UNITED STATES OF AMERICA

Before the

COMMODITY FUTURES TRADING COMMISSION

_______________________________________________
)
In the Matter of: ) CFTC DOCKET NO. 00 - 20
)
STANLEY C. HARLEY, ) ORDER INSTITUTING PROCEEDINGS
) PURSUANT TO SECTIONS6(c) AND 6(d)

Respondent.

) OF THE COMMODITY EXCHANGE ACT,
) AS AMENDED, MAKING FINDINGS AND
) IMPOSING REMEDIAL SANCTIONS
_______________________________________________ )

I.

The Commodity Futures Trading Commission (the "Commission") has reason to believe that Stanley C. Harley ("Harley") has violated Section 4m(1) of the Commodity Exchange Act, as amended (the "Act"), 7 U.S.C. 6m(1) (1994), and Commission Regulation ("Regulation") 4.31(a) and (b), 17 C.F.R. 4.31(a) and (b) (1999). Therefore, the Commission deems it appropriate and in the public interest that public administrative proceedings be, and they hereby are, instituted to determine whether Harley engaged in violations set forth in this Order and to determine whether any order should be issued imposing remedial sanctions.

II.

In anticipation of the institution of this administrative proceeding, Harley has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Without admitting or denying the findings of fact or conclusions of law in this Order, and prior to any adjudication on the merits, Harley acknowledges service of this Order. Harley consents to the use of the findings in this Order in this proceeding and in any other proceeding brought by the Commission, or to which the Commission is a party.1

III.

The Commission finds the following:

A. SUMMARY

From at least November 1998 to March 2000, Stanley C. Harley acted as a commodity trading advisor ("CTA"), by directing the trading in numerous commodity futures trading accounts, without being registered as a CTA, in violation of Section 4m(1) of the Act. In addition, Harley solicited prospective clients and entered into agreements with prospective clients to direct and/or guide their commodity interest accounts without first (1) delivering the required CTA Disclosure Document to the prospective clients; and (2) obtaining from these prospective clients a signed acknowledgement of receipt of the Disclosure Document, in violation of Regulation 4.31(a) and (b).

B. RESPONDENT

Stanley C. Harley resides at 1605 Ridgewood Drive, Camarillo, California 93012. Harley has never been registered with the Commission in any capacity.

C. FACTS

Harley has engaged in securities-related activities since at least 1991. He was registered with the Securities and Exchange Commission ("SEC") as an investment adviser ("IA") until October 20, 1997, when Harley withdrew his registration.2 Harley has been registered with the State of California as an IA since July 1991. Although Harley has never been registered with the Commission in any capacity, he has, pursuant to powers of attorney, managed numerous commodity futures trading accounts since at least November 1998.

In July 1999, Harley filed with the Commission a Notice of Exemption, in which he claimed that he was exempt from registration as a CTA pursuant to Regulation 4.14(a)(8), which exempts from registration, among others, persons registered with the SEC as an IA under the Investment Advisers Act of 1940. Harley was not registered as an IA with the SEC at that time.

Regulation 4.14(a)(8) provides for exemption from CTA registration only when (1) the CTA's commodity trading advice is directed solely to and for the sole use of entities which are excluded from the definition of the term "pool" or who are "qualifying entities" under Regulation 4.5, such as investment companies, insurance companies, banks or trustees of various employee pension and welfare plans under ERISA -- for which a notice of eligibility has been filed; (2) the advice is solely incidental to the providing of securities advice to such entities; and (3) the CTA is not otherwise holding himself out as a CTA to the public. Harley's clients are not entities which are excluded from the definition of the term "pool" or who are "qualifying entities" under Regulation 4.5. In addition, Harley's commodity interest trading advice to one or more of these clients is not solely incidental to his business of providing securities advice to them, and he does not employ only such strategies as are consistent with eligibility status under Regulation 4.5.

Finally, Harley has held himself out to the public as a CTA. In his Notice of Exemption from registration as a CTA that he filed with the Commission, Harley stated his intention to engage in business as a CTA. Consistent with his intention, Harley enters into "commodity trading advisory" contracts with his clients that state that he is a CTA. In addition, one or more introducing brokers have recommended him to prospective clients, and those recommendations have been the source of many of his clients. Finally, in his market letter analysis and his appearances as a "market analyst" on radio and television stations, and at investment seminars, Harley analyzes, among other things, movements in stock market indices, on which he trades futures contracts for the benefit of his commodity futures clients.

Harley does not provide any of his managed account clients with a CTA Disclosure Document. In fact, the CTA agreement into which he enters with his clients states that in accordance with his purported exemption from registration "the Commodity Trading Advisor is not required to provide a disclosure document." However, because Harley is not entitled to the registration exemption, he is required to provide all prospective clients with a CTA Disclosure Document.

D. LEGAL DISCUSSION

1. Harley Violated Section 4m(1) of the Act

Under Section 1a(5)(A) of the Act, in order to establish that someone is a CTA, it must be shown that the person (i) advised another about the value or advisability of trading in futures contracts, (ii) "either directly or through publications, writings or electronic media," (iii) for compensation or profit. Harley, for compensation or profit, gives and has given commodity futures trading advice by directing the trading in the accounts for which he has powers of attorney. Harley, therefore, is a CTA. 3

Section 4m(1) of the Act makes it unlawful to make use of the mails or instrumentalities of interstate commerce to provide commodity trading advice to more than15 persons during the preceding 12-month period, or to hold oneself out generally to the public as a CTA, unless registered as a CTA under the Act. Harley currently advises, and has typically advised, more than 15 clients at any given time, and holds himself out to the public as a CTA. In In re Armstrong, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. 25,657 at 40,151 (CFTC Feb. 8, 1993), the Commission found it unnecessary to determine whether the respondent had advised more than 15 people within the preceding 12 months, since he had held himself out to the public as a CTA. Holding oneself out as a CTA occurs "through such conduct as promoting advisory services through mailings, directory listings, and stationery, or otherwise initiating contacts with prospective clients." Interpretive Letter No. 91-9 [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) 25,189 (Dec. 30, 1991). See also In re R&W Technical Services, Ltd., Comm. Fut. L. Rep. (CCH) 27,582 (Mar. 16, 1999) affirmed 205 F.3d 165 (5th Cir. 2000)

Harley does not qualify for exemption from registration as a CTA under Regulation 4.14(a)(8) for the following reasons. First, Harley is not an "investment adviser" registered with the SEC since he withdrew his registration in 1997, and he is not a person excluded from the definition of the term "investment adviser" under Sections 202(a)(2) and 202(a)(11) of the Investment Advisers Act of 1940.

Second, Harley does not provide advice solely to persons who qualify under Regulation 4.5, which includes only certain entities excluded from the definition of the term "pool" or who are "qualifying entities" under Regulation 4.5. Such "qualifying entities" include only investment companies, insurance companies, banks, trustees of various employee pension and welfare plans under ERISA, and other similar "qualifying entities." Individuals, regardless of net worth or income, are not "qualifying entities." Seventeen of the 19 accounts which until recently Harley managed are owned by individuals who are ineligible for Regulation 4.5 status.

Third, the advice Harley gives to those persons whose commodity futures accounts he manages is not solely incidental to securities advice he provides to such clients.

Fourth, Harley holds himself out to the public as a CTA. Many of his commodity futures managed account clients have come to him as a result of recommendations from one or more introducing brokers or as a result of his market analysis in his market letter or his public appearances as a "market analyst." In addition, Harley has a "commodity trading advisory contract" which was signed by at least ten (10) of Harley's managed account clients. The contract states that Regulation 4.14(a)(8) authorizes Harley, a registered investment adviser, to operate as a CTA without registration with the Commission.

Therefore, Harley does not qualify for an exemption from registration as a CTA under Regulation 4.14(a)(8) and is acting, and has acted, as a CTA, without registering as such, in violation of Section 4m(1) of the Act.4

2. Harley Violated Commission Regulation 4.31 (a) and (b)

Section 4.31(a) of the Regulations provides that any CTA registered or required to be registered under the Act is prohibited from soliciting a prospective client, or entering into agreements with a prospective client to direct the client's commodity futures trading account, unless the CTA "at or before the time it engages in the solicitation or enters into the agreement (whichever is earlier), delivers or causes to be delivered to the prospective client a Disclosure Document for the trading program pursuant to which the trading advisor seeks to direct the client's account." Section 4.31(b) of the Regulations prohibits a CTA from entering into an agreement to direct a client's account unless the CTA has received a signed acknowledgement from the client that the client received the Disclosure Document.

Recently Harley has directed the trading in 19 commodity futures trading accounts, pursuant to powers of attorney, and has similarly directed the trading in other accounts in the past. However, Harley has not provided a Disclosure Document to those clients or received from these clients acknowledgment of receipt of a Disclosure Document. Harley has therefore violated Regulation 4.31(a) and (b).

IV. FINDINGS OF VIOLATIONS

Based on the foregoing, the Commission finds that Harley violated Section 4m(1) of the Act and Regulation 4.31(a) and (b).

V. OFFER OF SETTLEMENT

Harley has submitted an Offer of Settlement in which, without admitting or denying the findings of fact herein, he:

A. Admits the jurisdiction of the Commission with respect to all matters set forth in the Order;

B. Acknowledges service of the Order;

C. Waives:

1. the filing and service of a Complaint and Notice of Hearing;

2. a hearing;

3. all post-hearing procedures;

4. judicial review by any court;

5. any objection to the staff's participation in the Commission's consideration of its Offer;

6. all claims which he may possess under the Equal Access to Justice Act, 5 U.S.C. 504 (1994) and 28 U.S.C. 2412 (1994), as amended by the Small Business Regulatory Enforcement Fairness Act of 1996, Pub. L. No. 104-121, 231-232, 110 Stat. 862-863, and Part 148 of the Regulations, 17 C.F.R. 148.1, et seq. (1998), relating to, or arising from, this action, and he shall not assert any right under the Equal Access to Justice Act to seek costs, fees, or other expenses relating to, or arising from, this proceeding; and

7. any claim of Double Jeopardy based upon the institution of this proceeding or the entry of any order imposing a civil monetary penalty or any other relief;

D. Stipulates that the record basis on which this Order is entered consists solely of this Order and its findings to which he has consented in the Offer, which are incorporated in this Order; and

E. Consents, solely of the basis of the Offer, to the Commission's issuance of this Order, which makes findings of fact and findings of violations, and:

1. orders Harley to cease and desist from violating Section 4m(1) of the Act and Regulation 4.31(a) and (b);

2. orders Harley to pay a civil penalty in an amount of Ten Thousand Dollars ($10,000) as follows: five thousand dollars ($5,000) within five (5) days of the date of the Order and five thousand dollars ($5,000) within sixty (60) of the date of the Order. Harley shall make such payments by U.S. postal money order, certified check, bank cashier's check or bank money order, made payable to the Commodity Futures Trading Commission, and sent to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, under cover of a letter that identifies Harley and the name and docket number of the proceeding; Harley shall simultaneously transmit a copy of the cover letter and of the form of payment to Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W. Washington, D.C. 20581. In accordance with Section 6(e)(2) of the Act, if Harley fails to make either payment of his penalty within fifteen (15) days of the respective due dates, he shall be automatically prohibited from trading on all contract markets and, if he is registered with the Commission at that time, such registration shall be automatically suspended until he shows to the satisfaction of the Commission that payment has been made; and

3. orders Harley to comply with his undertakings as set forth below.

VI. ORDER

Accordingly, IT IS HEREBY ORDERED THAT:

A. Harley shall cease and desist from violating Section 4m(1) of the Act and Regulation 4.31(a) and (b);

B. Harley shall pay a civil penalty in an amount of Ten Thousand Dollars ($10,000) as follows: five thousand dollars ($5,000) within five (5) days of the date of the Order and five thousand dollars ($5,000) within sixty (60) days of the date of the Order.5 Harley shall make such payments by U.S. postal money order, certified check, bank cashier's check or bank money order, made payable to the Commodity Futures Trading Commission, and sent to Dennese Posey, Division of Trading and Markets, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, under cover of a letter that identifies Harley and the name and docket number of the proceeding; Harley shall simultaneously transmit a copy of the cover letter and of the form of payment to Director, Division of Enforcement, Commodity Futures Trading Commission, 1155 21st Street, N.W. Washington, D.C. 20581. In accordance with Section 6(e)(2) of the Act, if Harley fails to make either payment of his penalty within fifteen (15) days of the respective due dates, he shall be automatically prohibited from trading on all contract markets and, if he is registered with the Commission at that time, such registration shall be automatically suspended until he shows to the satisfaction of the Commission that payment has been made; and

C. Harley shall comply with the following undertakings:

1. not to engage in any activity which requires registration with the Commission as a CTA, including directing any current or prospective client's commodity interest account or guiding any current or prospective client's commodity interest trading, until Harley (a) is registered as a CTA with the Commission pursuant to Section 4m(1) of the Act, 7 U.S.C. 6m(1); (b) delivers or causes to be delivered to that client a Disclosure Document for the trading program pursuant to which Harley seeks to direct that client's account or to guide that client's trading, as required by Regulation 4.31(a), 17 C.F.R. 4.31(a); and (c) receives from that client an acknowledgement signed and dated by that client stating that such client received a Disclosure Document for the trading program pursuant to which Harley will direct the account or will guide the trading, as required by Regulation 4.31(b), 17 C.F.R. 4.31(b); provided, however, that Harley may direct his current clients' commodity interest accounts "for liquidation only;"

2. within 48 hours of the issuance of this Order, to (a) notify each current client that Harley is only allowed to trade the client's account "for liquidation only" until he satisfies the undertaking set forth above in Section III.1. above; (b) provide each current client with a copy of the Order accepting Harley's Offer of Settlement; and (c) explain to each current client the terms of the Order;

3. not to represent, through any Internet website, the "Harley Market Letter," any publication or broadcast, or by any other means of marketing, advertising, or promotion, that Harley is a registered investment adviser with the Securities and Exchange Commission or that Harley is eligible or qualified for exemption from registration as a CTA under Commission Regulation 4.14(a)(8); and

4. not to take any action or make any public statement denying, directly or indirectly, any finding in the Order, or creating, or tending to create, the impression that the Order is without factual basis; provided, however, that nothing in this provision affects Harley's: (i) testimonial obligations; or (ii) right to take legal or factual positions in other proceedings to which the Commission is not a party.

Dated: May 31, 2000 By the Commission.
_______________________
Jean A. Webb
Secretary to the Commission
Commodity Futures Trading Commission



NOTES:

1 Harley does not consent to the use of the Offer or the Order, or the findings consented to in this Order, as the sole basis for any other proceeding brought by the Commission other than a proceeding to enforce the terms of the Order. Harley does not consent to the use of the Offer or this Order, or the findings consented to in the Offer, by any other person or entity in this or in any other proceeding. The findings made in this Order are not binding on any other person or entity in any other proceeding.

2 Harley withdrew his IA registration with the SEC because of changes in the law governing the regulation of IAs. As of July 1997, any IA that is regulated or required to be regulated in the state in which it maintains its place of business generally is prohibited from registering with the SEC unless the IA (i) has assets under management of at least $25 million, or (ii) is an adviser to a registered investment company. See Section 203a(a)(1) of the Investment Advisers Act of 1940[15 U.S.C. 80b-3a(a)(1)], and SEC Regulation 203A-1, 17 CFR 275.203A-1 (1997). Harley had less than $25 million of assets under management and thus was registered with the State of California as an IA.

3 See CFTC v. British American Commodity Options Corp., 560 F.2d 135, 141 (2d Cir. 1977), cert. denied, 438 U.S. 905 (1978) (a firm that "offer[ed] opinions and advice, and issued analyses and reports concerning the value of commodities" to customers, was a CTA under the Act); Gaudette v. Panos, 644 F. Supp. 826, 839 (D. Mass. 1986) (defendants who represented their advisory skills to be exemplary, suggested that plaintiffs open a commodity account and then recommended certain futures contracts for investment were CTAs).

4 Since Harley has directed trading in commodity trading accounts for clients, Harley also would not be entitled to an exemption from registration as a CTA under Regulation 4.14(a)(9).

5 The Commission assessed this penalty amount in part based upon its determination that Harley may be entitled to a reduction of the amount of the penalty pursuant to the Small Business Regulatory Enforcement Act of 1996, Pub. L. 104-121, Title II (Mar. 24, 1996), 110 Stat. 857, 862, as a "small entity."