INITIAL DECISION RELEASE NO. 125 ADMINISTRATIVE PROCEEDING FILE NO. 3-9181 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Washington, D.C. ______________________________ : In the Matter of : : EDWARD D. JONES & Co., : INITIAL DECISION DONALD E. WALTER, : April 15, 1998 STEVEN T. ROBERTS, : RONALD L. GORGEN, and : CHARLES R. LARIMORE : ______________________________: APPEARANCES: Kevin C. Clegg and Gregory P. von Schaumburg for the Division of Enforcement, Securities and Exchange Commission Leo J. Asaro, Michael F. Coles and Lawrence Sobol for the Respondents BEFORE: Brenda P. Murray, Chief Administrative Law Judge The Securities and Exchange Commission ("Commission") issued an Order Instituting Public Administrative and Cease and Desist Proceedings ( Order ) on November 6, 1996, pursuant to Sections 15(b) and 19(h) of the Securities Exchange Act of 1934 ("Exchange Act") and Sections 9(b) and 9(f) of the Investment Company Act of 1940 ( Investment Company Act ). The Order alleges that from January 1990 until March 1993 (the relevant period ), Edward D. Jones & Co. ( Jones ) willfully violated Rule 22c-1, promulgated pursuant to Section 22 of the Investment Company Act, and that the individual Respondents caused the violation.<(1)> <(1)> The Commission entered settlements with Jones and Donald E. Walter, Jones s Director of Compliance. The Commission censured Jones, and ordered it to cease and desist from committing or causing any present or future violation of Rule 22c-1 promulgated pursuant to Section 22 of the Investment Company Act and to pay a $50,000 civil penalty. Edward D. Jones & Co., Order Making (continued...) ======END OF PAGE 1====== I held a hearing in St. Louis, Missouri, on December 18, 1996, at which the Commission s Division of Enforcement ( Division ) called six witnesses - all the individual Respondents, Jones s General Counsel, and a Division attorney, and introduced twenty-five exhibits. Respondents called no witnesses and introduced seven exhibits.<(2)> The Division filed its Post-Trial Brief on or about February 19, 1997, Respondents filed their Reply on March 11, 1997, and the Division filed its Rebuttal on or about March 31, 1997. Issue Whether Respondents caused Jones to violate Rule 22c-1, promulgated pursuant to Section 22(c) of the Investment Company Act, from January 1, 1990 through March 1993, due to acts or omissions that they knew or should have known would contribute to Jones s violations, and, if so, whether they should be ordered to cease and desist from committing or causing violations and any future violations of the Rule. Findings<(3)> Respondents Roberts, Gorgen, and Larimore Jones, a registered broker-dealer doing business as Edward Jones, reorganized its management structure in 1988 by reassigning twelve to fifteen persons from its Compliance Department ( Compliance ) to a new Department of Field Services ( Field Services ).<(4)> (Tr. 251-52.) Field Services became responsible for the direct supervision of the company s investment representatives. (Tr. 251-52.) In 1990, Jones had between 2000 and 2400 branch offices, most of which were staffed by one investment representative and a branch office <(1)>(...continued) Findings, Imposing Remedial Sanctions and Ordering Respondent Edward D. Jones & Co. to Cease and Desist, 65 SEC Docket 140 (July 28, 1997). Mr. Walter entered a Settlement in which the Commission ordered him to cease and desist from causing any present or future violation of Rule 22c-1 promulgated pursuant to Section 22 of the Investment Company Act. Edward D. Jones & Co., Order Making Findings and Ordering Respondent Donald E. Walter to Cease and Desist, 65 SEC Docket 132 (July 28, 1997). <(2)> I will cite the hearing transcript, and the exhibits admitted into evidence at the hearing as (Tr. __), (Div. Ex.__), (Resp. Ex.__), and (Counsel Ex.__) . <(3)> My findings are based on the record and my observation of the witnesses demeanor. I applied preponderance of the evidence as the applicable standard of proof. See Steadman v. SEC, 450 U.S. 91 (1981). <(4)> Jones is owned by The Jones Financial Companies, a holding company organized as a limited partnership registered in St. Louis, Missouri. (Tr. 28-29, 119.) ======END OF PAGE 2====== administrator. (Tr. 281, 305.) Unlike most broker-dealers, Jones did not use branch office managers to supervise its sales staff. Instead, twenty to thirty-five employees in Field Services located at Jones s St. Louis, Missouri, headquarters supervised the day-to-day activities of the investment representatives by reviewing all transactions and conducting branch office visits. (Tr. 231-32, 251-52, 285.) Field Services conducted its review of all transactions using computer programs which produced exceptions reports noting transactions which did not meet certain profiles and thus warranted review by Field Services. (Tr. 306-07.) For example, if an investor listed safety and income as their investment objectives on the customer account form, the computer program would issue an exceptions report noting any transaction in the account involving a non-income producing security. Similarly, if a customer s account form showed a net worth of $250,000, the computer program would issue an exceptions report if the account engaged in a single transaction with a cost of $100,000. In either situation, an employee in Field Services would contact the investment representative or the customer for an explanation of why the activity in the account did not match the customer s stated objectives or appeared unsuited to the customer s financial status. (Tr. 307.) Respondent Roberts was in charge of Field Services from 1988 through 1992. (Tr. 251, 254.) Mr. Roberts joined Jones in 1976, one year after graduating from the University of Illinois. (Tr. 248.) He became a Jones principal in 1982. He was an investment representative for eight years. In addition to Field Services, he has been appointed to supervisory positions in Sales and Compliance. (Tr. 250, 253-54.) Mr. Roberts has no record of securities violations. (Tr. 12.) Respondent Gorgen graduated from the University of Denver in 1972 with a degree in finance. (Tr. 172-73.) After working at Jones as an investment representative from 1979 to 1989, Mr. Gorgen became a Field Services Director working for Mr. Roberts in 1989, and succeeded Mr. Roberts as the head of Field Services in 1992.<(5)> (Tr. 173-77, 250-51.) Mr. Gorgen has no record of securities violations, and he became a Jones principal in January 1993. (Tr. 177, 233.) After the 1988 reorganization, Compliance s focus became more policy orientated. Compliance had oversight responsibility for Field Services. (Tr. 143, 179.) It informed Field Services of the applicable policies, rules, and regulations, and monitored whether Field Services communicated the information to the individual investment representatives. (Tr. 143- 44.) During the relevant period, the Director of Compliance was Mr. Walter, a lawyer who had headed the department since 1984. (Tr. 134.) Compliance s role was to ensure that Jones s policies and operations were in compliance with the rules and regulations of the securities industry. (Tr. 92, 139.) Unit Investment Trusts ( UITs ) <(5)> Jones had about twelve or fifteen Field Services Directors based at headquarters as the first level of supervision. (Tr. 231-32.) ======END OF PAGE 3====== Jones, whose retail securities business consists mainly of mutual funds, bonds, and stocks, experienced rapid growth during the relevant period. (Tr. 288, 303.) In 1989-90, in response to increased investor interest in UITs,<(6)> Jones established an affiliate, Unison Investments Trusts, Ltd. ( Unison), to sponsor three UITs.<(7)> (Tr. 43, 312-13.) Thereafter, Jones continued to act as a dealer in UITs sponsored by others, but it also began to serve as the underwriter and dealer for three UITs sponsored by Unison. (Tr. 43, 156-57.) Jones maintained a secondary market for the three UITs during the relevant period for any holder seeking to liquidate his or her investment. (Tr. 43, 184, 312-13.) Consistent with Rule 22c-1, the three trust prospectuses stated that Jones would purchase or redeem trust units at net asset value ( NAV ). (Counsel Ex. 1 at Stipulation No. 5; Div. Exs. 15A-B, 16A-B and 17A-B.) Jones s Investment Representative Compensation Manual ( Manual ) explains how the firm s investment representatives are compensated. It covers such topics as expenses, commissions, the bonus system, trips and awards, and the firm s profit sharing plan. (Tr. 287-88.) In January 1990, Jones modified the Manual to authorize investment representatives to charge commissions for the sale of unit trusts in certain circumstances because an increasing number of customers wanted to sell UITs and many of the UITs had not been purchased from Jones. (Tr. 47-48, 189, 294-95; Counsel Ex. 1 at Stipulation 4; Div. Ex. 10.) One of the goals of the new policy was to allow investment representatives to charge a commission for redeeming UITs which the customer had not purchased from Jones. (Tr. 295.) It is not clear whether historically Jones s investment representatives charged commissions for the redemptions of UITs sponsored by others prior to 1990; it is clear that Jones s Manual did not mention the subject. (Compare Tr. 47, 220 and Div. Ex. 10 with Tr. 194, 291-94, 300-01.) The new language added to the Manual was the result of the efforts of the individual Respondents. (Tr. 48-49, 52-53, 112-14, 126-28.) Mr. Roberts directed Mr. Gorgen to review the Special Charges Section of the Manual and to propose changes or additions when Jones issued a new version either annually or biannually. (Tr. 187, 190-91, 216, 218-19.) The Special <(6)> A UIT is a trust that invests in a fixed portfolio of income- producing securities and sells shares to investors. Once structured, it is not actively managed, except for some limited surveillance. The trust is also self-liquidating, distributing principal as debt securities mature or are redeemed, and paying out the proceeds from equities as they are sold in accordance with predetermined timetables. John Downes & Jordan Elliot Goodman, Barron s Finance & Investment Handbook, (4th ed. 1995). Each unit sold represented an undivided interest in the principal and net income of one of the trust. (Tr. 35-36.) <(7)> Unison, headquartered at Jones s offices in St. Louis, Missouri, shared staff with Jones. (Tr. 119.) Like Jones, Unison is a Missouri limited partnership owned indirectly by The Jones Financial Companies. The three trusts are the Insured Tax-Free Income Trust, the Central Equity Trust, and the 21st Century Trust. (Div. Exs. 15, 16, and 17.) ======END OF PAGE 4====== Charges Section dealt with unusual situations which were the subject of sufficient questions that management addressed them in writing in the Manual. (Tr. 236.) It also covered special circumstances where commissions might be allowed in situations where they were not normally permitted. (Tr. 243.) On this change and on others, Mr. Gorgen gathered information from interested persons at Jones, considered inquiries investment representatives forwarded to Field Services, and sent drafts of the proposed language for comments to the individuals involved with the particular subject matter. (Tr. 190, 195, 237-38, 263-64.) Mr. Gorgen always sent copies of proposed changes to Mr. Roberts and to Mr. Walter at Compliance. (Tr. 195, 222, 241, 299; Div. Exs. 1, 2, 4, and 7.) Mr. Roberts and Mr. Jones expected that Mr. Walter s review assured that the proposed language allowing commissions for the liquidation of the unit trusts in certain circumstances did not violate the applicable securities laws, rules, and regulations. (Tr. 89, 222, 241, 269-70, 277.) In this situation, however, Mr. Walter failed to consider the Investment Company Act and the applicability of Section 22 and Rule 22c-1. (Tr. 141, 146-54.) I didn t know Rule 22c-1 would apply. I did not know, -- I didn t have any reason to go beyond those things which I was familiar with, -- the NASD [ National Association of Securities Dealers ] rules and so forth, to determine a commission charge or a policy with regard to a charge that could be made on a liquidation of a security, particularly a unit trust. So, no, I did not consider the rule. (Tr. 153.) Mr. Gorgen, Mr. Roberts, and Mr. Walter forwarded the draft language they agreed upon to Mr. Larimore for final approval. (Tr. 196, 202-03, 237.) In Jones s management structure, Field Services was one of several units that was part of the Branch Administration Division headed by Mr. Larimore. (Tr. 143, 287.) Respondent Larimore graduated from the University of Kansas in 1962 with a degree in business administration and joined Jones as an investment representative in 1964. (Tr. 280.) Mr. Larimore was a member of the four to six person management committee that set the firm s policies. Because he always checked changes to the Manual with persons in Field Services and Compliance who knew the applicable securities laws, rules, and regulations, Mr. Larimore did not perform any independent research, and he assumed that the proposed commission policy was proper in all respects. (Tr. 299.) Mr. Larimore wrote the Manual on his word processor and was the final authority on what it contained. (Tr. 287, 298.) From January 1, 1990 until March 1993, the Manual contained guidelines which provided that: no commission should be charged when Trust units were purchased by Jones & Co. except for certain circumstances. With slight variation, during the relevant period, those circumstances were when the Trust units were not purchased from Jones & Co. and when the liquidated funds were not to be reinvested with Jones & Co. ======END OF PAGE 5====== If those two conditions existed, then, initially, commissions could be assessed at $45 per order or 1% of the proceeds. Later, if the circumstances existed, the permissible commissions became the greater of $50 per order or 1% of the gross proceeds (excluding accrued interest). Other circumstances, such as estates or other situations requiring special handling, could also have warranted the charging of a commission. (Counsel Ex. 1 at Stipulation 4.) <(8)> Respondents did not consult with Jones s General Counsel about whether the charges allowed by the new language in the Manual were legal. (Counsel Ex. 1 at Stipulation 8.) Jones s General Counsel first learned of these matters when the Division contacted the firm following the Commission s on- site audit of Unison in late January 1993. (Tr. 89; Div. Ex. 10.) The new commission policy was in effect from January 1, 1990 until <(8)> The actual language in Jones s Compensation Manual, Section III, Commission Payout, Special Commission Charges was as follows: January - June 1990: In special circumstances, fees may be charged for liquidation of mutual funds and unit trusts. The allowable fees are $45 per order or 1% of the proceeds, up to a maximum of $250. If you have questions, contact Field Services. (Resp. Ex. 21A.) July 1990 - June 1991: Liquidation of Mutual Funds and Unit Trusts As a general rule, no commissions are to be charged for the sale of these investments if they have been purchased through EDJ. However, if sale proceeds will not be reinvested, the maximum charge is the greater of $45 per order or 1% of the proceeds. (Resp. Exs. 21B and 21C.) July - December 1991: Mutual Funds & Unit Trusts, Special Circumstances: If sale proceeds will not be reinvested or the investment was not purchased through EDJ, a maximum commission charge is the greater of $45 per order or 1% of proceeds. (Resp. Ex. 21D.) 1992: Mutual Fund and Unit Investment Trust Liquidations No commission may be charged for SELL orders if these investments were purchased through EDJ. If the investment was not purchased through EDJ and sale proceeds will not be reinvested, a commission may be charged. The maximum commission allowed is the greater of $50 or 1% of principal. (Resp. Ex. 21E.) 1993: Same language as in 1992 with the addition of , excluding accrued interest . at the end the third sentence. (Resp. Ex. 21F.) ======END OF PAGE 6====== March 1993.<(9)> (Tr. 39-43.) During this time period, Jones charged commissions in connection with the purchase of UITs on hundreds of occasions. (Counsel Ex. 1 at Stipulation 7.) Contrary to the representation in the prospectuses, these customers received less than the NAV on the sale of their UITs. (Counsel Ex. 1 at Stipulation 5.) Jones did not disclose the charges to customers. (Counsel s Ex. 1 at Stipulation 5; Div. Ex. 13.) Because collecting data from each of the transactions during the relevant period would require excessive manual calculations, the parties agreed that a review by an independent auditor of a random sample of transactions would be considered as representative of what occurred. (Div. Ex. 11.) The review of a seventy-six day random sample disclosed that Jones imposed a charge in fifty-eight trades and that the fee charged was slightly over one half of 1% of the proceeds, excluding accrued interest. (Div. Ex. 11.) It appears from an extrapolation of the sample and Jones s internal review, that Jones charged commissions in 51% to 53% of UIT redemptions during the relevant period, and that these commissions averaged 0.6% of the principal amount of the respective trusts. (Tr. 39-43; Div. Ex. 20A.) Total commissions charged on these transactions was $120,000. (Counsel Ex. 1 at Stipulation 4.) During the relevant period, Jones did $1.8 billion worth of trades so that the $120,00 in commissions represented .007 of 1% of its revenue. (Tr. 311.) Respondents did not consider the creation of the policy significant because UITs were a very small part of Jones s business, and redemptions of UITs by customers, which occurred infrequently, was an even smaller part. (Tr. 228, 273, 301-02.) When contacted by Commission staff in March 1993 on this subject, Jones acknowledged its policy violated Rule 22c-1 and immediately stopped allowing investment representatives to charge commissions on sales of investment trusts. (Tr. 106-07; Div. Ex. 10.) In the fall of 1996, Jones refunded $198,111.26, inclusive of interest, in repayment to the affected customers. (Tr. 91-92; Edward D. Jones & Co., Order Making Findings, Imposing Remedial Sanctions and Ordering Respondent Edward D. Jones & Co. to Cease and Desist, 65 SEC Docket 140 (July 28, 1997)). Legal Conclusions<(10)> Rule 22c-1, promulgated pursuant to Section 22 of the Investment Company Act, provides in pertinent part: No registered investment company issuing any redeemable security, no person designated in such issuer s prospectus as authorized to consummate transactions in any such security, and no principal <(9)> Letter dated March 8, 1993, from Jones s General Counsel states Jones discontinued effective immediately the practice of imposing any charges whatsoever regarding redemptions/sales of unit trusts by clients. (Div. Ex. 10.) <(10)> I have considered all proposed findings and conclusions, and accept those that are consistent with this decision. ======END OF PAGE 7====== underwriter of, or dealer in, any such security shall sell, redeem, or repurchase any such security except at a price based on the current net asset value of such security. Respondents caused Jones to violate Rule 22c-1 by creating and implementing, from January 1, 1990 until March 1993, the policy by which Jones s investment representatives charged commissions on certain redemptions of three investment trust offerings where Jones was the underwriter and a dealer. Cease and Desist The Division seeks a cease and desist order against Respondents Gorgen, Roberts, and Larimore pursuant to Section 9(f)(1) of the Investment Company Act which provides that: If the Commission finds, after notice and opportunity for hearing, that any person is violating, has violated, or is about to violate any provision of this title, or any rule or regulation thereunder, the Commission may publish its findings and enter an order requiring 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, to cease and desist from committing or causing such violation and any future violation of the same provision rule, or regulation. 15 U.S.C. 80a-9(f)(1) (emphasis added). Having determined that Respondents caused Jones s violations, the question is whether Respondents knew or should have known that their actions would contribute to the violations. The Division does not allege that Respondents acted with knowledge. Moreover, the evidence is persuasive that Respondents were unaware that the actions described above would cause Jones to violate Rule 22c-1. Accordingly, I find that Respondents did not know that they contributed to the violations. Because the meaning of the phrase should have known is not clear and unambiguous on its face, we must explore its meaning. To do this it is necessary to consider what standard of care should be used in assessing whether Respondents should have known that their actions would contribute to Jones s violation. Commission decisions do not provide strong guidance since it appears that the Commission has yet to rule on this issue in the context of a cease and desist order.<(11)> <(11)> See Bruce A. Hiler & Neil K. Gilman, The SEC s Use of Its Cease and Desist Authority: a Survey, 23 Sec. Reg. L. J. 235, 266 (1995); Ralph C. Ferrara, Hardball! The SEC s New Arsenal of Enforcement Weapons, 47 Bus. Law. 33, 58-60 (1991). But cf. Impact of U.S. Supreme Court Decision: Central Bank of Denver v. First Interstate Bank of Denver: Testimony Before U.S. Senate Subcomm. on Securities of the Senate Comm. on Banking, Housing (continued...) ======END OF PAGE 8====== The Division characterizes the phrase should have known as classic negligence language and cites several decisions to support the use of a negligence standard. Knippen v. Ford Motor Co., 546 F.2d 993, 1003 (D.C. Cir. 1976); see also Heit v. Weitzen, 402 F.2d 909, 914 (2d Cir. 1968), cert denied, 395 U.S. 903 (1969); Levine v. CMP Publications, Inc., 738 F.2d 660, 674 (5th Cir. 1984). According to the Division, administrative law courts have repeatedly taken note of these and other similar cases and held that the standard for causing violations under Section 9(f) of the Investment Company Act is negligence. Carole L. Haynes, 60 SEC Docket 371, 402 (Aug. 31, 1995); Richard M. Kulak, 60 SEC Docket 1010, 1054 (September 26, 1995); Adrian C. Havill, 60 SEC Docket 2294, 2341 (August 31, 1995). (See Division s Post-Trial Brief at 19-21.) Citing Stern v. American Bankshares Corporation, 429 F. Supp. 818, 826 (E.D. Wis. 1977), Respondents challenge the Division s use of the negligence standard and argue that the knew or should know standard requires proof of more than mere negligence (Respondents Pre-hearing Brief at 7 and Respondents Reply to Division s Post-Trial Brief at 4 n.3; Tr. 13-14.) Respondents maintain that there is not one scintilla of evidence that Respondents acted intentionally, recklessly, or negligently. (Respondent s Post-hearing Brief at 12.) The sparse legislative history of the Remedies Act, the source of the Commission s cease and desist authority, does not address the standard for imposing liability under the cause language of the cease and desist provisions.<(12)> However, the consensus among legal commentators is that the concept of causing a violation is borrowed from Section 15(c)(4) of the Exchange Act which allows the Commission to proceed administratively against individuals, such as officers and directors, who drafted or signed inaccurate filings and who were in a position to make the necessary corrective filings.<(13)> As relevant here, Section 15(c)(4) provides that the Commission may issue an order requiring any person who was a cause of the failure to comply due to an act or omission the person knew or should have known would contribute to the failure to comply, to comply. 15 U.S.C.  78o(c)(4). In a highly publicized case involving an alleged violation of Section <(11)>(...continued) and Urban Affairs, 103 Cong., 2d Sess. (May 12, 1994) (statement of Arthur Levitt, SEC Chairman, noting that in numerous cases in other areas of law knew or should have known is the language of negligence ). <(12)> See House Comm. on Energy & Commerce, The Securities Law Enforcement Remedies Act of 1990, H.R. Rep. No. 616, 101st Cong., 2d Sess. 13-24 (1990), Senate Comm. on Banking, Housing & Urban Affairs, The Securities Law Enforcement Remedies Act of 1990, S. Rep. 337, 101st Cong., 2d Sess. 1-18 (1990). <(13)> See Ferrara, supra note 11, at 59; Hiler & Gilman, supra note 11, at 267; Steven Hansen, The Securities and Exchange Commission s Use of Cease and Desist Authority: a Preliminary Appraisal, 20 Sec. Reg. L. J. 340, 345-46 (1993). ======END OF PAGE 9====== 15(c)(4), Chief Judge Blair found that negligence was sufficient to establish liability for causing a failure to comply. George C. Kern, Jr., [1988-1989 Transfer Binder] Fed. Sec. L. Rep. (CCH) 84,342, at 89,594 (Nov. 14, 1987), aff d in part, vacated in part, 50 S.E.C. 596 (1991). Chief Judge Blair, nonetheless, terminated the proceedings because Kern was no longer in a position to make corrective filings or to control future compliance. Id. The Commission affirmed Chief Judge Blair s determination to terminate the proceedings, but never reached the issue of whether Kern caused a violation. George C. Kern, 50 S.E.C. at 602. The federal courts do not provide a definitive answer to the question since a number of prominent decisions hold that the phrase knew or should have known supports a negligence standard, while other decisions find that the phrase connotes a scienter standard. Compare e.g., SEC v. Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992); Knippen 542 F.2d at 1003 with e.g., Rudolph v. Arthur Anderson & Co., 800 F.2d 1040, 1047 (11th Cir. 1986); SEC v. Musella, 678 F. Supp. 1060, 1062 (S.D.N.Y. 1988). I find it appropriate to use a negligence standard to determine whether Respondents should have known that their actions would contribute to Jones s violation of Rule 22c-1 for purposes of Section 9(f) of the Investment Company Act. This is the meaning most decision makers have accorded these terms, it is line with the weight of scholarly opinion that exists on the subject, Respondents have failed to advance persuasive authority for application of a higher standard, and Chief Judge Blair used negligence in defining the phrase knew or should have know in Section 15(c)(4) of the Exchange Act in Kern. I find that Respondents were not negligent in causing Jones to implement the commission charge that violated Rule 22c-1. In making this determination, I employ the following definition of negligence: The omission to do something which a reasonable man, guided by those ordinary considerations which ordinarily regulate human affairs, would do, or the doing of something which a reasonable and prudent man would not do. . . . The term refers only to that legal delinquency which results whenever a man fails to exhibit the care which he ought to exhibit, whether it be slight, ordinary, or great. It is characterized chiefly by inadvertence, thoughtlessness, inattention, and the like, while wantonness or recklessness is characterized by willfulness. The law of negligence is founded on reasonable conduct or reasonable care under all circumstances of a particular case. Black s Law Dictionary 931 (5th ed. 1979). I find it was reasonable and did not demonstrate a lack of care for Respondents to rely on Mr. Walter, Jones s Director of Compliance. Mr. Walter was an attorney, well respected in the securities industry on compliance issues, and responsible for making sure that the policy ======END OF PAGE 10====== suggested by Respondents was legal and appropriate.<(14)> In making this judgment, I consider the following facts significant. Respondents Gorgen, Roberts, and Larimore were not attorneys and their specific responsibilities at Jones did not include assuring that the firm operations were legal.<(15)> Mr. Gorgen and Mr. Roberts were part of a department that had been carved out of Compliance. Compliance, however, retained oversight responsibility for assuring that the conduct of Field Services was in accord with the securities laws and regulations. Mr. Gorgen and Mr. Roberts followed a protocol that solicited input from a number of people seeking suggestions on any new language they proposed for the Manual and always sought the views of the Director of Compliance.<(16)> Mr. Gorgen and Mr. Roberts followed the established chain of command within Jones for establishing policies involving registered representatives compensation. UITs were a small part of Jones s business and Respondents were not familiar with the provisions of the Investment Company Act generally, and Rule 22c-1 in particular. Rule 22c-1 promulgated pursuant to Section 22 of the Investment Company Act is not a fundamental, high-profile, prohibition known generally by people in the securities industry. (Tr. 38.) Neither the NASD nor the New York Stock Exchange questioned the charges as part of their annual audits of Jones. (Tr. 38, 156.) Mr. Larimore occupied a much higher position at Jones than Mr. Gorgen, Mr. Roberts and Mr. Walter. For similar reasons, however, it was reasonable for him to have relied on Mr. Walter for ensuring what Respondents proposed as an addition to the Manual was legal and appropriate. Mr. Larimore was not an attorney, he was not involved in initiating or drafting the proposal, and he received it after it had been approved by a number of staff, including most prominently Mr. Walter. I do not accept the Division s position that seven factors created red flags that should have caused Respondents to investigate further the legality of the new compensation policy such as checking the language of <(14)> Mr. Walter has admitted in effect that he blew it when he reviewed the compensation policy and did not recognize the applicability of Rule 22c-1 and the prospectuses guarantees of redemptions at NAV. (Tr. 167-68.) <(15)> Mr. Walter earned a BA from Southeast Missouri State, an MBA from Southern Illinois University, and JD from St. Louis University. (Tr. 137-38.) He joined Jones in 1980 and has been Director of Compliance since 1984. (Tr. 133-34.) Mr. Walter holds various security licenses. Mr. Walter s tenure as Vice- chair of the NASD District Business Conduct Committee from 1993- 96, and his ten years of work as an arbitrator for the NASD indicate that he was respected by his industry peers. (Tr. 138- 39.) <(16)> There is absolutely no evidence that Mr. Gorgen and Mr. Roberts tried to conceal or obfuscate relevant information. Mr. Walter was fully informed. The record contains copies of several e-mails asking Walter s opinion on proposed language as well as replies in which he gave his approval. (Div. Exs. 1, 2, 4; Tr. 144-53.) ======END OF PAGE 11====== the Prospectus of the three trust offerings and/or seeking clearance from Jones s Legal Department. (See Division s Post-Trial Brief at 4-6.) (1) The Division cites the acknowledgment by Jones s General Counsel that pricing is a core issue in any securities transaction as red flag number one. (Tr. 37-38.) I consider Counsel s remark innocuous. But in any event, the undisputed evidence is that the charges at issue here averaged 0.6% of the principal amount of the unit s value, that the charges occurred in 51% to 53% of redemptions, and revenue earned by Jones as a result of the charges was $120,000 out of total revenues for the period of $1.8 billion. (Tr. 40-43, 311; Resp. Ex. 3 and 13.) Based on this evidence, I disagree that pricing should have given Respondents notice that caution was required. (2) The Division claims that Respondents decision to include language in the Manual allowing commissions in certain situations was a policy change and created a red flag that should have caused Respondents to exercise a higher degree of care.<(17)> I disagree that Respondents knew they were implementing a new policy in a significant area. The evidence as to whether Jones s investment representatives charged a commission for the sale of UITs before January 1990 is confusing. Mr. Gorgen s testimony is ambiguous and Mr. Roberts was not sure. (Tr. 204-05, 220, 267.) Asked whether Jones authorized investment representatives to charge commissions in connection with the repurchase of UITs prior to 1990, Mr. Larimore stated: I can t honestly say whether they did or not. I don t remember that we had anything that prohibited it. I don t, -- I know we didn t have anything that encouraged it. And, frankly, until about that period of time, unit trusts were such an infinitesimal part of our overall business, it wasn t an issue. We never saw them. (Tr. 292.) (3) and (4) The Division alleges that Jones s new role as a UIT underwriter and dealer, combined with UITs increasing popularity with customers, should have raised red flags at Jones to investigate further. I agree that Jones s new role should have caused someone at Jones to make sure that it observed the applicable legalities that went with its new status and activities. The responsible person at Jones, however, was Mr. Walter, not the Respondents. The undisputed evidence is that it was not Respondents role to assure compliance. The Division responded to Respondents late attempt to rely on Mr. Walter s attorney status by highlighting Mr. Walter s acknowledgment that in 1990 when he approved the new charge he was not acting as an attorney, but as a compliance officer. (Tr. 161-64.) The Division s point is well taken. I do not consider Mr. Walter s attorney status determinative, <(17)> This ruling also addresses the Division s sixth red flag which is that Respondents should have determined why Jones had not previously allowed commissions for these transactions. ======END OF PAGE 12====== however. Rather, it was reasonable for Respondents to rely on Mr. Walter because as the Director of Compliance, Mr. Walter was responsible for assuring that Jones complied with the laws, rules, and regulations that govern participants in the securities industry. (Tr. 92, 139.) (5) The Division cites Jones s failure to monitor the application of its new commission as a red flag. The Division does not explain its claim and I am unsure I grasp its significance. The evidence, however, is that Mr. Larimore s position is reasonable: it s hard for me to imagine that this product area would have ever gotten elevated to the point we would have set up special systems to catch it because first, we didn t know it was a problem area and when we did learn it was one, we stopped it. And second of all, it represented such a small fraction of the daily activity we have or the revenue as to be totally insignificant. (Tr. 311-12.) (7) The Division s seventh red flag is that Field Services only acted on unique, atypical, anomalous, or exceptional compensation matters. As the person who established employee compensation, Mr. Larimore used Field Service as an information source because it received inquiries from individual investment representatives about compensation where the general compensation policy appeared inappropriate or unclear. For example, Mr. Larimore modified the firm s general compensation policy to reflect the extra work required of investment representatives when they handled estates. (Tr. 303-04.) I find the Division s position unpersuasive. The evidence is that Respondents general procedure was to act carefully, there was nothing to distinguish it from the other matters Field Services handled, and there is nothing to indicate that the Respondents did not act carefully in these matters. The record evidence, my observation of the witnesses who I found to be candid and credible in their testimony and Jones s reaction to the Commission s staff findings are consistent with my conclusion that what occurred here was not the result of negligence by these individuals, and that these Respondents and the firm with which they are associated are conscientious participants in the securities industry. For all the reasons stated, I find that the Division has not shown that these Respondents caused Jones to violate Rule 22c-1 promulgated pursuant to Section 22(c) of the Investment Company Act due to an act or omission they knew or should have known would contribute to such violation. Record Certification Pursuant to Rule 351(b) of the Commission's Rules of Practice, 17 C.F.R.  201.351(b) (1997), I certify that the record includes the items set forth in the record index issued by the Secretary of the Commission on ======END OF PAGE 13====== June 20, 1997. ORDER Based on the findings and conclusions set forth above, I DENY the Division s request that a cease and desist order be issued against Steven T. Roberts, Ronald L. Gorgen, and Charles R. Larimore pursuant to Section 9(f) of the Investment Company Act. 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 (1997). Pursuant to that rule, a petition for review of this initial decision may be filed within twenty-one 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 twenty-one days after service of the initial decision upon such 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. ______________________________ Brenda P. Murray Chief Administrative Law Judge ======END OF PAGE 14======