## Facts

- Reynolds & Co. was a registered broker-dealer and a member of the NASD and the New York Stock Exchange, operating through several branch offices.
- In Reynolds’s Carmel office, salesman Patrick Coleman had trading discretion over four customer accounts but failed to obtain required written authorizations from two customers.
- Coleman executed transactions without the required partner initialing/approval and excessively traded the four accounts, generating commissions while the accounts sustained losses.
- William Rice, the West Coast managing partner and San Francisco branch manager, knew Coleman was trading without required approvals; Rice told the office to obtain written authorizations but did not require monitoring of Coleman’s accounts and did not initial or approve the transactions.
- Rice and Carmel co-manager Wilfred Aldous agreed that trading volume was not important if the accounts were making money, even though the accounts in fact lost money.
- In Reynolds’s Chicago office, an employee made unauthorized trades for customers and forged customers’ names for more than a year.
- Chicago branch manager Robert Whittaker, employee Elmer Stefany, and partner John White knew of circumstances that should have led to discovery of the unauthorized trading and forgery, but the misconduct continued.
- In Reynolds’s Berkeley office, assistant manager Wesley Roland and other employees made false and misleading statements to induce customers to buy speculative stocks, despite Reynolds’s stated policy against encouraging speculative investments.
- Roland did not tell customers he was selling his own shares in the same securities he was recommending, and he delayed executing customer buy orders until employee activity moved market prices upward.
- Berkeley manager Wilson Dodd knew about the speculative-stock sales efforts, did not review the sales literature being used, and allowed Roland to negotiate trades directly with other dealers by telephone without adequate oversight.
- In Reynolds’s Minneapolis office, weak controls allowed a salesman to receive checks drawn on customer accounts, creating an opportunity for customer-fund misappropriation.
- The SEC instituted an administrative proceeding to determine whether to revoke Reynolds’s broker-dealer registration, suspend or expel Reynolds from NASD and exchange membership, and find that Rice, White, Whittaker, Dodd, Aldous, Roland, Stefany, and Coleman were causes of any such order.

## Issues

1. Whether Reynolds & Co. and associated persons committed securities-law and SRO-rule violations through excessive and unauthorized trading, forged documentation, misleading sales statements, undisclosed conflicts, and improper handling of customer funds.
2. Whether Reynolds & Co. and its managers failed reasonably to supervise branch-office activities such that revocation/suspension/expulsion and “cause” findings against the named individuals were warranted.

## Decision

- The SEC found misconduct across multiple Reynolds branch offices, including excessive trading in discretionary accounts without required authorizations and approvals, unauthorized trading coupled with customer-signature forgery, and misleading sales practices in speculative securities.
- The SEC concluded Reynolds failed to provide supervision and controls reasonably capable of preventing and detecting the violations, including failures to act on warning signs and failures to enforce required pre-approval and review procedures.
- The SEC imposed significant remedial sanctions against Reynolds and made “cause” findings against responsible individuals whose actions or inaction allowed the violations to occur or continue.

## Legal Principles

- Excessive trading in a customer account, particularly where the broker exercises control or discretion and the trading serves the broker’s commission interest rather than the customer’s objectives, may constitute a fraudulent or deceptive practice under the federal securities laws and applicable SRO rules.
- Discretionary authority over customer accounts must be properly documented through required customer authorizations and must be subject to the firm’s required supervisory approvals; ignoring these requirements supports findings of misconduct and deficient supervision.
- A broker-dealer must maintain and enforce supervisory procedures reasonably designed to detect and stop wrongdoing in branch offices, including review of trading activity, commission patterns, and required documentation.
- Supervisors and managers can be liable for failure reasonably to supervise when they know of improper practices or when available information and circumstances would lead a reasonable supervisor to investigate and take corrective steps.
- False or misleading statements used to induce customer purchases, as well as undisclosed conflicts such as recommending securities while selling the supervisor’s own position, violate standards governing fair dealing and antifraud compliance.
- Allowing sales staff to use unreviewed sales literature, to conduct trading away from normal oversight channels, or to accept customer checks in a manner that creates misappropriation risk reflects inadequate controls and can support firm and supervisor liability.

## Conclusion

*In the Matter of Reynolds & Co.* holds that a broker-dealer and its managers may face severe SEC discipline when branch offices engage in churning, unauthorized trading, forged paperwork, misleading sales efforts, and conflict-tainted recommendations, and when firm leadership fails to enforce basic approval, review, and control measures that would have identified and stopped the misconduct.


In the Matter of Reynolds & Co., 39 S.E.C. 902 (1960)