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NASD LETTER OF ACCEPTANCE, WAIVER AND CONSENT

NO. CE2050007

TO: Department of Enforcement NASD

RE; Wachovia Securities, Inc., Respondent (CRD No. 19616)

Larry M. Phillips, Respondent (CRD No. 362671)

HA$W ENFORCEMENT

Richard J. DiCenso, Respondent (CRD No. 67208)

Pursuant to Rule 9216 of NASD Code of Procedure, Respondents Wachovia Securities, Inc. ('Wachovia"), Larry M. Phillips ("Phillips"), and Richard J. DiCenso ("DiCenso") (collectively referred to as "Respondents") submit this Letter of Acceptance, Waiver and Consent ("AWC") for the purpose of proposing a settlement of the alleged rule violations described in Part H below. This AWC is submitted on the condition that, if accepted, NASD will not bring any future actions against Respondents alleging violations based on the same factual findings.

I understand that:

1. Submission of this AWC is voluntary and will not resolve this matter unless and until it has been reviewed and accepted by NASD's Department of Enforcement and National Adjudicatory Council (**NAC") Review Subcommittee or Office of Disciplinary Affairs ("ODA"), pursuant to NASD Rule 9216; ,

2. If this AWC is not accepted, its submission will not be used as evidence to prove any of the allegations against Respondents; and

3. If accepted: 1

a. this AWC will become part of Respondents* permanent disciplinary record and may be considered in any future actions brought by NASD or any other regulator against Respondents;

b. this AWC will be made available through NASD's pijblic disclosure program in response to public inquiries about Respondents' disciplinary record;

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c. NASD may make a public announcernent concerning this agreement and the subject matter thereof in accordance with NASD Rule 8310 and IM-8310-2; and

d. Respondents may not take any action or make or permit to be made any public statement, including in regulatory filings or'otherwise, denying, directly or indirectly, any allegation in this AWC or create the impression that the AWC is without factual basis. (Nothing in this provision affects Respondents* testimonial obligations or right to take legal or factual positions in litigation or other legal proceedings in which NASD is not a party.

Respondents also understand that their experience in the securities industry and disciplinary history may be factors that will be considered in deciding whether to accept this AWC. That experience and history are as follows:

A. Wachovia Securities, Inc.

Respondent Wachovia Securities, Inc. ("Wachovia*1 or the "Firm") has been a member firm since July 1987. The Finn, based in Richmond Virginia, has branches throughout the country. In September 2001, Wachovia merged with First Union Securities. Regulators have disciplined Wachovia and its predecessor firms multiple times. The Firm has been cited three times in 2004.

In July 2004, the NYSE censured and fined Wachovia 5250,000 for violations of NYSE and SEC rules. The NYSE cited the Firm for various failures, including but not limited to the following: pennitting employees and managers to act in a registered or managerial capacity without active or proper registrations; failing to ensure that customers received mutual fund switch letters with proper disclosures or that research reports clearly disclosed securities in which the Firmjmade markets; failing to promptly and accurately report customer complaints; and failing to supervise reasonably for, among other things, the prompt reporting of customer complaints.

In June 2004, NASD fined the Firm $20,000, ordered it to pay restitution of $19,486.25, and censured it for violating MSRB rules by failing to execute eight municipal security positions at prices that were fair and reasonable during the period August 22,2002, through December 10,2002.

In February 2004, the SEC and NASD censured and fined Wachovia|$4,844,465 for violations of the securities laws and SEC rules by failing to notify customers of appropriate breakpoint discounts and failing to disclose the remuneration the firm received from front end sales loads. I

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B. Larry M. Phillips

Respondent Larry M. Phillips ("Phillips") entered the securities industry in 1972 when he joined Dean Witter Reynolds, Inc. Phillips worked at Dean Witter until August 1992, when he joined Prudential Securities, Inc. He left Prudential to join the Encino, CA office of Everen Securities, Inc in 1996. In April 1999, First Union Securities acquired Everen Securities, Inc., and in September 2001, First Union merged with Wachovia. Phillips, who was registered as a general securities representative and as a general securities sales supervisor, worked at the Firm until he was discharged in November 2003 for violating the Firm's order entry policy. !

Following his departure from Wachovia, Phillips joined RBC Dain Rauscher in December 2003, where he is currently registered with the firm as general securities representative and as a general securities sales supervisor. Phillips has no relevant disciplinary history.

C. Richard J. DiCenso I .

Respondent Richard J. DiCenso ("DiCenso") started working in the securities industry in 1972 when he began working at Sage Financial Group. DiCenso joined Everen Securities, Inc. in July 1996 after working at a number of other member firms. He worked there through the combinations with First Union Securities and Wachovia, During the relevant period, DiCenso was the branch manager for the Encino, CA branch office of First Union and Wachovia. While at Wachovia, he was registered as general securities sales supervisor and as a general securities representative.

DiCenso left Wachovia in May 2003, and he is currently registered with member firm Crowell, Weedon & Co. as a general securities representative. He has no relevant disciplinary history.

I.

WAIVER OF PROCEDURAL RIGHTS

Respondents specifically and voluntarily waive the following rights granted under NASD's Code of Procedure:

A. To have a Formal Complaint issued specifying the allegations against me; i

i B. To be notified of the Formal Complaint and have the opportunity to

answer the allegations in writing;

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C. To defend against the allegations in a disciplinary hearing before a hearing panel, to have a written record of the hearing made and to have a written decision issued; and

D, To appeal any such decision to the NAC and then to the U.S. Securities and Exchange Commission and a U.S. Court of Appeals.

Further, Respondents specifically and voluntarily waive any right to claim bias or prejudgment of the General Counsel, the NAC, or any member of the NAC, in connection with such person's or body's participation in discussions regarding the terms land conditions of this AWC, or other consideration of this AWC, including acceptance or rejection of this AWC.

Respondents further specifically and voluntarily waive any right to claim that a person violated the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144, in connection with such person's or body's participation in discussions regarding the terms and conditions of this AWC, or other consideration of this AWC, including its acceptance or rejection.

n. ACCEPTANCE AND CONSENT

A. Respondents hereby accept and consent, without admitting or denying the allegations or findings, and solely for the purposes of this proceeding and any other proceeding brought by or on behalf of NASD, or to which NASD is a party, prior to a hearing and without an adjudication of any issue of law or fact, to the entry of the following findings by NASD:

Summary

During the period May 25,2001, through April 12, 2002, Wachovia, acting through registered representative Phillips, created and distributed a total of 26 written communications that failed to disclose adequately material facts regarding investment products and strategies, or made exaggerated, unwarranted or misleading statements or claims regarding those products, or both. Wachovia, acting primarily through branch manager DiCenso, failed to supervise reasonably Phillips's written communications activities in connection with 20 pieces of correspondence and 6 pieces of sales literature. In addition, Wachovia failed to file Phillips's sales literature with NASD.

Wachovia also failed to establish and maintain procedures that were reasonably designed to achieve compliance with NASD's requirement for filing sales literature within 10 days of first use.

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The Pilgrim Principal Protection Fund

In most of the written communications, Phillips either omitted material facts or made exaggerated, unwarranted or misleading claims regarding the Pilgrim Principal Protection Fund. In particular, he omitted material facts about the fund's risks, fees, and "guarantees," and he made exaggerated, unwarranted or misleading statements regarding the fund's investment objectives and methodologies.

As explained in its July 3,2001 prospectus, the Pilgrim Principal Protection Fund has an "Offering Phase, a Guarantee Period and an Index Plus LargeCap Period," and during these three periods, the Fund has different financial objectives and investing methodologies. Phillips misled investors by failing to fully explain how the Fund's investment objectives and methodologies change during these three distinct periods and by touting the benefits of the Fund found separately in each period as if they coexisted.

The financial objectives and investing methodologies of the three periods are as follows: j

I a) Offering Phase

During this phase, which ran from July 5, 2001, through October 3, 2001, the Fund was offered to investors to purchase shares of the Fund.

b) Guarantee Period

During this period, which began on October 4, 2001, and runs through October 3,2006 (the "Guarantee Maturity Date"), the Fund, according to the prospectus, "seeks to participate in favorable equity market conditions while preserving at least the principal amount of the Fund as of the inception of the Guarantee Period."

During this period, under normal market conditions, according to the prospectus, "the Fund's assets are allocated between an Equity Cqmponent, consisting primarily of stocks, and a Fixed Income Component, consisting primarily of U.S. Government securities."

The Fund guarantees that the value of each shareholder's account on the Guarantee Maturity Date will be no less than the value of that shareholder's account as of the inception of the Guarantee Period less certain expenses, provided that all dividends and distributions received from the Fund have been reinvested and no shares have been redeemed. If, however, a shareholder takes any distributions or dividends in cash instead of reinvesting them, or if any shares are redeemed before the Guarantee Maturity Date, or if there are expenses incurred by the Fund that are not covered by the Expense Limitation Agreement with the Fund's Adviser, the shareholder's guarantee amount will

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be reduced. Accordingly, to take advantage of the Fund's guarantee, each shareholder must redeem his or her shares on the Guarantee Maturity Date. After this date, the Index Plus LargeCap Period begins, and the Fund's guarantee is no longer in effect.

c) Index Plus LargeCap Period: During this period, which begins immediately following the Guaranteed Period, the Fund, according to the prospectus, "seeks to outperform the total return performance of the Standard and Poor's 500 Index, while maintaining a risk profile consistent with the Indjex."

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Wachovia and Phillips Distributed Written Communications That Contained Misleading Statements, Were Unbalanced, and Omitted Material Facts.

Wachovia and Phillips distributed 20 pieces of correspondence and 6 pieces of sales literature that omitted material facts and contained misleading, unbalanced, or exaggerated statements regarding investment products, such as the Pilgrim Protection Fund and variable annuities, and investment strategies promoted therein.

1. Pilgrim Protection Fund

During the period August 20, 2001, through April 12,2002, Wachovia and Phillips distributed 19 pieces of correspondence and 6 pieces of sales literature that omitted material facts and contained misleading, unbalanced, or exaggerated statements or claims regarding the Pilgrim Protection Fund. For example, the written communications were deficient in the following manner:

a. Material Omissions.

In these written communications, Phillips touted selected features of the Pilgrim Protection Fund, such as the Fund's guarantee feature. For example, in one of his written corrimunications, Phillips claimed that the Pilgrim Protection Fund "offers a one time money back guarantee after 5 years, therefore, you have the potential of the stock market but no risk." And in some of the other written communications, Phillips explained that the Fund "offers a money back guarantee after 5 years (October 4,2006)." While touting this feature in his written communications, Phillips failed to disclose, among other things, the following facts:

i . As with any investment in stocks or bonds, the Pilgrim Protection Fund is subject to market risks.

ii. If an investor redeems his or her investment prior to the end of the 5-year Guarantee Period, her redemption will be at the Fund's current net asset value, a value that could be more or less than her initial investment. (

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i i i . When held until the 5 year Guarantee Period, the value of ihe Fund will be reduced by any sales charges, redemptions, and distributions the investor has received in cash, as well as certain Fund expenses, such as interest, taxes, and extraordinary expenses.

b. Misleading, Unbalanced, or Exaggerated Statements or Claims.

In these written communications, Phillips made unwarranted and misleading statements or claims regarding the investment objectives and benefits of the Pilgrim Principal Protection Fund. As described above, the Fund has three distinct periods: The Offering Phase, a Guarantee Period, and an Index Plus LargeCap Period, and each period has distinct benefits as well as distinct investment objectives. In his written communications, Phillips touted the investment objective of the Fund's Index Plus LargeCap Period and a benefit found in the Fund's Guarantee Period in a manner that suggested that they coexist. They do not.

Specifically, Phillips claimed that the Fund would strive to "outperform the S&P 500 index" and that it "offers a money back guarantee at the end of 5 years, (October 4, 2006)." In fact, according to its prospectus, the period during which the Fund's objective was to "outperform the total return performance of the S&P 500" (the Index Plus LargeCap Period) only begins after the period - the Guarantee Period - during which the Fund offers a "guarantee" ends.

Among other statements, Phillips made the following unwarranted and misleading statements regarding the Pilgrim Protection Fund:

i. 'The Pilgrim Protection Fund is conservative growth fund striving to outperform the S&P 500. However, this program offers a money back guarantee after 5 years (October 4, 2006)."

ii. "The Pilgrim Protection Fund will invest in conservative growth stocks. The goal will be to outperform the Standard and Poors 500 index. However, the fund offers a money back guarantee at the end of 5 years."

iii . "The Pilgrim Protection Fund is a growth fund, which will strive to outperform the S&P 500 index. However, this fund offers one-time Money Back Guarantee in 5 years (October 4,2006)."

2. Variable Annuity

On May 25,2001, and December 10,2001, Wachovia and Phillips distributed two pieces of correspondence that omitted material facts and contained rmsleading, unbalanced, or exaggerated statements or claims regarding variable annuities. These written communications failed in the following respects:

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a. Material Omissions. j i i

In the correspondence, Phillips recommended a variable annuity, but he failed to identify the product as a variable annuity. In one instance, Phillips recommended a 'Tax-Deferred Annuity with a living benefit feature" and explained that the customer's funds would be "invested in a flexible array of mutual funds." In the second instance, Phillips referred to a product as **the LNG annuity." In both instances, Phillips described or referred to a variable annuity, but he failed to identify the product as a variable annuity as required.

b. Misleading, Unbalanced, or Exaggerated Statements or Claims.

In the correspondence, Phillips claimed that the value of the variable annuity was guaranteed to "double" in 10 years. This statement was unwarranted and misleading. In fact, only the variable annuity's "income benefit" is guaranteed to double in 10 years, not the value of the variable annuity. An investor can only take advantage of this benefit if he or she pays an additional fee to have this rider added on to his or her contract. Phillips did not disclose this fact while discussing the benefits of a variable annuity.

3. Investment Strategy

On May 25, 2001, Wachovia and Phillips distributed one piece of correspondence that contained false, misleading, unbalanced, and impermissibly promissory statements or claims regarding an investment strategy Phillips recommended.

In this correspondence, Phillips recommended an investment plan that would use the customer's money, totaling approximately $303,000, "to generate income to be distributed at the rate of approximately $6,000 per month" for a 10 year period. The plan would reduce the customer's principal "by less than $200,000 in the first 10 years." In order to satisfy these requirements, Phillips's investment plan would have to earn a rate f return of approximately 22% per year for 10 years. Phillips failed to disclose this fact and others such as the features, expenses, or risks associated with his investment plan. He, therefore, failed to provide the customer with a sound basis for evaluating his investment plan. In addition, Phillips's prediction that his investment plan would generate "approximately $6,000 per month" was unwarranted, rnisleading, and impermissibly promissory because it predicted future specific returns.

By virtue of the foregoing conduct, Wachovia and Phillips violated Conduct Rules 2110, 2210(d)(1)(A), 2210(d)(1)(B), andIM-2210-2.1

'Rule 2110 provides:

A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade.

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Wachovia Failed to File Sales Li tera ture with N A S D .

On August 20, 2001, and August 21,2001, Phillips distributed a total of six pieces o f sales literature to customers. In each one, Phillips recommended the Pilgrim Protection Fund. Wachovia was required to file Phillips's sales literature with N A S D ' s Advertising Regulation Department within 10 days o f first use. Wachovia did not file

Rule 2210(d)(1)(A) provides:

Al l member coininunications with the public shall be based on principles of fair dealing and good faith and should provide a sound basis for evaluating the facts in regard to any particular security or securities or type of security, industry discussed, or service offered- No material fact or qualification may be omitted if the omission, in the light of the context of the material presented, would cause the communication to be misleading.

Rule 2210(d)(1)(B) provides:

Exaggerated, unwarranted or misleading statements or claims are prohibited in all public communications of members. In preparing such communications, members must bear in mind that inherent in investment are the risks of fluctuating prices and the uncertainty of dividends, rates of return and yield, and no member shaU, directly or indirectly, publish, circulate or distribute any public communication that the member knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading.

IM-2210-2 establishes additional guidelines that must be considered for advertisements and sales literature about variable life insurance and variable annuities.

IM-2210-2(a)(l) provides:

In order to assure that investors understand exactly what security is being discussed, all communications must clearly describe the product as either a variable life insurance policy or a variable annuity, as applicable . . . Considering the significant differences between mutual funds and variable products, the presentation must not represent or imply mat the product being offered or its underlying account is a mutual fund.

IM-2210-2(a)(2) provides.

Considering that variable life insurance and variable annuities frequently involve substantial charges and/or tax penalties for early withdrawals, there must be no representation or implication that these are short-term, liquid mvestments...

IM-2210-2(a)(3) provides:

Insurance companies issuing variable life insurance and variable annuities provide a number of specific guarantees. For example, an insurance company may guarantee a minimum death benefit for a variable life insurance policy or the company may guarantee a schedule of payments to a variable annuity owner. Variable life insurance policies and variable annuities may also offer a fixed investment account that is guaranteed by the insurance company. The relative safety from such a guarantee must not be overemphasized or exaggerated as it depends on the Llaims-paying ability of the issuing insurance company. There must be no representation or implication that a guarantee applies to the investment return or principal value of the separate account...

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any of Phillips's sales literature with NASD.

By virtue of this conduct, Wachovia violated Conduct Rules 2110 and 2210(c)(1).2

Wachovia and DiCenso Failed Reasonably to Supervise Phillips's Written Communications Activity.

Wachovia, acting primarily through DiCenso, reviewed and approved Phillips's written communications. As described above, these written cornmunications were deficient because they omitted material facts or contained exaggerated, unwarranted or misleading statements or claims regarding the products or investment strategies recommended. By approving these written communications, Wachovia and DiCenso failed reasonably to supervise Phillips.

By virtue of this conduct, Wachovia and DiCenso violated Rule 2110 and 3010 (a)(1)-3

Wachovia Failed to Establish, Maintain, and Enforce Written Procedures That Were Reasonably Designed to Achieve Compliance with NASD's Rule on Communications with the Public.

During the relevant period, Wachovia's written supervisory procedures incorrectly defined "sales literature" which is required to be filed with NASD's Advertising Regulation Department within 10 days for first use. Wachovia's managerial personnel used the written supervisory procedures to determine whether a written communication should to be forwarded to NASD's Advertising Regulation Department. Bylincorrectly defining "sales literature," Wachovia's written supervisory procedures improperly instructed the Firm's managerial personnel on when a written communication qualified as sales literature that needed to be filed with NASD's Advertising Regulation Department.

By virtue of this conduct, Wachovia violated Conduct Rule 2110 and 3010(bXl)-4

2 Rule 2210(c)(1) provides:

Advertisements and sales literature concerning registered investment companies (including mutual funds, variable contracts and unit investment trusts)... shall be filed with the Association's Advertising/Investment Companies Regulation Department (Department) within 10 days of first use or publication by any member. The member must provide with each riling the actual or anticipated date of first use.

3 Rule 3010(a) provides, in part:

Each member shall establish and maintain a system to supervise the activities of each registered representative and associated person that is reasonable designed to achieve compliance with applicable securities laws and regulations, and with the Rules of this Association.

4 Rule 3010(b)(1) provides:

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B. Respondents also consent to the imposition, at a maximum, ofithe following sanctions:

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Wachovia

1) A censure, and

2) A fine of Twenty-five Thousand ($25,000) Dollars.

Phillips

1) A fine of Twenty Thousand ($20,000) Dollars, and

2) A suspension from associating with any member firm in any capacity for ten (10) business days.

DiCenso

1) A censure, and

2) A fine of Fifteen Thousand ($15,000) Dollars.

The sanctions imposed herein shall be effective on a date set by NASD staff. Pursuant to -8310-2(1), a bar or expulsion shall become effective upon approval or acceptance of this AWC by the NAC.

m.

OTHER MATTERS

A. I understand that I may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct I understand that I may not deny the charges or make any statement that is inconsistent with the AWC in this Statement. This Statement does not constitute factual or legal findings by NASD, nor does it reflect the views of NASD or its staff.

B. I agree to pay any monetary sanctions imposed on me and have attached an Election of Payment form showing the method by which I propose to pay

Each member shall establish, maintain, and enforce written procedures to supervise the types of business in which it engages and to supervise the activities of registered representatives and associated persons that are reasonably designed to achieve compliance with applicable securities laws and regulations, and with applicable Rules of this Association.

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any fine imposed. y

C. I specifically and voluntarily waive any right to claim that I am unable to pay, now or at any time hereafter, any monetary sanction imposed in this matter.

D. I understand that if I am barred or suspended from associating with any NASD member, I become subject to a statutory disqualification as that term is defined in Section 3(a)(39) of the Securities Exchange Act of 1934, as amended. Accordingly, I may not be associated with any NASD member in any capacity, including clerical or jninisterial functions, during the period of the bar or suspension. (See NASD Rule 8310 and IM-8310-

I certify that I have read and understand all of the provisions of this AWC and have been given a full opportunity to ask questions about it, and that no offer, threat, inducement, or promise of any kind, other than the terrns set forth herein, has been made to induce me to submit it.

1.)

Date

BV: jfUttl iJf> [Name and title]

Date Respondent, Larry M. Phillips

Date Respondent, Richard J. DiCenso

Accepted by NASD:

Date Director, Department of Enforcement

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matte.

H. I mjdexstand that i f l am hatred ox suspended from associating with any NASD member, X become subject to * statutory duquatirjcarion aa that term U defined in Section 3(a)(39) of me Securities Exchangfl Act of1934, as Amended. Accordingly, I xnayaotbeaasociateriwimarryNASD njoiibcx marry capacity, iuclofirig clerical or nsinlKtorial functions, during flic period of the bar or enpqurion. (Sea NASD Rule 8310 andrM-8310-U

I certify that 1 have read aid understand all of the piovialuns of This AWCandhgye pcey given a full cppcrrtimrry to ask questions about it, and that no ofier, threat, mducamerrt, ox proirjiaeofanykixid, otbzr me to sTTbxnit fa.

Date

Date

Respondent, Wachcrvia Securities* LLC

B y . _ [Name and title]

RgayUMffnt, Laiiy M. PhnHps

Date

Accepted by NASD;

Respondent, Richard J. DiCenso

Date Dfaeutor, Deportment ofjgrtibirccaient Signed on behalf of the DneoDor of

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any fine imposed.

C I specifically and voluntarily waive any right to claim that I am unable to pay, now or at any time hereate> acymoiie ary sanction iEiposerimmis matter.

D- I understand mat if I am tencd or suspended fiom associating wfm my NASD member, I become subject to a statutory disqnnrificalian as that term is defined in Section 3(a)C39) of the Securities Exclumge Act of 1934* as amended. Aw#rdmgly,Itti ixrtbea member in any capacity, tramrrrng dcrical or mixristcrial functions, during the period of the bar or suspension- (See NASD Rule 8310 and IM-8310-

provisions of this AWC and have been given a full oppc rtunity to ask. questions aboutft, and that no offer, threat, inducement, or nrottdac of any land, other than the term* set &r& submit it

Date Respondent, Wachovia Securities, Inc.

By: fName and title]

Date

Accepted by NASD:

Date

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Statement of Corrective Action

This Corrective ActioaStatement is submitted by the Respondent. It does not constitute 1

factual or legal finds by NASD, nor does it reflect the views of NASD, or its staff.

As corrective action, I have taken and passed continuing education courses on client contact, Mutual Funds and Annuities.

My employer has placed me under a program of Heightened Supervision for a minimum of 1 year. This program includes cancellation of all discretionary accounts, special review of all written and electronic correspondence, exclusion from any award programs, inability to earn commissions on certain investment products and a personal monthly meeting with my branch manager to review compliance with the terms of the program.