## Facts

- Jack C. Smith, Jr. was president and CEO of Torrey Pines Securities, Inc., a registered broker-dealer, and had overall supervisory responsibility under the firm’s written supervisory procedures (WSPs).
- Dennis Lee Keating II, a registered representative and part-owner, operated Torrey Pines’s Corona, California branch office and was given supervisory responsibility for that office.
- From August 2006 to November 2008, Keating conducted an unregistered private securities offering outside the scope of his work for Torrey Pines and, without separately registering as a broker-dealer for that activity, acted as an unregistered broker-dealer.
- Keating formed a private company, raised millions of dollars from investors (including Torrey Pines customers), and promised returns that were not realized.
- The SEC found Smith did not establish reasonable policies and procedures assigning responsibility to supervise Keating, resulting in Keating effectively supervising himself and operating without independent review of communications and activities.
- The SEC found Smith did not revise or implement WSPs or other branch-specific controls to ensure reasonable supervision of the Corona branch.
- The SEC found Smith failed to develop and implement systems to carry out the firm’s procedures on registered representatives’ outside business activities, including systems for supervisors and compliance to monitor such activities.
- Keating was permanently enjoined in a separate action from violating broker-dealer registration and antifraud provisions and was barred from association with a broker-dealer or investment adviser.

## Issues

1. Whether Smith failed reasonably to supervise Keating, with a view to preventing Keating’s violation of Exchange Act § 15(a), within the meaning of Exchange Act §§ 15(b)(4)(E) and 15(b)(6).
2. Whether allowing a registered representative to “self-supervise,” coupled with inadequate monitoring of outside business activities, constitutes unreasonable supervision warranting remedial sanctions.

## Decision

- The SEC instituted administrative proceedings under Exchange Act § 15(b) and Advisers Act § 203(f) and resolved the matter by an administrative order based on Smith’s offer of settlement (without admitting or denying the findings, except as to jurisdiction).
- The SEC found Smith failed reasonably to supervise Keating, with a view to preventing Keating’s violations of Exchange Act § 15(a).
- The SEC imposed a bar from association with any broker or dealer and any investment adviser, with a right to apply for reentry subject to specified conditions.
- The SEC imposed a civil monetary penalty.
- The SEC stated the sanctions were appropriate and in the public interest.

## Legal Principles

- Under Exchange Act §§ 15(b)(4)(E) and 15(b)(6), the SEC may sanction a supervisor who fails reasonably to supervise a person subject to supervision, with a view to preventing violations of the federal securities laws.
- Reasonable supervision requires supervisory procedures that assign clear responsibility for oversight and prevent conflicted “self-supervision” by the supervised person.
- Written supervisory procedures are insufficient without systems reasonably designed and implemented to monitor compliance, including monitoring registered representatives’ outside business activities.
- Supervisory liability may be based on structural and implementation failures that permit or prolong underlying violations, including unregistered broker-dealer activity in connection with securities offerings.

## Conclusion

The SEC concluded that Torrey Pines’s CEO failed reasonably to supervise a branch representative who conducted an unregistered private offering as an unregistered broker-dealer, and it imposed an industry association bar and a civil penalty based on deficient assignment of supervisory responsibility and inadequate systems to monitor outside business activities.


In re Jack C. Smith, Jr., Exchange Act Release No. 63834 (Feb. 3, 2011)