In the Matter of ) Request for Review of ) NYSE Hearing Board ) Decision Michael Peter Sirianni ) )

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1 In the Matter of ) Request for Review of ) NYSE Hearing Board ) Decision Michael Peter Sirianni ) ) In accordance with NYSE Rule 476(f), after a consideration of the record in this matter, written submissions filed by the parties and oral argument, the NYSE Regulation Board of Directors ( Regulation Board ) affirms the June 17, 2008 decision of the Hearing Panel (the Decision ) in all respects. We write to address certain arguments made by Respondent as part of this review process. This matter involves Michael Peter Sirianni ( Respondent ), a former registered representative and branch manager, and his involvement with numerous variable annuity exchange transactions. Underlying the Panel s determinations for Charges I, II and III 1 are findings that Sirianni engaged in unsuitable annuity exchange transactions. Sirianni argues that the Panel s unsuitability determinations were made by improperly looking only at collated information about a series of trades and without proof that the specific trades executed on behalf of specific customers were unsuitable. In affirming the Panel below, the Regulation Board specifically concludes that there was ample individualized information of unsuitability presented. Moreover, the collated information tendered by the experts supported and enhanced the unsuitability determination. Finally, the penalty is properly crafted under standards required by McCarthy v. SEC, 406 F.3d 179 (2d Cir. 2005). Individualized Analysis: Customer Testimony As a threshold matter, the Regulation Board agrees with the fundamental finding of the Panel that [v]ariable annuities are long-term investment products that are designed to be held, not switched. Decision at 13. Therefore, excessive trading in these products is a red flag indicating that the underlying trades are unsuitable. Although evidence was presented to the Hearing Panel 1 Those charges were for violations of NYSE Rule 476(a)(6) and 405(1) in that Sirianni, on one or more occasions, (I) recommended and sold variable annuities to customers that were unsuitable in view of the customers investment objectives, investment experience and/or financial resources; (II) failed to use due diligence to learn the essential facts relative to customers in connection with the purchase and sale of variable annuities and disclose those facts to his member firm employer; and (III) failed to supervise the purchase and sale of variable annuities transactions at his member firm employer.

2 about overall trading patterns, the Panel also heard testimony from eight of Sirianni s variable annuity customers: five who testified on behalf of Enforcement, and three on behalf of Sirianni. The five Enforcement witnesses testified about the excessive number of annuity exchanges Sirianni effected in their accounts. Tr. at (Customer A), (Customer B), and Transcripts of Customers C at 1-55, D at 1-77 and E at For two of these witnesses, annuity contracts were exchanged at least once per year over a period of three and five years. Tr. at (Customer A), (Customer B). All customers testified that they were persuaded by Sirianni to exchange their annuities to take advantage of higher death benefits and other product enhancements. Tr. at (Customer A), (Customer B), and Transcripts of Customers C at 1-55, D at 1-77 and E at However, the Panel found that the promised additional benefits and enhancements were either illusory or misrepresented by Sirianni. Decision at Each customer suffered significant losses to their accounts as a result of the high surrender charges and other fees applicable to the switches. Tr. at , 1732; Enf. Exs. 160 and 161. Sirianni s three customer witnesses testified that that they spoke to Sirianni frequently, that he disclosed all surrender fees, and that they themselves made the decisions on the annuity switches, sometimes rejecting Sirianni s recommendations. Tr. at (Customer F), (Customer G), Tr. of Customer H at However, even if the customers understood and consented to the trades, it was still the responsibility of the registered representative to ensure that his recommendations were suitable. [T]he Commission has held on many occasions that the test is not whether [the customers] considered the transactions in their account suitable, but whether [the representative] 'fulfilled the obligation he assumed when he undertook to counsel [them], of making only such recommendations as would be consistent with [their] financial situation and needs.'" Stephen Thorlief Rangen, 1997 SEC LEXIS 762 (April 8, 1997)(citations omitted). 2 Therefore, the testimony of Sirianni s witnesses is anything but dispositive on the issue of suitability. For example, one customer (Customer F) testified that she knowingly made the exchanges recommended by Sirianni, but the record shows she engaged in the absurd total of eleven exchanges while a customer of the branch. Enf. Ex Expert Testimony The Hearing Panel also heard the testimony of two expert witnesses. One expert had been a chief compliance officer and chief executive officer, respectively, of an insurance company and its affiliated broker dealer, with extensive compliance and other experience with variable annuities and other securities and insurance products. The expert conducted an individualized review of seventeen customer files. Tr. at The files contained the same data available to Sirianni at the time Sirianni executed or approved the exchanges. Tr. at , The expert concluded that all the initial annuity contracts in the 17 customer accounts were suitable, but that all subsequent exchanges were unsuitable because they (1) were not reasonable 2 See also Clinton Hugh Holland Jr., 1995 SEC LEXIS 3452 (Dec. 21, 1995) ( [E]ven if we conclude that [the customer] understood [Respondent s] recommendations and decided to follow them, that does not relieve [the Respondent] of his obligation to make reasonable recommendations. 2

3 for the customers given their circumstances, (2) only benefited the registered representative through commissions, and (3) contained a clear pattern of switching, flipping, and excessive rollover. Tr. at This expert also testified that variable annuity switch rates at an individual branch of more than 5% to 10% are typically considered a red flag from a supervision and compliance standpoint. Tr. at At various points during the relevant period, Sirianni s branch had substantially higher exchanges rates as high as 92%. Decision at 8, 15; Enf. Ex. 31. Enforcement s other expert was a professor of finance and expert in the area of annuities, and he testified about the objective mathematical merits of the exchanges. He compiled data for 270 transactions and found complete data for 78 exchanges. Of those 78 exchanges, he concluded that 61 (78%) were not in the economic best interest of the customer and resulted in damages to the customers of $148, Tr. at 1678; Enf. Ex The Hearing Panel credited the testimony of the experts. Decision at 13, Hearing Panel Findings Based upon evidence presented at Hearing, including customer and expert testimony, the Hearing Panel found that: Sirianni failed to use due diligence to learn the essential facts relative to customers in connection with many of the annuities switches executed Decision at 12. Sirianni systematically caused the execution of and/or granted supervisory approval for annuity switches on behalf of certain customers without adequate regard to the customers individual circumstances, such as [need for] access to the invested funds, the amount of time since their purchase of the previous annuity and the amount of life insurance that they already had. Decision at 12. [M]any of the annuity switches were switches of original contracts that had been held for only a few years or less Decision at 12. Customers were often making one switch a year from their variable annuities. One customer engaged in four switches in fewer than five years. Decision at 12 and 15. The reasons that were cited for switching were often inaccurate. Decision at 12. Sirianni actively recommended and sold unsuitable products to customers. Decision at 15. These complex products, which are ideal products for abuse, were sold and resold to customers who were completely dependent on Sirianni s advice and lacked the knowledge to evaluate what they were being sold. Decision at The expert s mathematical model calculated whether the customer, at the time of purchase, was more likely than not to lose money on the exchange, given the costs (surrender fees and product enhancement fees) and the benefits to the customer, in light of mortality rates and various performance scenarios based on the S&P

4 [T]he testimony of the customers [established] that they did not buy the switches but were sold them. Decision at 16. Sirianni knew his customers, but only on a surface level, not in depth. He relied on a one size fits all sales strategy to keep his earnings up. Decision at 16. We affirm the Hearing Board s findings. We further agree that [t]he unsuitability of Sirianni s trades may be ascertained by looking at both the individual trades that were examined and the pattern of frequent switches that benefited Sirianni at the expense of his customers. Decision at 16 (emphasis added). Unsuitability can be determined not only by evaluating individual customer transactions (as the Panel did with respect to the testimony from eight customer witnesses), but also by looking at the frequency and/or pattern of transactions as a whole. In fact, [e]xcessive trading may be thought of as quantitative unsuitability. John M. Reynolds, 1991 SEC LEXIS 2725 (Dec. 4, 1991); See also Donald A. Roche, 1997 SEC LEXIS 1283 (June 17, 1997) (excessive trading violates self-regulatory organization suitability requirements). 4 Moreover, we find that the Panel s reliance on pattern testimony augmented but did not supplant suitability decisions based on individualized customer information. Penalty The Hearing Panel imposed a censure and five-year bar from membership, allied membership, approved person status, and from employment or association with any member or member organization.. We affirm this penalty as consistent with the requirements discussed in McCarthy v. SEC, 406 F.3d 179 (2d Cir. 2005) and NYSE Information Memo Specifically, we note the seriousness of the offense which involved a large number of unsuitable products sold and resold to customers who were completely dependent on Sirianni s advice and lacked the knowledge to evaluate what they were being sold. Decision at 15. Sirianni s conduct harmed the trading public by taking advantage of his customers and causing them to pay unnecessary fees in connection with unnecessary annuity switches. Notably, the Firm paid approximately $500,000 to provide customer restitution. See David A. Noyes & Co., Inc., NYSE Hearing Board Decision (Nov. 9, 2005). Sirianni personally gained from his misconduct. In 2000 alone, Sirianni earned over $200,000, with a high percentage of the money coming from annuity switches. Tr. at ; see generally Decision at 16. Further, Sirianni circumvented established Firm procedures and failed to heed numerous warnings from regulators and Firm personnel. Indeed, the firm s approval manager testified that in almost all instances, he did not receive approval requests from Sirianni. Tr. at 361. Sirianni s behavior demonstrates that Sirianni s likelihood of repetition is high and that a significant suspension is necessary for deterrence purposes. Accordingly, a five-year suspension is necessary to protect the investing 4 Harry Gliksman, 1999 SEC LEXIS 2685 (December 20, 1999), aff'd, 24 Fed. Appx. 702 (9th Cir. 2001) (unpublished) ( Under the applicable rules, recommendations may be unsuitable if the trading is excessive based on the customer's objectives and financial situation. ); See also David A. Gingras, 1992 SEC LEXIS 2537 (September 21, 1992) (finding excessive turnover in customer accounts unsuitable); Plase Michael Tansil, Decision at 15 (NYSE Hearing Board Sept. 18, 2006) ( [t]he unsuitability of Respondent s actions is not evident in any one trade or his position in any one stock; rather it is manifest in the overall structure and strategy of his customers portfolios. (emphasis added). 4

5 public from Sirianni s extensive predatory sales practices, and to send a message to other member firms that the Exchange will not tolerate such conduct. February 23, 2009 By the Board of Directors NYSE Regulation, Inc. 5

6 N E W Y O R K S T O C K E X C H A N G E L L C NYSE HEARING BOARD DECISION 08-[ ]34 [ ] June 17 [ ], 2008 MICHAEL PETER SIRIANNI FORMER REGISTERED REPRESENTATIVE AND BRANCH OFFICE MANAGER * * * Violated NYSE Rule 476(a)(6) in that he (1) recommended and sold variable annuities to customers that were unsuitable, (2) failed to supervise variable annuities transactions at his firm, (3) made one or more misstatements to his firm and (4) made one or more misstatements to the ExchangeNYSE; caused a violation of NYSE Rule 405(1) in that he failed to use due diligence to learn the essential facts relative to customers and disclose them to his firm in connection with variable annuity transactions Censure and five-year bar. Appearances: For the Division of Enforcement Susan Light, Esq. Danielle I. Schanz, Esq. Steven M. Tanner, Esq. Howard L. Kneller, Esq. Jeremy Bloom, Esq. For Respondent Murin Ted S. Helwig, Esq. Amy E. Gibson Lum * * * A Hearing Panel on behalf of the New York Stock Exchange LLC ( NYSE or the Exchange ) considered a Charge Memorandum issued by NYSE Regulation, Inc. s Division of Enforcement ( Enforcement ) against Michael Peter Sirianni, a former registered representative and branch office manager with David A. Noyes & Co., Inc. (the Firm ). The Firm is a member organization of the NYSE. Sirianni was charged with having: I. EngagedViolated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade in that, on one or more occasions, he recommended and sold variable annuities to customers that were unsuitable in view of the customers investment objectives, investment experience and/or financial resources. See also, Paul Edward Murin, Jr., Decision (NYSE Hearing Board June 17, 2008).

7 2 II. III. IV. Caused a violation of ExchangeNYSE Rule 405(1) in that, on one or more occasions, he failed to use due diligence to learn the essential facts relative to customers in connection with the purchase and sale of variable annuities and disclose those facts to his member firm employer. EngagedViolated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade in that, on one or more occasions, he failed to supervise the purchase and sale of variable annuities transactions at his member firm employer. EngagedViolated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade by making one or more misstatements to his member firm employer. V. EngagedViolated NYSE Rule 476(a)(6) by engaging in conduct inconsistent with just and equitable principles of trade by making one or more misstatements to the Exchange. Sirianni filed an answer and denied a majority of the allegations and each of the respective charges issued against him. Based on the pleadings, and/or the evidence and argument presented at the hearing, the Hearing Panel made the following findings: Background and Jurisdiction 1. Michael Peter Sirianni ("Sirianni") was born in Sirianni was hired by the Firm in July 1996 as a producing Branch Office Manager of a branch of the Firm located in Wausau, Wisconsin (the "Branch") and remained so employed until shortly before the Branch was closed in February Sirianni is presently employed by a nonmember financial organization. 2. In an examination report dated December 28, 2001 (the "Special Examination Report"), which was sent to the Firm, the ExchangeNYSE's Division of Member Firm Regulation ("MFR") noted, among other things, that Sirianni and certain other registered representatives at the Branch, were executing annuity "switches," i.e., the purchase of an annuity with the proceeds of the sale of an existing annuity, on behalf of certain of the Firm's customers. MFR further noted that a number of those switches were not in the economic interest of the customers and that the Firm was inadequately supervising such switches. 3. By letter dated October 15, 2002, sent via certified mail, return receipt requested, Enforcement notified Sirianni that the ExchangeNYSE had commenced an investigation concerning annuities sales at the Branch. 4. Thereafter, Sirianni, represented by counsel, provided information and testimony in connection with the ExchangeNYSE's investigation.

8 3 Annuity Sales, Switches and Supervision Introduction 5. The Branch was opened in At all relevant times, the Branch was comprised of fewer than eight registered representatives and included, at certain times, Sirianni, as well as three of his brothers and/or half-brothers, their father and other registered representatives unrelated to Sirianni. 6. During the Relevant Period, Sirianni and certain of the other registered representatives at the Branch recommended the execution of variable annuity switches on behalf of customers. 7. Many annuities, including those sold at the Branch, have "surrender" fees that are assessed if the purchaser of the annuity decides to "cash in" the investment within a certain number of years after they are purchased. Such fees may constitute in excess of eight percent or more of the investment principal if the annuity is redeemed during the first year after it is purchased. Thereafter, such fees usually decrease, typically by one percent each year. 8. As a result of, among other things, the aforementioned surrender fees, annuities are generally viewed as long-term investments. The Regulatory Timeline NASD Notice to Members (December 1996) 9. In December 1996, NASD Regulation, Inc. ( NASD Regulation ) issued Notice to Members 96-86, which reminded members that variable annuities are subject to NASD suitability requirements. NASD members and associated persons were reminded that they have a fundamental responsibility for dealing fairly with their customers. 10. The Notice to Members also contained this pertinent warning: Finally, NASD Regulation is aware of the practice whereby a registered representative replaces a customer s existing variable contract with a new variable contract that doesn t improve the customer s existing position, but generates a new sales commission for the registered representative. Such a replacement practice designed merely to generate new sales commissions for the registered representative would be prohibited by NASD Conduct Rules requiring that members and registered representatives deal fairly with customers. NYSE Examination (January 1998) 11. From January 12 through January 28, 1998, the NYSE conducted an examination of the Firm which included the Firm s Chicago headquarters as well as the Branch.

9 4 12. The NYSE s examination report found that, of the sixty-six annuity contracts sold at the Branch during the period of October 1, 1997 through December 31, 1997 twentythree were switches in which the customers incurred surrender charges. The twentythree switches represented sixty-four percent of the total dollar value generated for that period. In at least four instances, the previous annuity had been solicited by the same registered representative. 13. The examination report found that the Firm violated NYSE Rule 342 by, among other things, failing to have in place appropriate written procedures to (1) ascertain whether the customers understood the penalties for switching and (2) evidence the suitability of annuities purchased by the Firm s customers. Securities and Exchange Commission Examination (May 1998) 14. On May 22, 1998, the Midwest Regional Office of the Securities and Exchange Commission ( SEC ) wrote to the CEO of the Firm concerning a recent examination of the Firm. The SEC noted that the deficiencies found by the NYSE and the NASD with respect to the Branch s supervision of annuity switches had not been corrected. The letter indicated that those deficiencies are brought to your attention for immediate corrective action. NASD Notice to Members (May 1999) 15. In May 1999, the NASD issued Notice to Members 99-35, which reminded members of their responsibilities regarding the sale of variable annuities. The Notice to Members identified areas of concern that NASD Regulation expected to be addressed by members. The Notice to Members described variable annuities as long-term investments for retirement and noted that the suitability analysis under the NASD Rules was particularly complex for such products due to their myriad features. 16. Among other things, the Notice to Members suggested that member firms develop an exchange or replacement analysis document that would be completed for all switches. The exchange or replacement analysis would explain the benefit of replacing one variable annuity contract with another. The Notice to Members made clear that the document should be signed by the customer, the registered representative, and the registered principal. 17. The Notice to Members also suggested that member firms consider developing compliance systems to monitor and identify registered representatives whose clients had a particularly high rate of variable annuity replacements or rollovers, so that the firms could investigate the suitability of such switches. 18. The suggested routing of the Notice to Members included senior management and registered representatives.

10 5 NYSE Disciplinary Action HPD (September 1999) 19. In David A. Noyes & Co., Inc., Decision (NYSE Hearing Board Sept. 22, 1999) the ExchangeNYSE took formal disciplinary action against the Firm. In that decision, the Firm consented to a finding that it violated NYSE Rule 342 by failing to provide for and maintain appropriate supervisory procedures pertaining to the purchase, sale and transfer of annuity products by its registered representatives and further consented to a penalty of a censure, a $60,000 fine and an undertaking that pertained to a non-annuity topic. 20. Specifically, the Firm consented to a finding that, during the period of October 1, 1997 through December 31, 1997, it failed to supervise its annuity products business in that it (1) did not maintain written procedures relating to annuity products that provided clear guidance to its registered representatives with respect to their compliance responsibilities; (2) did not maintain written procedures with respect to the supervision of its annuity products business; (3) did not maintain written procedures pertaining to the review of its annuity products business for use during Branch office inspections; (4) did not have procedures in place to monitor the number of annuity transfers effected by the Firm s registered representatives or the number or frequency of annuity transfers completed by its customers: (5) permitted its registered representatives to submit annuity contracts and transfer applications to issuing annuity companies without first having been reviewed by a supervisor for completeness, accuracy and suitability; and (6) maintained no master listing of annuity transfers and therefore, generated no exception reports, including reports to capture multiple purchases or sales to one customer or reports indicating excessive transfers by customers or registered representatives. NASD Examination (February 2000) 21. On February 29, 2000, NASD Regulation staff conducted an exit interview at the Firm following a routine cycle examination. The examiners found that the Firm lacked a consistent and adequate supervisory system at the branch level for the review of switches. The examiners reviewed twenty-nine variable annuity transactions for the period of December 1 through December 31, They found that the Firm failed to provide evidence of written approval by a principal for all twenty-nine of those transactions. They also found fifteen of the transactions to be unsuitable. Finally, the examiners found that the Firm failed to prepare and maintain adequate written supervisory procedures concerning switches and suitability. NASD Letter of Caution (May 2000) 22. On May 19, 2000, NASD Regulation sent the CEO a Letter of Caution based on certain findings in the February 2000 examination report. Specifically, the Letter of Caution identified the Firm s failure to evidence written principal approval for twenty-nine out of twenty-nine variable annuity transactions as a repeat violation.

11 6 NASD Notice to Members (July 2000) 23. In July 2000, NASD Regulation issued Notice to Members 00-44, which focused on retail sales of variable annuities to individuals. The Notice to Members identified areas of concern that NASD Regulation expected to be considered by member firms in developing and implementing appropriate supervisory procedures. The Notice to Members advised registered representatives to carefully consider whether variable annuity switches were in the best interests of their customers. The Notice to Members also encouraged member firms to adopt procedures for the review of replacement recommendations in order to ensure that they were suitable, and to engage in monitoring to prevent improper and excessive switches. Finally, the Notice to Members reiterated the guidance articulated in Notice to Members (June 1999) regarding the adoption and implementation of supervisory systems and procedures by member firms. SEC Examination (February 2001) 24. On February 16, 2001, the Midwest Regional Office of the SEC wrote to the CEO concerning a recent examination of the Firm. That examination found that, for the year ended September 30, 2000, sixty-three percent of the Branch s revenues were earned from the sale of insurance products. The majority of that revenue came from the sale of one hundred and ninety-two variable annuities; one hundred and twelve, or fifty-nine percent, were switches. Of those one hundred and twelve, seventy-one (sixty-four percent) had been held for twenty-four months or fewer and forty-six had been replaced in a previous exchange by the Firm. In most cases the replaced contracts were held for short periods of time, often fewer than twenty-four months. 25. The SEC examiners found that customer records were incomplete and did not contain sufficient information to assess whether the switches were suitable. They also found that many of the cited reasons for making switches were inaccurate. The examiners found that the Firm failed to comply with the guidelines in Notice to Members 96-86, and that, as a result, certain customer accounts were excessively traded without improving the economic position of the customers. 26. The SEC examiners noted that, despite entering into a Stipulation and Consent with the NYSE in 1999 regarding, inter alia, the Firm s failure to implement procedures for generating exception reports, the Firm still was not generating exception reports as of November The SEC examiners also identified certain supervisory lapses at the Branch including the failure to supervise Sirianni and the fact that the Branch s customer new account information continued to be incomplete despite two citations by the NYSE. 28. The letter stated that [i]mmediate and meaningful remedial action must be taken by your Firm to assure that recommendations are made only when the registered

12 7 representative and his superior have sufficient knowledge regarding a customer s financial and other relevant information. Please inform us as to what actions you intend to take to remedy this situation. The letter also noted that [t]he deficiencies and/or violations of law described above are brought to your attention for immediate corrective action. NYSE Examination (March 2001) 29. NYSE examiners met with the CEO and others during an exit interview on March 8, In a written examination report dated April 2, 2001, the examiners found that the supervision of annuity switches at the Branch did not comply with NYSE Rule 342. NASD Letter of Caution (May 2001) 30. On May 30, 2001, NASD Regulation sent the CEO a Letter of Caution which related to an examination that concluded on February 14, The Letter of Caution noted that the Firm failed to follow its own supervisory procedures concerning annuity switches. Eight out of twenty-one transactions did not reflect the required approval. NYSE Examination (November 2001) 31. On November 12, 2001, NYSE examiners conducted an exit interview by conference call relating to a November 2001 examination of the Firm. On December 28, 2001, MFR issued the Special Examination Report which found that forty-two percent of the revenue earned by the Branch for the period of January 1, 2001 through April 30, 2001 was from the sale of variable annuities. 32. Twenty-two of the twenty-four variable annuity transactions executed during that period (ninety-two percent) were switches. Nineteen of the twenty-two switches replaced contracts that had been held for fewer than twenty-four months. Seventeen of the twenty-two exchanges resulted in an eight percent surrender charge, while the registered representatives for those transactions received a commission of approximately six percent on each exchange. 33. The Special Examination Report also found that Sirianni was aware of the Firm's policies regarding variable annuities; that Sirianni and his brother, A, "earned most of the Branch's commissions generated for the sale of variable annuity contracts;" and that Sirianni and his brother A "incurred unnecessary costs for their customers in exchange for their own 6% commission." 34. The Special Examination Report found that most of the customers "did not benefit from the switches" and "were actually economically disadvantaged by them." It concluded that the registered representatives did not act in the best interests of those customers, and that the Branch s supervisory procedures and internal controls were not adequate.

13 8 The Firm s Adoption and Enforcement of Written Procedures Concerning Annuities 35. The inadequacy of the Firm s supervisory procedures regarding annuities was addressed in the March 1998 NYSE examination report, the May 1998 SEC examination report, the September 1999 disciplinary proceeding by the NYSE and the February 2000 NASD examination report. The NASD also issued its second Notice to Members on that topic in May During that time the Firm did not implement any written annuity procedures. 36. In March 2000 two years after the Firm received the March 1998 NYSE examination report the Firm finally implemented written procedures regarding the supervision of annuity transactions (the "March 2000 Procedures"). 37. The March 2000 Procedures mandated, inter alia, the following multi-part approval process with respect to variable annuity switches effectuated at the Firm: a. First, all annuity switches were required to be approved by a Branch Office Manager before they were submitted to the issuing company. b. Second, where the surrender charge of an annuities contract (1) exceeded $5,000, or (2) was three percent or more of the investment principal, the transaction had to be further approved prior to submission to the issuing company by the Firm's Insurance Department Manager ( IM ) or National Director of Marketing ( DM ). c. Third, "if any funds [were] withdrawn within the first two years and [were] being reinvested," further approval as set forth above was required. (Emphasis in original.) 38. The Firm informed Sirianni and the registered representatives at all Firm offices, including the Branch, of the requirements of the March 2000 Procedures. 39. A copy of the March 2000 Procedures was sent to the Branch via at or about the time they were adopted. The procedures were also discussed during a visit by the Firm's IM and DM to the Branch in early March The Branch was further made aware of such procedures during a weekly compliance meeting that was held on or about March 6, The March 2000 Procedures were also discussed during internal Firm compliance audits of the Branch that occurred in or about September of 2000 and November of While the Firm thus had written annuity procedures in place as of March 2000, those procedures contained large gaps that Sirianni and the Branch were able to exploit. The March 2000 Procedures did not include the mechanisms necessary to determine

14 9 whether they were being followed. In addition, the procedures did not require heightened monitoring of all switches executed by the Firm. Only the switches that met the criteria noted in sub-paragraphs 41(b) and (c) above were subject to additional approval. Finally, Sirianni, who was a primary seller of annuity switches and a producing Branch Office Manager, was effectively his own supervisor. 42. As discussed at paragraphs 28-32, supra, the SEC notified the Firm by a letter dated February 16, 2001, that its supervisory procedures regarding annuities transactions remained deficient. 43. That finding was reiterated in an MFR report sent to the CEO on or about April 3, 2001, which indicated, among other things, that the Firm continued to lack appropriate procedures for the supervision of annuity switches executed at the Branch. 44. In May 2001, the Firm again revised its procedures to remove the limiting criteria in sub-paragraphs 41(b) and (c) above and require that all switches receive an additional layer of supervisory approval. 45. The change did not prevent Sirianni and the Branch from continuing to circumvent the Firm s annuity approval procedure. In June 2001, the Firm again revised its procedures and announced that it would not pay commissions for switches unless the prior annuity was owned for more than two years or there was no surrender charge involved in the transaction. 46. The June 2001 revisions successfully reduced the number of switches that were executed at the Branch by removing the financial incentive for registered representatives to engage in such transactions. However, the resulting decrease in revenue caused the Firm to close the Branch in Unsuitable Annuity Switches and Other Violative Sales Practice Conduct 47. Sirianni, as a registered representative of the Firm, was responsible for servicing certain of the Firm's customers in connection with the sale of variable annuities. Moreover, as a producing Branch Office Manager, Sirianni was responsible for both approving annuities switches at the Branch and submitting such switches for further supervisory review as required by the March 2000 Procedures. 48. Sirianni was not just the branch manager or a supervisor but a very active participant in the selling of switches. During the Relevant Period, more than 200 annuity switches were executed at the Branch. Approximately 42% of the switches at the branch were executed by Sirianni himself. 49. Sirianni circumvented the March 2000 Procedures in that he failed to submit requests for the approval of most of the annuity switches executed during the Relevant Period for which approval was required under such procedures. Thus,

15 10 Sirianni caused annuity switches to be executed at the Branch that were not subject to appropriate supervisory review. 50. In addition, Sirianni failed to use due diligence to learn the essential facts relative to customers in connection with many of the annuities switches executed at the Branch during the Relevant Period, a number of which were for Firm customers that he services as a registered representative. 51. Instead, Sirianni systematically caused the execution of and/or granted supervisory approval for annuity switches on behalf of certain of the Firm's customers during the Relevant Period without adequate regard to the customers' individual circumstances, such as the time period in which such customers required access to the invested funds, the amount of time since their purchase of the previous annuity and the amount of life insurance that they already had. 52. Moreover, many of the annuity switches that occurred at the Branch during the Relevant Period were switches of original annuity contracts that had been held for only a few years or less, thus causing the customers involved to incur substantial surrender fees, other charges and increased expenses in connection with such transactions. 53. Customers were often making one switch a year from their variable annuities. One customer engaged in four switches in fewer than five years. 54. The reasons that were cited for switching were often inaccurate. About forty percent of switches cited dollar cost averaging as the reason to switch. However, the registered representatives for approximately sixty percent of that group did not select dollar cost averaging when they actually executed the switches in question. 55. Despite the fact that he had a relatively small amount of funds under management, Sirianni was among the top ten producing registered representatives at the firm. The branch had high returns with little or no new money coming in. Sirianni's Misstatements to the Firm 56. During the Relevant Period, Sirianni verbally represented to certain members of the Firm's management, including the Firm's Director of Compliance and General Counsel, that he was following the March 2000 Procedures. 57. In addition, in a letter to the firm dated February 22, 2001, Sirianni represented that he was following the Firm's procedures concerning annuities switches. 58. Since, as set forth above, Sirianni failed to follow the March 2000 Procedures, the foregoing representations made by Sirianni to the Firm were false and misleading.

16 11 Sirianni's Misstatement to the Exchange 59. In the Special Examination Report, MFR noted that Sirianni stated, in an interview on May 16, 2001, "that he had faxed the applications that met the organization's criteria for prior approval to [the Firm s IM]." 60. As described above, Sirianni failed to submit all annuity applications that required approval by the Firm s IM pursuant to the Firm's March 2000 Procedures. 61. Accordingly, the aforementioned representation made by Sirianni to the Exchange during an examination was false and misleading. Charges against Sirianni DECISION The Hearing panel unanimously found Sirianni guilty of Charges I through V. Charge I Sirianni, as a registered representative of the Firm, was responsible for servicing certain of the Firm's customers in connection with the sale of variable annuities. As a producing Branch Office Manager, Sirianni was also responsible for approving annuities switches at the Branch and for submitting such switches for additional supervisory review as required by the March 2000 Procedures. Sirianni himself was a primary violator at the Branch, in that he actively recommended and sold unsuitable products to customers. Approximately forty-two percent of the switches at the branch were executed by Sirianni himself. These complex products, which are ideal products for abuse, were sold and resold to customers who were completely dependent on Sirianni s advice and lacked the knowledge to evaluate what they were being sold. Expert testimony at the hearing established that only five to ten percent of variable annuity transactions are typically switches. Any greater percentage is considered a red flag from a supervision and compliance standpoint. An NYSE examiner testified that a November 2001 examination of the Branch disclosed that forty-two percent of the Branch s revenue was derived from the sale of variable annuities. Twenty-two of the twenty-four annuities transactions executed (ninety-two percent) were switches. Nineteen of the twenty-two contracts that were replaced had been held for fewer than twenty-four months. Most of the customers in question were charged eight percent surrender fees. The February 2001 SEC letter noted that one hundred and twelve of one hundred and ninety-two variable annuity transactions at the Branch (fifty-nine percent) were switches. The same letter

17 12 also indicated that sixty-four percent of the Branch switches reviewed were held for twenty-four months or fewer. The NYSE s expert witnesses concluded that the pattern of trading switches at the Branch demonstrated that many of those transactions were not in the economic interests of the Branch s customers. Customers often made one switch a year from their variable annuities. One customer engaged in four switches in fewer than five years. Such trading often caused significant decreases in the value of those accounts and the death benefits associated therewith, resulting in significant losses to the customers in question. The evidence disclosed that over two hundred unsuitable switches occurred in customer accounts at the Branch during the Relevant Period. The reasons cited for switching were often inaccurate. About forty percent of the switches cited dollar cost averaging as the reason to switch. However, the registered representatives for approximately sixty percent of that group did not select dollar cost averaging when they actually executed the switches in question. We concluded from the testimony of the customers that they did not buy the switches but were sold them. As a group they did not have a sufficient understanding of this complex product. Sirianni knew his customers, but only on a surface level, not in depth. He relied on a one size fits all sales strategy to keep his earnings up. When the Firm implemented controls for prior approvals, he often bypassed those procedures in order to continue his switch trades. He misled both his firm and the NYSE about his compliance with the March 2000 Procedures. Despite the fact that he had a relatively small amount of funds under management, Sirianni was among the top ten producing registered representatives at the Firm. The Branch had high returns with little or no new money coming in. The unsuitability of Sirianni s trades may be ascertained by looking at both the individual trades that were examined and the pattern of frequent switches that benefited Sirianni at the expense of his customers. Those customers did not have the knowledge and investment sophistication to understand what Sirianni was doing to them. See Bruce Cohen, Decision (NYSE Hearing Board Jun. 26, 2002); Plase Michael Tansil, Decision (NYSE Hearing Board Sept. 18, 2006). Charge II Sirianni failed to use due diligence to learn the essential facts of his customers. This was demonstrated by his testimony about certain customers and the manner in which he applied a one size fits all sales strategy to the customers in question. Switches are, for good reason, relatively rare in variable annuities the frequency of such transactions among Sirianni s customers is the exception that proves this rule. Sirianni had other options available to him to meet the trading objectives of his customers if he needed to improve the investment performance in a customer s account, he could simply have changed the funds in the customer s sub-accounts. Such a change would have resulted in no cost to the

18 13 customer, but also would have earned no commission for Sirianni. Instead, Sirianni cited false reasons for engaging in frequent switches that benefited him, rather than the customers in question. Charge III Sirianni failed to supervise the execution of variable annuity transactions at the Branch. Sirianni clearly failed to supervise his own conduct he was responsible for a significant number of the unsuitable switches executed at the Branch. He also permitted the registered representatives at the Branch to engage in the same misconduct. The Branch earned a substantial amount of its income from variable annuities sales and switches. Sirianni did little or nothing to restrain this misconduct. Charges IV and V While Sirianni represented to the Firm and the NYSE that he was following the March 2000 Procedures, our examination of the evidence indicated otherwise. Those procedures required Sirianni to submit annuity applications for prior approval. In most cases, he did not. The Firm s systems and procedures did not provide any consistent method to detect such lapses. As a result, Sirianni and the Branch were able to circumvent those procedures for their own benefit. PENALTY In determining an appropriate penalty, the Panel was required to consider a number of factors, including the seriousness of the offense, the corresponding harm to the trading public, the potential gain to Respondents from the violations, the potential for repetition in light of the current regulatory and enforcement regime, and the deterrent value to Respondents and others. McCarthy v. SEC, 406 F.3d 179, 190 (2d Cir. 2005). Other important factors that are routinely used to guide the determination of a penalty include the degree of scienter and the degree to which a respondent has taken responsibility and feels remorse for his actions. See Factors Considered By The New York Stock Exchange Division of Enforcement In Determining Sanctions, Information Memo (Oct. 7, 2005), at 2-3. Enforcement recommended a penalty of a censure and a ten-year bar for Sirianni. In support of this proposed penalty, Enforcement cited a number of cases including Steven Allen Koch, Decision (NYSE Hearing Board Sep. 26, 2006), which was the first case at the NYSE involving the suitability of variable annuities. Koch resulted in a penalty of a censure and a oneyear bar after a contested hearing. However, Koch was a registered representative, not a supervisor, and the case involved only two customers rather than the dozens here. Enforcement also cited Alex Alfred Collins, Decision (NYSE Hearing Board Nov. 9, 2004), which involved unsuitable trades in the accounts of fifteen elderly and unsophisticated customers. The Hearing Panel in that case imposed the consented-to penalty of a censure and a five-year bar. Unlike Murin, Sirianni s violations were ones of commission, not omission. Not only did he fail to supervise and restrain the excessive number of variable annuity switches that were executed at the Branch, he was responsible for over forty percent of them himself. When the Firm finally

19 14 put procedures in place to prevent or restrict such trading, Sirianni found ways to bypass the procedures. Sirianni s actions adversely affected both the Firm and its customers. Sirianni is a danger to customers and his past conduct demonstrates that, given the opportunity, he will commit such violations again. The Hearing Panel thus finds that a penalty of a censure and a five-year bar from membership, allied membership, approved person status and from employment or association with any member or member organization, is necessary and appropriate to protect the investing public. We have imposed a five-year bar instead of the tenyear bar recommended by Enforcement because we believe that there is little practical difference between them. For the Hearing Board Vincent F. Murphy - Hearing Officer Panelists: Marguerite M. Crane Richard Groendyke