Reference no: EM133199950

Jim Jansen is a dually licensed Financial Adviser with Freedom Investments.  He is currently the largest producer in the Firm's New York City office.  Freedom Investments is known for its large array of mutual fund and Unit Trust offerings.  When Johnson joined Freedom Investments in July 2020, his customers held 1.3 million shares of NeedToKnow Inc., an up-and-coming technology company.  Jansen's customers held 24 percent of the outstanding shares and 35 percent of the float, much of it on margin.   During the recruiting process, Jansen told Freedom Investments about his interest in the company.  The Freedom Branch Manager and Regional Director were unfamiliar with NeedToKnow but decided to hire Jansen and transfer his customer accounts to Freedom Investments without further inquiry.

Shortly after Jansen joined Freedom Investments, he began recommending NeedToKnow stock to his clients who accumulated an additional 30,000 shares over 30 days.  Due to his client's significant holdings, Jansen was advised that he could not solicit purchases of additional shares of NeedToKnow stock.   Jansen's clients continued to buy and sell NeedToKnow, increasing Jansen's client's holdings in the company and generating significant revenue on the frequent trading for Jansen and Freedom.  All of the transactions were marked unsolicited (meaning that the purchase was the client's idea, not the registered representative's idea).  Most of the trades were done on a discretionary basis, however none of Jansen's clients had completed a power of attorney form when they opened their accounts with Freedom Investments.  Many of the clients were elderly with limited assets.

Jansen's trading activity appeared regularly on compliance alerts, which flagged for certain activity in customer accounts.   These alerts were reviewed by Compliance and the Branch Manager.   At Compliance's direction, Ralph Ryder, the Branch Manager, asked Jansen for an explanation regarding the trading in the account, including why there were so many trades marked unsolicited.  He also inquired as to the high costs of the transaction-based accounts.  Jansen explained that his clients all follow the stock and had called him to place the transactions.  He also explained that even though he is dually licensed as an RIA, his clients had always had transactional accounts so there was no reason to consider the different account type options when the clients moved their accounts to Freedom Investments.  The Manager provided this explanation to Compliance each time an alert would generate, which was at least once a week for several months.

After Jansen had been employed with Freedom Investments for nine months, the Firm received a SEC inquiry into trading in NeedToKnow.  In response to the SEC inquiry, Janet Joplin (Freedom's General Counsel) through Bill Dylan (Freedom's Chief Compliance Officer) asked Jansen to explain the basis for the recommendations to purchase NeedToKnow, including whether the transactions were actually solicited or unsolicited.   Jansen sent a memo to his Branch Manager, Joplin and Dylan advising them that the clients were aware of the costs, actively followed NeedToKnow stock and all of the transactions were unsolicited.   Dylan provided the information to the SEC in response to its inquiry.   Joplin then directed Dylan to ensure that Jansen's trades in NeedToKnow received pre-approval going forward.  Dylan contacted the margin department to seek their assistance in monitoring the transactions.  The Head of the Margin Department told Dylan that Jansen's client's trading in NeedToKnow stock often violated margin requirements.  Dylan contacted Ryder and advised him of the restrictions and asked for his help in monitoring the transactions for pre-approval.   Although the trading decreased in volume, Jansen continued to enter unsolicited orders to purchase NeedToKnow on margin without pre-approval and neither Ryder or Dylan took any action. 

Freedom Investment's did not have a written policy relating to concentration levels in individual securities but based upon a prior SEC regulatory action against it many years ago, it had adopted an unwritten rule that an individual registered representative should not control more than 15% of the float of a company.   The Firm has no pre-trade controls to ensure that this policy isn't violated.  Although the Firm looked at cost and turnover ratios, the Firm did not monitor customer accounts for purposes of whether a fee-based account would be less costly than a transactional account.  The Firm relied on the new account booklet to explain all the features of the various accounts it offered.  The SEC followed up on its prior inquiry with a formal request seeking the Firm's policies and procedures relating to concentration, and recommendations/disclosures to customers.  They also sought new account information for all of Jansen's clients purchasing NeedToKnow, including investment objectives and financial information, notes of communication with clients, any compliance alerts and records of supervisory review of the transactions.

Please answer the following 8 questions.  Label each answer--e.g., Question 1....; Question 2...., etc.

Question 1: Once the SEC receives and reviews the information provided by Freedom Investments in response to the above inquiry, what are some of the possible next steps that the SEC can take as part of the investigation and enforcement process?  Is Freedom Investments entitled to any information from the SEC during the investigation.