## Facts

- Prudential Securities Incorporated (PSI), a registered broker-dealer, operated a Direct Investment Group (DIG) for roughly ten years that structured, promoted, and sold more than 700 limited-partnership offerings totaling about $8 billion.
- DIG marketing personnel produced promotional materials for brokers and reported to DIG management rather than the firm’s ordinary regional supervisory chain, creating a largely separate sales structure.
- PSI representatives were not required or encouraged to read partnership prospectuses and often made misleading statements about the investments’ nature, yield, liquidity, and risks.
- Limited partnerships were broadly sold to retail customers without adequate suitability review, and many investors suffered substantial losses.
- Separately from DIG, an earlier SEC order (1986) identified supervisory deficiencies and required PSI to retain a consultant to review and recommend improvements to supervisory and compliance procedures.
- Although PSI revised procedures (including “active-account” reviews), branch managers often did not follow them; the firm lacked effective monitoring and did not provide compliance sufficient authority to enforce firm rules.
- PSI’s written procedures for correcting audit-identified violations were incomplete, including failure to specify corrective steps, assign responsibility, require heightened supervision after deficiencies, or require looking back to determine prior customer harm.
- The SEC identified misconduct in at least nine branch offices, including churning, unsuitable accounts, unauthorized trading, and other fraudulent schemes.
- In one example, a broker opened margin accounts for elderly/widowed/retired customers and engaged in speculative and excessive unauthorized trading; despite “active-account” reports and the broker’s prior complaint history, PSI did not apply heightened supervision and the branch manager failed to contact customers as required.

## Issues

1. Whether PSI and its associated persons engaged in fraudulent or deceptive practices in connection with the offer and sale of limited-partnership interests in violation of federal securities laws.
2. Whether PSI failed reasonably to supervise associated persons, including in light of prior regulatory notice of supervisory weaknesses.
3. Whether PSI’s supervisory, compliance, and written procedures were reasonably designed, implemented, and enforced to prevent and detect securities law violations.

## Decision

- The SEC accepted PSI’s offer of settlement and entered findings and sanctions by administrative order.
- The SEC found violations involving misrepresentations and omissions in limited-partnership marketing, unsuitable sales practices, and fraudulent account activity (including churning and unauthorized trading).
- The SEC found PSI failed reasonably to supervise due to inadequate supervisory structure (including DIG’s separation from ordinary oversight) and failures to enforce existing procedures or respond to red flags.
- The SEC imposed significant monetary relief and required undertakings designed to strengthen supervisory policies, compliance procedures, and controls for hiring and monitoring higher-risk representatives.

## Legal Principles

- A broker-dealer must ensure that communications about securities sold to customers are fair and not misleading, and that representatives are sufficiently informed about products they recommend.
- Selling complex, illiquid, and speculative products without adequate suitability review can constitute sales practice abuse and support findings of supervisory failure when tied to firm-wide controls.
- “Reasonable supervision” requires more than written policies; firms must implement, monitor, and enforce procedures and promptly correct deficiencies revealed by audits, exception reports, or other warning signs.
- Supervisory systems must assign clear responsibility for remediation and require heightened supervision when deficiencies or risk indicators arise, including when hiring individuals with significant complaint histories.
- Prior regulatory actions and notice of deficiencies increase the seriousness of later supervisory failures and may justify stronger remedial sanctions and undertakings.

## Conclusion

The SEC concluded that PSI’s limited-partnership sales practices and branch-office misconduct reflected fraudulent activity and a firm-wide failure to reasonably supervise, warranting substantial monetary relief and mandated improvements to supervisory and compliance systems.


In re Prudential Sec. Inc., Exchange Act Release No. 33,082 (SEC Sept. 29, 1993)