a ratio of 50% equities to 50% bonds and ranked highly as a manager of equities and of fixed income. (Tr. 222-23; Div. Ex. 5A.) From 1987 through 1991, equities in the VAS composite outperformed bonds and, therefore, the more equities in a composite the better the composite would be expected to perform; thus comparing a composite with 54.4% (and a <(20)>(...continued) a column titled BAL. 50%EQ./50%BDS. (Tr. 217, 491-94; Div. Exs. 3, 5A.) The 18.20% return for VAS EQUITY PORTFOLIO result from the 1991 Chart is indicated on the 1991 Bar Graph with an asterisk in a column titled EQUITY. (Tr. 217-18, 493- 94; Div. Exs. 3, 5A.) The 10.17% return for VAS BOND PORTFOLIO result from the 1991 Chart is indicated on the 1991 Bar Graph with an asterisk in a column titled FIXED INCOME. (Tr. 217, 494; Div. Exs. 3, 5A.) <(21)> Division Exhibits 40 and 51 show that the percentage of equity assets in the composite for each year was: 1987, 51%; 1988, 53%; 1989, 61%; 1990, 49%; and 1991, 58%. ======END OF PAGE 12====== fortiori 58.5%) equities against a benchmark of 50% equities would cause the composite to appear somewhat better than it really was. (Tr. 496-97.) Mr. Marchese also prepared a bar graph that compared VAS one, three, and five year performance with a CDA Universe representing a BALANCED PORTFOLIO: 60% EQUITY. (Tr. 224, 864-65; Div. Ex. 30; see also Tr. 234-35; Div. Ex. 48A.) That graph showed that VAS performance for the five year period was ranked highly, but below the fifth percentile threshold of 15.6% return. (Tr. 228-30; Div. Ex. 30.) Mr. Valicenti showed this bar graph to at least one prospective client. (Tr. 510, 864-65, 894; Div. Ex. 30.) Mr. J. Valicenti s Subsequent Performance Calculations During the course of the Commission investigation of VAS, Mr. J. Valicenti prepared a document that showed rates of return for the accounts making up the 1991 composite. (Tr. 731-32; Div. Ex. 90.) The calculations in this document excluded the Maria Kaufman account because Ms. Kaufman died in that year. (Tr. 732, 734; Div. Ex. 90.) In addition, Mr. J. Valicenti used equally-weighted rates of return as opposed to the market- weighted rates of return used to create the 1991 chart.<(22)> (Tr. 732- 34; Div. Ex. 90.) The results on Mr. J. Valicenti s document, therefore, are not strictly comparable with those reported on the 1991 Chart. (Tr. 733-34; compare Div. Ex. 90, with Div. Ex. 3.) Mr. J. Valicenti also calculated 1987 through 1991 rates of return for the nineteen accounts selected for use in the 1991 Chart.<(23)> (Tr. 749-52; Resp. Ex. 21A.) As a result of adding 1987 data for the four accounts omitted from Mr. Marchese s calculations, the five year rate of return decreased from 14.27% to approximately 14.05%. (Tr. 749-50; compare Div. Ex. 3, with Resp. Ex. 21A.) As a result of adding 1987 data for the four accounts omitted from Mr. Marchese s calculations and correcting certain mathematical errors, the five year rate of return decreased from 14.27% to approximately 13.56%. (Tr. 751-52; compare Div. Ex. 3, with Resp. Ex. 21A.) <(22)> A market-weighted rate of return takes into consideration the size of an individual portfolio in relation to the total of all portfolios. A market-weighted rate of return is calculated by taking the percentage of the total of the individual portfolio, divided by the total of all the portfolios in the group, and multiplying that across the rate of return. (Tr. 733.) An equal-weighted rate of return represents the return of the portfolio calculated with the same percentage of weighting . . . [r]egardless of market size. (Tr. 733.) <(23)> Mr. J. Valicenti included in his calculations 1987 data for four accounts, Andrew J. Dozack, Jr., Ida S. Fidelman, Gilbert Meltzer, and Herbert M. Ziff, Inc., that were left out of Mr. Marchese s calculations. Mr. J. Valicenti did not include 1987 and 1988 data for two accounts, the Benedictine Foundation of New York and James E. Collins, because they were opened in mid-1988. (Tr. 749-52; Resp. Ex. 21A.) ======END OF PAGE 13====== Mr. J. Valicenti also calculated 1987 through 1991 rates of return for the original 22 accounts selected for use in the 1991 Chart.<(24)> (Tr. 741-49; Resp. Ex. 47A.) As a result of adding the three accounts omitted from Mr. Marchese s calculations, the five year rate of return decreased from 14.27% to approximately 13.76%. (Tr. 744-45; compare Div. Ex. 3, with Resp. Ex. 47A.) As a result of adding the three accounts omitted from Mr. Marchese s calculations and correcting certain mathematical errors, the five year rate of return decreased from 14.27% to approximately 13.26%. (Tr. 746-49; compare Div. Ex. 3, with Resp. Ex. 47A.) Mr. J. Valicenti ordered from CDA a printout showing the performance of money managers from 1987 through 1991 using the same criteria used in creating the 1991 Bar Graph except that the asset mix selected was 54.6% equities and 45.4% fixed income. (Tr. 761-71; Resp. Ex. 34.) The results show the top fifth percentile of performance at 14.2% and above, the top tenth percentile at 13.3% and above, and the top twenty-fifth percentile at 12.5% and above. (Tr. 768-69; Resp. Ex. 34.) The record does not show that the Commission compliance examiners or the Division calculated rates of return from VAS records of accounts. Distribution VAS distributed the 1991 Chart and the 1991 Bar Graph in the blue folders to prospective clients on a number of occasions during 1992, mostly during or after a meeting with the prospects. Mr. Valicenti testified that in 1992 VAS handed out copies at presentations to the Chemung County Community Foundation, the Soaring Museum, St. Joseph s Hospital, and the Woodbrook adult care facility. (Tr. 866-68.) Additionally, he furnished them to about 8-10 individuals with whom he met.<(25)> (Tr. 868, 905-06, 913-15.) Mr. Marchese testified that he provided the performance material to four individuals whom he identified; there may have been a few other individuals to whom he provided the materials, as well. (Tr. 298-301.) He also testified that blue folders were available at the opening of the Corning office and that he would have handed some out to people who requested information; he assumed that folders contained the 1991 Chart and the 1991 Bar Graph but did not recall whether he discussed the performance materials with anyone there. (Tr. 317-18, 322-23.) Ms. Rogers testified that, at the behest of Mr. Valicenti or a portfolio manager, she mailed <(24)> Mr. J. Valicenti included in his calculations the three accounts left out of the 1991 Chart calculations, Chemung County Historical Endowment, Jean B. Shull, and Josephine Ambrose, but did not include 1987 and 1988 data for two accounts, the Benedictine Foundation of New York and James E. Collins, because they were opened in mid-1988. (Tr. 742-43, 750-51; Resp. Ex. 47A.) <(25)> Additionally Mr. Valicenti acknowledged that he had mailed the materials in 1992 to an individual who never met with him or became a client. (Tr. 907-08, 914; Div. Ex. 115.) ======END OF PAGE 14====== maybe between 20 and 100 blue folders containing performance information. (Tr. 131.) Mr. Reidy s general testimony was in accord with this. (Tr. 437-39.) The Division suggests that the distribution of the 1991 Chart and 1991 Bar Graph resulted in an increase in the number of accounts and assets under management at VAS in 1992. (Div. Reply to Resp. Proposed Findings of Fact at 4.) VAS business continued to grow during 1992. (Div. Ex. 9; Tr. 467-68, 520.) There is, however, no evidence to connect the growth to the limited distribution of the performance materials. There is no evidence to show that the 1991 Chart and 1991 Bar Graph were decisive factors in acquiring clients. There is not a scintilla of evidence to suggest that any client or prospective client relied on the materials, much less suffered any losses, or that VAS or Mr. Valicenti profited from the use of the materials. EXPERT TESTIMONY The Commission s rules do not specify requirements for performance standards for investment advisers; thus testimony from several expert witnesses was received, bearing on standards and practices in the industry, as well as other matters. In its direct case the Division offered Robert L. Hagin, Ph.D., a partner since 1985 in Miller, Anderson, Sherrerd, an investment adviser to large institutional clients with a minimum account size of $25 million. (Tr. 333-35.) He was offered as an expert concerning the normal practices and ordinary standards of care in the presentation of performance material and how prospective clients use investment adviser performance material. (Tr. 336-37.) In response to Dr. Hagin s testimony, Respondents offered Jeffrey P. Lessard, Ph.D., Associate Professor of Finance and Accounting at Rochester Institute of Technology as an expert in investment management industry standards and practices for performance presentation and on what a reasonable investor would consider material. (Resp. Ex. 74 at 2-3; Apr. Tr. 10-96.) Respondents also offered, in response to Dr. Hagin, John W. Piccione, a portfolio manager at Chase Manhattan Bank in Rochester, as an expert concerning investment management industry practices and standards. (Resp. Ex. 75 at 2-5; Apr. Tr. 98-139.) In rebuttal, the Division offered Scott Lummer, Ph.D., currently employed by Ibbotson Associates, a consulting and data products firm, as an expert concerning widely recognized principles in the investment adviser industry in the presentation of performance data using composites. (Tr. 145-52; Div. Ex. 116.) Procedural Issues The Division, by oral motions, challenged the qualifications of Dr. Lessard and Mr. Piccione to testify as experts. I took the Division s motions under advisement at the hearing. After extensive voir dire focusing on Dr. Lessard s curriculum vitae, the Division moved that he not be received as an expert qualified to render an opinion in this matter on the basis that his background and experience do not include first hand knowledge or academic knowledge that bears on the facts in dispute. (Apr. Tr. 13-46; Resp. Ex. 71.) The motion will be ======END OF PAGE 15====== denied, and Dr. Lessard accepted as an expert. His present teaching, research, and administrative activities include performance standards and other practices in the investment management industry. (Tr. 68-76; Resp. Ex. 70 at 3-7.) After voir dire focusing on Mr. Piccione s curriculum vitae, the Division moved that he not be received as an expert qualified to render an opinion in this matter on the basis that his job does not include producing advertising material, which is the subject of this case. (Apr. Tr. 99-115; Resp. Ex. 76.) The motion will be denied, and Mr. Piccione accepted as an expert. His employment is in an occupation similar to that of an investment adviser and his professional activities include performance presentation and other practices in the investment management industry. (Tr. 130-33; Resp. Ex. 75 at 2-5.) Performance Presentation Standards Division expert Hagin testified that VAS performance materials violated a number of well known rules of the road that were later codified in AIMR s Performance Presentation Standards.<(26)> For example, he testified that VAS use of a composite based on some but not all of its accounts was never appropriate. (Tr. 391.) Similarly violative of the rules of the road was VAS use of end of period market values<(27)> in its calculations, which was sloppy work, according to Dr. Hagin. (Tr. 347-50.) On the other hand, VAS used market weighting and geometric linking to calculate the performance of the accounts used in the 1991 Chart, which he considered appropriate. (Tr. 342-43, 613.) Concerning the CDA universe, Dr. Hagin opined that normal convention in the industry was to use 60/40, and observed that the 1991 Bar Graph showing 50/50 disclosed that VAS picked a slower rabbit to run against. (Tr. 407-08.) Dr. Lessard opined that VAS use of the 50/50 benchmark was appropriate. (Resp. Ex. 74 at 28.) Dr. Lessard articulated what is, it must be concluded, the most accurate overview: the only standard in the industry . . . [is] the standard that has grown out of cases . . . before the Securities and Exchange Commission . . . . [It] is fair disclosure, [no] materially misleading information, no deceit, no fraud intended in the presentation of performance information. (Apr. Tr. 73, 233.) Dr. Lessard contrasted the situation of investment advisers with that of accountants, for whom recognized standards do exist and are enforced; indeed, if an investment <(26)> The AIMR standards were published in 1993. (Tr. 607-09; Resp. Ex. 74 at 9.) Although the Division stressed repeatedly that this proceeding is not based on AIMR standards, (Tr. 609, 619; Apr. Tr. 198), Dr. Hagin referred to them frequently. (See, e.g., Tr. 377, 609-10, 626.) <(27)> In contrast to the extensive evidence in the record concerning the selection of accounts used for the composite, there is essentially no evidence on why end of period values were used. There is only a glancing reference at Tr. 158. ======END OF PAGE 16====== adviser wanted to learn how to present the performance in the appropriate manner, he would be frustrated by the lack of universal standards. (Resp. Ex. 74 at 8-22; Apr. Tr. 233-36; see also, Dr. Hagin s testimony at Tr. 617-19, 625.) Reasonable Investor s Understanding of Composite The phrase Composite of discretionary accounts with a balanced objective appears on the 1991 Chart. (Div. Ex. 3.) Respondent expert Lessard testified that composite has no clear meaning to the average investor. (Resp. Ex. 74 at 23.) Dr. Hagin commented that it has an explicit meaning to someone in the investment advisor industry, i.e., no sampling and no selectivity, but that someone not in the industry may not know the importance or meaning of the statement. (Tr. 614-15.) Dr. Lummer also testified that the meaning of composite (i.e., to include all accounts under management) would be completely unambiguous to those in the investment management community but may not be as clear to the average investor. (Apr. Tr. 209-11.) Materiality of Performance Information Respondent Valicenti testified that personal service for individuals seeking someone to handle their financial affairs attracts clients to VAS, while conceding that performance is a leveling factor; he stated that most prospects do not talk about performance or request performance information. (Tr. 843-44.) According to Division expert Hagin, performance, alone, is crucial in attracting clients; handholding is taken for granted. (Tr. 383-84, 636-37.) THE 1992 CHART AND 1992 BAR GRAPH In January 1993, when Mr. Marchese resigned from the firm, Mr. Valicenti told Mr. Reidy to update the VAS performance materials. (Tr. 428, 443, 870-71.) Mr. Reidy began compiling 1992 performance figures for the accounts represented on the 1991 Chart. (Tr. 430.) Mr. Valicenti told Mr. Reidy that the figures were not correct and that some accounts should be excluded. (Tr. 430-31, 871-72.) Mr. Valicenti gave Mr. Reidy a new list of twenty-eight accounts to work with, which included thirteen, but excluded six, of the accounts used in the 1991 Chart. (Tr. 431-32, 443, 450-51, 871-72; see Div. Ex. 39.) In addition, one of the three original accounts left off of the 1991 composite, Chemung County Historical Endowment, was included in the 1992 composite. (See Div. Ex. 39.) In approximately March 1993, Mr. Reidy created the new chart (the 1992 Chart) and bar graph (the 1992 Bar Graph) showing VAS performance for 1988 through 1992. (Tr. 429-34; Div. Exs. 4, 6A.) There is conflicting evidence on whether the new materials were distributed. Weighing the evidence in light of the Division s burden of proof, I find that the Division failed to show by a preponderance of the evidence that the new materials were distributed. Mr. Valicenti testified that to his knowledge VAS never distributed the updated material, stating that he put the project on the back burner because he had noted some problems with it, and VAS had no need to make a ======END OF PAGE 17====== presentation to bid for an institution s business. (Tr. 869, 872-73.) Mr. J. Valicenti testified that he was unaware of the existence of the updated material prior to the Commission examination in December 1993; as a portfolio manager, he would have known of the material if it was completed and in use. (Tr. 724-26.) Nor did VAS employees Diana Rockwell or Nancy Lehman recall the updated material ever being distributed. (Tr. 673-74, 691.) Lawrence Cutler, a Commission compliance examiner who conducted the December 1993 examination at VAS, testified that Mr. Valicenti included the updated materials with documents he provided in response to Mr. Cutler s request for performance materials shown to clients. (Tr. 18-19, 21, 23- 24.) This indicates Mr. Valicenti s full cooperation with the examination. His testimony that the updated materials were not distributed, however, weakens the Division s argument that his providing them to Mr. Cutler implies that they were distributed. Ms. Rogers could only recall charts and bar graphs generally, not the 1992 versions, specifically, as being included in the blue folders. (Tr. 126-30, 146.) David Reidy stated generally that the updated material was sent to prospective clients. (Tr. 433-36.) However, when asked to identify any clients to whom he sent the updated material, he could only recall one, Frank Fisher; he could not recollect when he sent the material to Mr. Fisher, but did recall that Mr. Fisher met with him thereafter and became a client. (Tr. 441-42, 444-45.) Mr. Fisher, however, had become a client during 1992, before the updated material was created.<(28)> (Tr. 869; Div. Ex. 9.) The fact that Mr. Reidy s recollection, which was at best vague, concerning the material provided to Mr. Fisher was inconsistent with more reliable evidence in the record undercuts, as well, his general recollection that the updated material was sent out to individuals whom he could not identify. The testimony of Ms. Rogers and Mr. Reidy was not probative evidence that the 1992 materials were distributed. Mr. Valicenti, as is amply demonstrated throughout the record, was very much in control at VAS, and his testimony that the materials were not distributed, placed in context, is more credible. Additionally, the Division has the burden of proof by a preponderance of the evidence. In sum, the record does not contain a preponderance of evidence to establish that the updated materials, the 1992 Chart and the 1992 Bar Graph, were ever distributed. III. CONCLUSIONS OF LAW <(28)> The Division argues in its Reply Brief at 31-32 that Mr. Fisher was an existing client when he was sent the material, citing approvingly to Mr. Reidy s testimony at Tr. 441 that he sent the material to Mr. Fisher, but overlooking his testimony at Tr. 442 that Mr. Fisher thereafter met with him and became a client. The Division argues unconvincingly that this corroborates its reasoning concerning distribution of the updated materials based on Mr. Cutler s testimony that they were included among documents provided in response to his request for performance materials shown to clients. ======END OF PAGE 18====== The OIP alleges that VAS willfully violated Sections 206(1), 206(2), and 206(4) of the Advisers Act and Rules 206(4)-1(a)(2) and 206(4)-1(a)(5) thereunder, and that Mr. Valicenti willfully aided and abetted the violations. The record supports a conclusion that VAS willfully violated Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) in connection with the 1991 Chart and 1991 Bar Graph, and that Mr. Valicenti was a cause of the violation within the meaning of Section 203(k)(1) of the Advisers Act. The alleged violation of those sections in connection with the 1992 Chart and 1992 Bar Graph was not proven. The alleged violation of Advisers Act Section 206(4) and Rules 206(4)-1(a)(2) and 206(4)-1(a)(5) in connection with the M.R. Sample was not proven. Finally, it is concluded that Mr. Valicenti did not aid and abet VAS proven violations within the meaning of Sections 203(e) and 203(f) of the Advisers Act. SECTIONS 206(1) AND 206(2) OF THE ADVISERS ACT Under Sections 206(1) and 206(2) of the Advisers Act, it is unlawful for an investment adviser to employ any device, scheme, or artifice to defraud, or to engage in any course of business, that operates as a fraud on clients or prospective clients. These sections prohibit investment advisers from making material misrepresentations to clients or prospective clients. A violation under Section 206(1) requires scienter, a knowing or reckless disregard for the truth. SEC v. Steadman, 967 F.2d 636, 641-42 (D.C. Cir. 1992). Scienter is not a required element of a Section 206(2) violation; a finding of negligence is adequate. Id. at 643 & n.5 (citing SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963)). 1992 Chart and 1992 Bar Graph No violations were established concerning the 1992 Chart and 1992 Bar Graph. They were not distributed to any client or prospective client. 1991 Chart and 1991 Bar Graph VAS and Mr. Valicenti distributed the 1991 Chart and 1991 Bar Graph to several prospective clients. No violations were established concerning misrepresentation of VAS performance, i.e., its rate of return. The Division failed to demonstrate what was a fair representation of VAS performance during the relevant period; nor can a fair representation be calculated from any record evidence.<(29)> While many calculations were presented and compared with VAS performance materials, none were proven correct or accurate. The expert testimony made clear that, at the time VAS created and distributed its charts and graphs, there was no universally accepted industry standard for calculating and presenting performance results of investment advisers. <(29)> The Division s suggestion, in its Reply Memorandum at 33, that it does not have to prove what a fair representation should have been is inconsistent with its burden of proving a violation of the statute by a preponderance of the evidence. See Steadman v. SEC, 450 U.S. 91, 102 (1980). ======END OF PAGE 19====== There are conflicting opinions on definitions, methodologies, and conclusions. In addition, the Commission has provided little guidance on the appropriate methods for calculating and presenting performance. There is, however, misrepresentation of matters other than VAS rate of return. a. Misrepresentation The 1991 composite did not include all the accounts for the full five year period although, after reading the 1991 Chart, a client or prospective client could have reasonably assumed that was the case. The record shows that this inaccuracy resulted from negligent acts or omissions of Mr. Valicenti and VAS. Additionally, the manner in which the results on the 1991 Chart were presented on the 1991 Bar Graph portrays to investors certain information that is not precisely accurate. The total portfolio results on the 1991 Chart were, supposedly, calculated from a composite of accounts with a balanced objective over a five year period. The 1991 Bar Graph compared those results to an industry sample of accounts with 50% equities and 50% bonds. A client or prospective client, after reviewing the 1991 Chart and the 1991 Bar Graph, could have reasonably assumed, therefore, that the VAS accounts reflected on the 1991 Chart were accounts with 50% equities and 50% bonds. The VAS performance asterisk on the 1991 Bar Graph, however, did not represent the performance of a composite that had a ratio of 50% equities to 50% bonds. In fact the composite had approximately 54% equities. The performance asterisks, therefore, do not accurately depict the performance of the VAS composite against a comparable industry standard. The record shows that this inaccuracy resulted from negligent acts or omissions of Mr. Valicenti and VAS. b. Materiality While performance is clearly material, misrepresentation of performance was not proven. Whether the misrepresentation that was proven is material is a closer question. The standard of materiality is whether or not a reasonable client or prospective client would have considered the information important in deciding whether or not to invest with VAS and Mr. Valicenti. See SEC v. Steadman, 967 F.2d at 643; see also Basic Inc. v. Levinson, 485 U.S. 224, 240 (1988); TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976). On balance, it is concluded that the fact of VAS misrepresentation would be considered important information to a reasonable client or prospective client. A client would consider accurate accounting of his assets to be important and VAS errors and omissions might suggest slipshod accounting in client accounts. c. Section 206(2) Violations Therefore, VAS violated Section 206(2) because it negligently misrepresented, to clients and prospective clients, material facts about VAS performance in the 1991 Chart and 1991 Bar Graph. d. Willful Violations This proceeding was instituted pursuant to Advisers Act Sections 203(e), 203(f) and 203(k). The Commission must find willful violations to ======END OF PAGE 20====== impose sanctions under Sections 203(e) and 203(f). The question arises whether the violations in this case, which resulted from negligent conduct, are willful within the meaning of Sections 203(e) and 203(f). Footnotes are not the best source of authoritative rulings on a dispositive question. See McElroy Electronics Corp. v. FCC, 990 F.2d 1351 (D.C. Cir. 1993); RCA Global Communications, Inc. v. FCC, 758 F.2d 722 (D.C. Cir. 1985). However, the Commission s rulings on this issue appear in such sources. The Commission has ruled that negligence based violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, comparable to Advisers Act Sections 206(2) and 206(4), were willful. C. James Padgett, 64 SEC Docket 319, 331 n.34 (1997), appeal pending. The Commission stated, without elaboration, that: [respondents] argue that negligent conduct cannot support a finding of willful conduct. Section 15(b) of the Exchange Act, under which this proceeding was brought, requires a finding of a violation of the securities laws to be willful. The courts have long held that willfulness here means no more than intentionally committing the act that constitutes the violation. Id. (citing Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (1976), cert. denied, 434 U.S. 1009 (1978)); see also, First Pittsburgh Securities Corp., 47 S.E.C. 299, 304 n.19 (1980); Donald T. Sheldon, 51 S.E.C. 59, 82 n.94 (1992), aff d on other grounds, 45 F.3d 1515 (11th Cir. 1995). Thus, willfulness derives from the discrete acts and omissions that form the negligent conduct, in this case the preparation of the performance materials that were distributed by the Respondents. Accordingly, it is concluded that the violations in this case are willful within the meaning of Advisers Act Sections 203(e) and 203(f). VAS committed its violations largely through the acts and omissions of Mr. Valicenti, as set forth above. Thus, Mr. Valicenti was a cause of VAS violations within the meaning of Section 203(k)(1) of the Advisers Act because of acts or omissions he knew or should have known would contribute to such violation. e. Aiding and Abetting Whether Mr. Valicenti aided and abetted VAS violations within the meaning of Advisers Act Sections 203(e) and 203(f) is a different question. For aiding and abetting violations of the federal securities laws, three elements must be present: i) a primary or independent securities law violation that has been committed by some other party; ii) awareness or knowledge by the aider and abettor that his or her role was part of an overall activity that was improper; and iii) that the aider and abettor knowingly and substantially assisted the conduct that constitutes the violation. Woods v. Barnett Bank of Fort Lauderdale, 765 F.2d 1004, 1009 (11th Cir. 1985); Investors Research v. SEC, 628 F.2d 168, 178 (D.C. Cir.), cert. denied, 449 U.S. 919 (1980); IIT v. Cornfield, 619 F.2d 909, 922 (2d Cir. 1980); Woodward v. Metro Bank of Dallas, 522 F.2d 84, 94-97 (5th Cir. 1975); SEC v. Coffey, 493 F.2d 1304, 1316 (6th Cir. 1974), cert. denied, 420 U.S. 908 (1975); William R. Carter, 47 S.E.C. 471, 502-03 (1981). ======END OF PAGE 21====== The first and third elements, that a primary violation was committed by VAS and that Mr. Valicenti knowingly and substantially assisted the conduct that constitutes the violation are clearly present. The second element, awareness or knowledge that his role was part of an overall activity that was improper, is, however, absent. The knowledge or awareness requirement can be satisfied by recklessness when the alleged aider and abettor is a fiduciary or active participant. See Ross v. Bolton, 904 F.2d 819, 824 (2d Cir. 1990); Cornfield, 619 F.2d at 923, 925; Rolf v. Blythe, Eastman Dillon & Co., 570 F.2d 38, 47-48 (2d Cir.), cert. denied, 439 U.S. 1039 (1978); Woodward, 522 F.2d at 97. Neither the courts nor the Commission have, however, ruled that negligence is sufficient.<(30)> Accordingly, it is concluded that Mr. Valicenti did not aid and abet VAS violations of Section 206(2).<(31)> f. Section 206(1) Neither VAS nor Mr. Valicenti knowingly or recklessly misrepresented VAS performance in the 1991 Chart and 1991 Bar Graph, and, therefore, there is no violation of Section 206(1). Likewise, without a primary violation, there is no aiding and abetting violation of Section 206(1). Mr. Valicenti did not select performance figures that he knew were false in order to induce his clients or prospective clients to invest with him, or to otherwise defraud any client or prospective client. Nor were VAS or Mr. Valicenti s actions reckless -- an extreme departure from the standards of ordinary care. SEC v. Steadman, 967 F.2d at 641-42 (quoting Sunstrand Corp. v. Chemical Corp., 533 F.2d 1033, 1045 (7th Cir.), cert. denied, 434 U.S. 875 (1977)). SECTION 206(4) OF THE ADVISERS ACT AND RULES 206(4)-1(a)(2) AND 206(4)- 1(a)(5) Section 206(4) prohibits any investment adviser from engaging in any "act, practice or course of business which is fraudulent, deceptive, or manipulative." Rule 206(4)-1(a)(5) makes it illegal for an investment adviser "directly or indirectly, to publish, circulate or distribute any advertisement" which "contains any untrue statement of a material fact, or which is otherwise false or misleading." Scienter is not a required element of a violation of Section 206(4). See SEC v. Steadman, 967 F.2d at 647. Rule 206(4)-1(b) defines "advertisement" to include: <(30)> The Commission has made Delphic statements in footnotes that could be construed as implying that negligence is sufficient. See Raymond L. Dirks, 47 S.E.C. 434, 448 n.51 (1981), aff d, 681 F.2d 824 (1982), rev d on other grounds, 463 U.S. 646 (1983); Kingsley, Jennison, McNulty & Morse, Inc., 51 S.E.C. 904, 911 n.28 (1993). <(31)> The findings of fact herein would support a conclusion that Mr. Valicenti violated Section 206(2). The OIP, however, does not charge him as a primary violator but rather as an aider and abettor of VAS violations. ======END OF PAGE 22====== any notice, circular, letter or other written communication addressed to more than one person, or any notice or other announcement in any publication or by radio or television, which offers (1) any analysis, report, or publication concerning securities, or which is to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (2) any graph, chart, formula or other device to be used in making any determination as to when to buy or sell any security, or which security to buy or sell, or (3) any other investment advisory service with regard to securities. Material that promotes investment advisory services for the purposes of inducing potential clients to subscribe to these services is an advertisement covered by the rule. SEC v. C.R. Richmond & Co., 565 F.2d 1101, 1105 (9th Cir. 1977) (citing Paul K. Peers, Inc., 42 S.E.C. 539, 540- 41 (1965)). The M. R. Sample The M.R. Sample is not an advertisement as defined in Rule 206(4)- 1(b). The M.R. Sample was intended and used as an example of a VAS client s quarterly account statement. This conclusion is inescapable both from the convincing and unrebutted testimony concerning its use and from the face of the document. The document is organized to look like an account statement and provides no real useful information other than to demonstrate the components of a VAS account statement. The Division s argument that the document was used to induce clients and prospective clients to subscribe to VAS services by showing selective past specific recommendations (i.e., mostly securities that had market value higher than cost basis; securities in different industries; and recognizable securities) is strained and unpersuasive compared to the more likely interpretation that it was an example of an account statement. The M.R. Sample does not promote VAS performance or any of VAS investment services. A reasonable client or prospective client would look upon the M.R. Sample only as an example of an account statement. Therefore VAS did not violate Section 206(4) of the Advisers Act and Rules 206(4)-1(a)(2)<(32)> and <(32)> Rule 206(4)-1(a)(2) makes it illegal for an investment adviser "directly or indirectly, to publish, circulate or distribute any advertisement which: refers, directly or indirectly, to past specific recommendations of such investment adviser which were or would have been profitable to any person; provided, however, that this shall not prohibit an advertisement which sets out or offers to furnish a list of all recommendations made by such investment adviser within the immediately preceding period of not less than one year if such advertisement, and such list if it is furnished separately: (A) state the name of each security recommended, the date and nature of each such recommendation (e.g., whether to buy, sell or hold), (continued...) ======END OF PAGE 23====== 206(4)-1(a)(5) by distributing the M.R. Sample to clients and prospective clients. Since there is no primary violation, Mr. Valicenti did not aid and abet violations of these provisions with respect to the M. R. Sample. <(32)>(...continued) the market price at that time, the price at which the recommendation was to be acted upon, and the market price of each such security as of the most recent practicable date, and (B) contain the following cautionary legend on the first page thereof in print or type as large as the largest print or type used in the body of the text thereof: "it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list[.]" ======END OF PAGE 24====== 1992 Chart and 1992 Bar Graph No violations were established concerning the 1992 Chart and 1992 Bar Graph. They were not distributed to any client or prospective client. The 1991 Chart and 1991 Bar Graph The chart and bar graph were used as marketing tools to induce prospective clients to invest through VAS.<(33)> Thus, VAS performance charts and bar graphs were advertisements within the meaning of the rule. The Commission has commented that: the use of model or actual results in an advertisement would be false or misleading under Rule 206(4)-1(a)(5) if it implies, or a reader would infer from it, something about the adviser's competence or about future investment results that would not be true had the advertisement included all material facts. Any adviser using such an advertisement must ensure that the advertisement discloses all material facts concerning the model or actual results so as to avoid these unwarranted implications or inferences. Clover Capital Management, Inc., SEC No-Action Letter, [1986-1987 Transfer Binder] Fed. Sec. L. Rep. (CCH) 78,378, at 77,183 (Oct. 28, 1986) (citations omitted).<(34)> VAS violated Section 206(4) and Rule 206(4)- 1(a)(5), and Mr. Valicenti caused but did not aid and abet VAS violations for the reasons discussed above concerning the violations of Section 206(2). <(33)> It is not improper to judge advertisements of an investment adviser by their impact on the segment of the public at which they were aimed. C.R. Richmond & Co., 565 F.2d at 1106 n.3 (citing Marketline, Inc. v. SEC, 384 F.2d 264 (2d Cir. 1967), cert. denied, 390 U.S. 947 (1968)). <(34)> Whether any communication is, or is not, misleading will depend on all the particular facts, including (i) the form as well as the content of a communication; (ii) the implications or inferences arising out of the communication in its total context; and (iii) the sophistication of the prospective client. Clover Capital Management, Inc., SEC No-Action Letter, [1986-1987 Transfer Binder] Fed. Sec. L. Rep. (CCH) 78,378, at 77,183 n.3 (Oct. 28, 1986) (citations omitted); Covato/Lipsitz, Inc., SEC No-Action Letter, [1981-1982 Transfer Binder] Fed. Sec. L. Rep. (CCH) 77,087, at 77,744 (Sept. 23, 1981); Morill Stanfill & Co., (Edward F. O'Keefe), SEC No-Action Letter, [1978 Transfer Binder] Fed. Sec. L. Rep. (CCH) 81,682, at 80,743-44 (March 14, 1978). ======END OF PAGE 25====== IV. PUBLIC INTEREST Imposition of administrative sanctions requires consideration of: the egregiousness of the defendant's actions, the isolated or recurrent nature of the infraction, the degree of scienter involved, the sincerity of the defendant's assurances against future violations, the defendant's recognition of the wrongful nature of his conduct, and the likelihood that the defendant's occupation will present opportunities for future violations. Steadman v. SEC, 603 F.2d 1126, 1140 (5th Cir. 1979), aff d on other grounds, 450 U.S. 91 (1981). The severity of a sanction depends on the facts of each case and the value of the sanction in preventing a recurrence. Berko v. SEC, 316 F.2d 137, 141 (2d Cir. 1963); Richard C. Spangler, Inc., 46 S.E.C. 238, 254 n.67 (1976); Leo Glassman, 46 S.E.C. 209, 211-12 (1975). VAS and Mr. Valicenti s actions were not egregious. They were negligent in calculating and presenting performance on the documents, but the evidence does not show that Mr. Valicenti intended to fraudulently induce clients and prospective clients to invest with VAS. There is no evidence to suggest that any client or prospective client relied on the materials, much less suffered any losses or that VAS or Mr. Valicenti profited from the use of the performance materials. The infraction was isolated. There have been no previous disciplinary actions against Respondents. Mr. Valicenti and VAS discontinued the use of the M.R. Sample when questions of its appropriateness were raised. Mr. Valicenti and VAS, otherwise, used the charts and bar graphs in very limited situations. The 1991 Chart and 1991 Bar Graph were distributed in one-on-one meetings and mailed out to prospective clients. The 1992 Chart and 1992 Bar Graph were not distributed, and Mr. Valicenti acknowledged problems with them. This demonstrates Respondents recognition of potential problems, and sincere attempts to refrain from any inappropriate behavior. Although VAS and Mr. Valicenti continue to perform investment advisory services, the likelihood for future violations is slim. VAS and Mr. Valicenti have demonstrated, in their actions after the Commission s examination and investigation, that they recognize the potential for problems in performance materials, and that they will continue their business with a heightened awareness. Nevertheless, VAS and Mr. Valicenti failed to take the appropriate care in calculating and presenting VAS performance figures and, therefore, caused misleading materials to be distributed to the public. The Division requests a cease and desist order, civil penalties, and that Respondents be barred from the securities industry. Based on my findings and conclusions, the sanctions the Division seeks are not appropriate in the public interest. In addition, it would be particularly inappropriate to impose such severe sanctions in the absence of clear pronouncements from the Commission regarding the proper methods for calculating and presenting performance data. ======END OF PAGE 26====== Because Mr. Valicenti was a cause of VAS violations within the meaning of Section 203(k) but did not aid and abet them within the meaning of Sections 203(e), 203(f), and 203(i), only the cease and desist remedy is available as to him. REVOCATION Section 203(e)<(35)> of the Advisers Act authorizes the Commission to revoke the registration (or take other administrative action) of an investment adviser if it or any associated person willfully violated any provision of the Advisers Act. The sanctions of revocation and suspension are excessively harsh for the violations in this case. The violations were not egregious, Respondents did not act with scienter, and once they recognized potential problems they discontinued the questionable activities. A sanction of censure is sufficient to recognize the violative conduct and deter such conduct in the future by Respondents and other investment advisers. See Kingsley, Jennison, McNulty & Morse, Inc., 51 S.E.C. 904, 912 (1993). Accordingly, it is in the public interest that Respondent VAS be censured pursuant to Sections 203(e) of the Advisers Act. CIVIL PENALTIES Section 203(i) of the Advisers Act authorizes the Commission to impose civil penalties for willfully violating the Advisers Act if it is in the public interest. To the extent that the record contains evidence relevant to the factors enumerated in Section 203(i)(3), it weighs against imposition of a penalty in addition to a censure of VAS. The factors enumerated in Section 203(i)(3)(A) (fraud), (B) (harm to others), (C) (unjust enrichment), and (D) (previous violations) are absent, and (E) (deterrence) is satisfied by the censure. The legislative intent in authorizing the Commission to impose civil penalties was to give it increased flexibility in its choice of remedies, not that it would impose a civil penalty in every case. (H. Rep. 101-616, at 18 (1990); Sen. Rep. 101-337, at 11 (1990).) CEASE AND DESIST Section 203(k)(1) of the Advisers Act authorizes the Commission to issue cease and desist orders. If the Commission finds that a person is violating, has violated, or is about to violate any provision of the Advisers Act, or rule thereunder, it may enter a cease and desist order against such person, and any other person that is, was, or would be a cause of the violation, due to an act or omission the person knew or should have known would contribute to such violation. Section 203(k)(1). Neither the Commission nor any court of appeals has ruled on whether the Commission must find a likelihood of future violation to issue a cease <(35)> Effective April 9, 1997, Section 203(e)(4) of the Advisers Act was redesignated as Section 203(e)(5), Section 203(e)(5) of the Advisers Act was redesignated as Section 203(e)(6), and Section 203(f) was amended to reflect the changes in numbering. ======END OF PAGE 27====== and desist order. The courts have, however, ruled that a likelihood of future violation is required when considering the cease and desist authority of other administrative agencies. Precious Metals Assocs., Inc. v. CFTC, 620 F.2d 900, 912 (1st Cir. 1980); Borg-Warner Corp. v. FTC 746 F.2d 108, 110-11 (2d Cir. 1984); NLRB v. Savin Business Machines Corp., 649 F.2d 89, 93 (1st Cir. 1981); Citizens State Bank v. FDIC, 751 F.2d 209, 214-15 & n.9 (8th Cir. 1984). Cease and desist authority was added to the sanctions available to the Commission in administrative proceedings by the Remedies Act of 1990. As noted in the House Report on the legislation, other federal agencies, e.g., the Commodity Futures Trading Commission (CFTC), Federal Trade Commission (FTC), National Labor Relations Board (NLRB), and each of the federal bank regulatory agencies were empowered to issue cease and desist orders; a cease and desist order was described as an administrative remedy comparable to an injunction. (H. Rep. 101-616, at 23-24.) A likelihood of future violation is required for an injunction. SEC v. Steadman, 967 F.2d 636, 647-48 (D.C. Cir. 1992); United States v. W.T. Grant Co., 345 U.S. 629, 633 (1953). The Steadman court summarized the law in this area as follows: The ultimate test of whether an injunction should issue is whether the defendant s past conduct indicates . . . that there is a reasonable likelihood of further violation[s] in the future. There must be some cognizable danger of recurrent violation, something more than the mere possibility which serves to keep the case alive. The relevant factors we consider when assessing the likelihood of recurrent violation include whether a defendant s violation was isolated or part of a pattern, whether the violation was flagrant and deliberate or merely technical in nature, and whether the defendant s business will present opportunities to violate the law in the future. Injunctive relief is reserved for willful lawbreakers or those whose operations are so extremely or persistently sloppy as to pose a continuing danger to the investing public. . . . A permanent injunction is a drastic remedy and should not be granted lightly, especially when the conduct has ceased. SEC v. Steadman, 967 F.2d at 647-48 (citations omitted) (quoting SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1168 (D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979); W.T. Grant Co., 345 U.S. at 633; SEC v. First City Fin. Corp., 890 F.2d 1215, 1228 (D.C. Cir. 1989); 1 T. HAZEN, THE LAW OF SECURITIES REGULATION  9.5, at 400 (2d ed. 1990.)). The Respondents violations were isolated, and their use of performance materials was discontinued after the 1991 Chart and 1991 Bar Graph were used in presentations to prospective clients in 1992. The violations were closer to merely technical on a continuum between merely technical and flagrant and deliberate. Finally, the censure is a deterrent against future violations. Therefore, while the Respondents remain in the investment adviser business, so their business will present opportunities to violate the law in the future, the censure reduces the likelihood of future violations. ======END OF PAGE 28====== V. RECORD CERTIFICATION Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R.  201.351(b) (1996), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on July 19, 1996. VI. ORDER I ORDER that the Division s motions to exclude the testimony of Dr. Lessard and Mr. Piccione ARE DENIED and that Dr. Lessard and Mr. Piccione ARE ACCEPTED as experts in standards and practices in the investment advisory industry. Based on the findings and conclusions set forth above: I FURTHER ORDER that, pursuant to Section 203(e) of the Investment Advisers Act of 1940, 15 U.S.C.  80b-3(e), Valicenti Advisory Services, Inc., IS CENSURED for violations of Sections 206(2) and 206(4) of the Advisers Act and Rule 206(4)-1(a)(5) thereunder; and I FURTHER ORDER that this administrative proceeding IS DISMISSED as to Respondent Vincent R. Valicenti. This order shall become effective in accordance with and subject to the provisions of Rule 360 of the Commission's Rules of Practice, 17 C.F.R.  201.360 (1996). Pursuant to that rule, a petition for review of this initial decision may be filed within 21 days after service of the decision. It shall become the final decision of the Commission as to each party who has not filed a petition for review pursuant to Rule 360(d)(1) within 21 days after service of the initial decision upon that party, unless the Commission, pursuant to Rule 360(b)(1), determines on its own initiative to review this initial decision as to any party. If a party timely files a petition for review, or the Commission acts to review as to a party, the initial decision shall not become final as to that party. _______________________ Carol Fox Foelak Administrative Law Judge ======END OF PAGE 29======