Company Name: Shearson Lehman Brothers Inc.
Public Availability Date: 05-17-1988INQUIRY LETTERWILLKIE FARR & GALLAGHER
ONE CITICORP CENTER, 153 EAST 53RD STREET
NEW YORK, N.Y. 10022-4669
TELEPHONE (212) 935-8000 July 15, 1987 Mary E.T. Beach, Esq.
Associate Director
Division of Corporate Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549 Re: Shearson Lehman Brothers Inc. - Request
for Waiver of Disqualification Provisions
of Rule 252(d)(3) of Regulation A and Rule
505(b)(2)(iii) of Regulation D Dear Ms. Beach: On behalf of our client, Shearson Lehman Brothers Inc. ("Shearson"), we hereby
request that the Securities and Exchange Commission (the "Commission") waive
application to Shearson of the disqualification provisions set forth in
Regulation A, Rule 252(d)(3), and incorporated in Regulation D, Rule
505(b)(2)(iii). Application of these provisions arises as a result of orders
entered by the Commission against Shearson in release Nos. 23640 and 24595 dated
September 24, 1986 and June 15, 1987, respectively. We believe that the
following facts would support a determination by the Commission, pursuant to
Rule 252(g) and Rule 505(b)(2)(iii)(C), that "it is not necessary under the
circumstances that the exemption provided by Regulation A and by Rule 505 of
Regulation D be denied" to Shearson. The 1986 Order On September 24, 1986 an Order of Censure (the "1986 Order") was entered by the
Commission against Shearson, pursuant to Section 15(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The 1986 Order found that
"Shearson failed reasonably to supervise two registered representatives and the
branch manager of their Utica, N.Y. office with a view to preventing violations
of Section 206 of the Advisers Act and Section 10(b) of the Exchange Act and
Rule 10b-5 thereunder, thereby violating Section 15(b)(4)(E) of the Exchange
Act." For your convenience a copy of the 1986 Order is attached hereto as
Exhibit A to this submission. At the time the 1986 Order was entered Shearson had submitted an Offer of
Settlement, which the Commission determined to accept, in which Shearson agreed
to hire an independent consultant (the "Consultant"). The Consultant was to
review and make recommendations relating to Shearson's procedures for
supervising and monitoring its compliance and supervisory personnel, including
branch office activities. The recommendations were to focus on Shearson's
procedures for preventing and detecting violations of state and federal
securities laws and the rules and regulations of any national security exchange,
the National Association of Securities Dealers, or any other self-regulatory
organization of which Shearson was a member. The procedures and rules that were recommended and implemented were designed to
prevent a recurrence of the activities alleged in the 1986 Order, and included
the policies and practices concerning: (a) the transfer of securities by trade correction, from and between customer
accounts and/or employee-related accounts; (b) the use authorization of trade correction forms; (c) extensions and last day cash calls as a result of trade corrections; (d) the transfer of funds to, from, and between customer accounts and/or
employee-related accounts as a result of trade corrections; (e) the establishment, monitoring and restriction of allocation accounts in
branch offices; (f) the response to branch office audit reports and follow-up on control
weaknesses contained in branch audit reports; (g) the adherence to specific instructions of the Compliance Department by
branch office personnel, which relate to compliance with Shearson's supervisory
and compliance procedures and the follow-up thereto; (h) the dissemination to branch office personnel of compliance manuals and other
guidelines regarding compliance procedures generally and the education of such
personnel therewith. Shearson has cooperated fully with the Consultant in the preparation of his
report and with implementation of the recommended procedures. The Consultant
submitted his report to the Commission, and Shearson has submitted an affidavit
to the New York Regional Office and the Division of Market Regulation setting
forth the details of its implementation of the Consultant's recommendations. A
copy of the affidavit is attached hereto as Exhibit B to this submission. The 1987 Order A second Order of Censure (the "1987 Order") was entered by the Commission
against Shearson on June 15, 1987, pursuant to Section 15(b) of the Exchange
Act. The 1987 Order found that Shearson "failed to obtain or maintain the
physical possession or control of all its customers' fully-paid and/or excess
margin securities ("customers' securities"), in violation of Rule 15c3-3(b)(1)"
and that Shearson "failed to reduce to its possession or control, within the
prescribed time period, customers' securities which had been allocated to open
stock loan positions, in violation of Rule 15c3-3(d)(1)." A copy of the 1987
Order is attached hereto as Exhibit C. At the time the 1987 Order was entered Shearson had submitted an Offer of
Settlement, which the Commission determined to accept, in which Shearson agreed
to immediately implement certain procedures, policies and actions designed to
prevent violations of Rules 15c3-3(b)(1) and (d)(1) under Section 15(b) of the
Exchange Act. Shearson has commenced to implement all of the procedures,
policies and actions detailed in the Order, including, but not limited to: (a) procedures to keep customers' securities segregated from Shearson's other
securities positions so that deliveries respecting loans of securities will be
effected only out of the amount of securities not so segregated; (b) a policy for monitoring transactions where Shearson failed to timely receive
securities which it contracted to borrow and to review such results on a monthly
basis; (c) procedures to calculate the market value of deficits resulting from
securities loaned and to communicate this information to a senior officer on a
daily basis; (d) procedures for issuing default notices when Shearson has not obtained
possession or control of securities within five business days following the
issuance of instructions to recall loaned securities; (e) procedures to initiate close-outs where a broker, dealer or other entity
defaults on the return of loaned securities; (f) designation of a compliance officer, independent of the stock loan
department, who has responsibility for ensuring that securities are reduced to
possession and control on a timely basis; (g) enrollment of a senior supervisory person from the stock loan/borrow
department in a class concerning Rule 15c3-3 which is scheduled for September,
1987. The 1987 Orders also requires that Shearson retain a firm of independent public
accountants to conduct semi-annual reviews of Shearson s compliance with the
1987 Order and determine if any material inadequacies exist therein. Shearson
has retained Coopers & Lybrand in that capacity. Coopers & Lybrand will file the
results of its semi-annual review with the New York Regional Office. Conclusion We believe it is important to note that Shearson was censured by the 1986 Order
for the activities of only two of its thousands of registered representatives
and one of its many branch managers, all of whom were working out of only one of
Shearson's numerous offices. In addition, the 1986 Order and the 1987 Order were
not entered against Shearson in connection with any of its underwriting
activities, nor was there any allegation or finding of fraud on the part of
Shearson in connection with the situations addressed by either the 1986 Order or
the 1987 Order. Shearson has been registered with the Commission as a broker-dealer pursuant to
Section 15(b) of the Exchange Act since 1965. Shearson is still so registered,
as well as registered or licensed as a broker-dealer in each of the fifty
states. Thus, Shearson is subject to the continuing supervision of both federal
and state regulators. We believe that all of the factors set forth above, including (1) the types of
offenses for which Shearson was censured; (2) the extensive corrective steps
which Shearson has taken and continues to take to ensure that all of its
registered representatives and branch managers are adequately supervised and
monitored; (3) the procedures and policies which Shearson has adopted and
continues to implement to prevent violations of rules regarding the possession
and control of customers securities; (4) the continued monitoring and reporting
of Shearson's compliance with the 1986 Order and the 1987 Order; and (5) the
fact that neither the 1986 Order nor the 1987 Order touched upon Shearson's
underwriting activities, provide the Commission with good reason for determining
that it is not necessary under the circumstances that the exemptions provided by
Regulation A and by Rule 505 of Regulation D be denied to Shearson. Should the Commission reach such a determination, the exemptions from
registration under the Securities Act of 1933, as amended, and available under
Regulation A and Rule 505 of Regulation D (which incorporates the Rule 252(d)(3)
disqualifiers), would become available to Shearson. In addition, certain
exemptions provided by state securities laws designed to coordinate with the
exemption provided by Regulation D (which incorporate as a condition to their
availability the disqualifying provisions of Regulation A) would become
available to Shearson and to issuers for whom Shearson may act as underwriter,
promoter or dealer-manager. We, therefore, request that the Commission reach the determination, set forth at
Rule 252(g) and at Rule 505(b)(2)(iii)(C) and thereby waive the application of
any disqualifying provisions of Rule 252(g) and Rule 505 (b)(2)(iii) which
relate to the 1986 Order and the 1987 Order. Should you require any further information in order to respond to this request,
please do not hesitate to telephone (collect) either Catherine J. Douglass of
this firm or the undersigned. To the extent that it is possible, we request that
the Commission address this request on an expedited basis. Sincerely, Ellen Lieberman, Esq. EL/dcp Enclosures
cc: Catherine J. Douglass
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