the Matter of the Application of REUBEN
D. PETERS and PETERS SECURITIES CO., LP
For Review of NASD
Denial of Application to Associate
Between 1993 and 1995 Reuben D. Peters (then managing general partner of Peters Securities Co.) and eight other parties engaged in an after-market trading manipulation that artificially raised the price of a NASDAQ Small Cap stock for which Peters Securities was the primary market maker. On June 16, 2000, Reuben D. Peters was enjoined with his consent against future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933 (the "disqualifying event") and he paid $340,138.65 in disgorgement and prejudgment interest and a civil penalty of $25,000. Peters also agreed to a settlement of a parallel administrative proceeding brought by the SEC based on the same misconduct. Pursuant to the settlement, the SEC suspended Peters for two months. The suspension ended on September 3, 2000. By virtue of the injunction, Peters was statutorily disqualified and would subsequently need to apply for permission to become associated with an NASD member firm.
Prior to the entry of the SEC injunction noted above and pertaining to an unrelated matter, on April 14, 2000, NASD accepted Peters' and Peters Securities' Letter of Acceptance, Waiver and Consent ("AWC") for violations of NASD Rules 1120, 2110, 3010 and SEC Rule 15c3-1 involving
In settling with NASD, Peters and Peters Securities agreed to be fined $55,000, jointly and severally. In addition, Peters was suspended as a general securities principal and financial and operations principal for 30 days, and he was required to re-qualify before acting in those capacities.
In February 2002, NASD accepted another AWC against Peters Securities that stated that the Firm committed certain market trading violations (including limit order display violations, short sale violations, and violations of rules relating to market making activities), agreed to pay a fine and provide restitution to customers. As a result of this AWC, Peters Securities underwent a restructuring in which it stopped accepting retail orders and became a proprietary trading firm.
Peters' SD Application
On August 21, 2000, Peters Securities filed an application with NASD to permit the statutorily disqualified Peters to continue to associate with Peters Securities. Peters Securities proposed that Peters continue to work out of the Firm's office located in Telluride, Colorado and that Peters' work be supervised by one of the Firm's registered representatives, Matthew Bowling, who also worked in the Firm's Telluride office. In the application, Peters Securities stated that Peters would trade proprietary accounts for his own gain or loss, participate as a general partner in the Firm's gains or losses, as well as the gains or losses resulting from his own proprietary trading, but would not be involved in the supervision of the day-to-day activities of individuals at the Firm. Peters Securities noted in the application that it no longer engaged in any retail market activities, and thus no longer was engaged in the type of business that had been at issue in the 2000 disciplinary matter.
In February 2001, Peters Securities filed a supplemental application with NASD requesting that NASD allow Peters to associate with Petco Trading LLC ("Petco"), an entity that was intended to become the sole general partner of Peters Securities.
Ross and Van Dusen Tests Are Satisfied
Change of Plans
On February 7, 2002, Peters Securities advised NASD that Petco would no longer be operating as a registered broker-dealer or as general partner of the Firm. The Firm also advised NASD that certain of its personnel had left the firm, as a result of which the Firm would not be providing on-site supervision of Peters.
In December 2002, NASD responded to the changed circumstances by withdrawing the filed 19h-1, and Member Regulation commenced extensive discussions with the Firm concerning its new proposed supervision of Peters. As a result of these discussions, Peters Securities proposed to establish a number of supervisory procedures that would give the Firm direct oversight of Peters' trading activities even though there would be no on-site supervision. The Firm proposed that Peters be supervised by one of its general partners, Christopher Rosman, who worked in Peters Securities' Chicago office and had no prior disciplinary history. In a letter dated January 21, 2003, Member Regulation recommended approval of the Firm's application. Member Regulation reiterated all the factors described in the 19h-1 Notice underlying the approval of the Firm's original application. Member Regulation then addressed the changes in the Firm's proposed supervision of Peters. Member Regulation noted first that Peters' trading activity would be limited to proprietary trading and that Peters Securities no longer conducted business with the public. Member Regulation then explained that the arrangements compensated for the lack of on-site supervision with "real-time monitoring" of Peters' activities and provided "the necessary documentation review and enhanced compliance measures necessary to monitor the activities of Peters."
NASD Denies Application
A hearing was held on January 30, 2003, and Rosman testified that the Firm's computer trading system enabled Rosman to see every trade executed by Peters on a real-time basis. Counsel for the Firm stated that this monitoring system enabled the other Peters Securities partners to look at Peters' trading, conduct random spot checks at any time during the day, and run various types of exception reports that would show, for example, any trades over a certain size or not executed through an electronic system. Notably, A staff person from Member Regulation, Lorraine Lee, testified that both NASD's Department of Market Regulation and the district office that oversees Peters Securities were confident that Peters Securities had dealt with all of the regulatory issues raised in the prior disciplinary proceedings and that permitting Peters' association was not against the public interest.
By decision dated September 23, 2003 ("the September 23 decision"), the NAC denied the Firm's application. Inexplicably, the September 23 decision determined that the SEC's Van Dusen and Ross decisions did not apply here --- this despite those same decisions having been cited as relied upon in the 19h-1 Notice filed with the SEC. Peters and Peteres Securities appealed the NAC decision to the SEC.
The Three-Prong 19(f) Test
(1) was based on specific grounds that exist in fact;
The SEC stated that this first requirement for a basis on specific grounds is not in dispute because Peters is subject to a statutory disqualification pursuant to Exchange Act Section 3(a)(39) as a result of the permanent injunction entered against him in 2000.
(2) was made in accordance with the SRO's rules; and
Less clear is this second prong because there was no indication in the record that the Hearing Panel or the Committee ever submitted written recommendations as required by NASD Procedural Rule 9524(a)(10), or that they were considered by the NAC, as required by Rule 9524(b)(1).
(3) that these rules were applied in a manner consistent with the purposes of the Exchange Act.
Ah, now here's the rub! Because the September 23 decision misconstrued the applicability of the Van Dusen and Ross, the SEC couldn't conclude that the third prong was satisfied and remanded the matter for further consideration as discussed below.
Back to the Drawing Board
Because the September 23 decision stated at the outset of its analysis that the NAC was not bound by the standards set forth in Van Dusen and Ross, the SEC was unable to discern whether the September 23 decision appropriately considered the record before it. The September 23 decision makes clear that the seriousness of Peters' misconduct underlying the injunction provided support for its determination to deny the application. It also considers Peters' other disciplinary history. The September 23 decision does not, however, engage in the analysis required by Van Dusen and Ross of the relevance of any of this misconduct.
Further, the SEC was also puzzled by some inherent flaws in the NASD's reasoning. For example, in the 19h-1 Notice, the NASD approved the application, notwithstanding the recently proposed restructuring of the firm. However, at a later date, the September 23 decision finds that the restructuring of the Firm, under which it no longer engages in the types of conduct that led to its and Peters' earlier disciplinary actions, is too recent for the Firm to have had sufficient time to demonstrate regulatory compliance within the newly reorganized format. The logic is flawed. If the "recency" of the restructuring were seriously troubling, the NASD would have had more of a problem with that factor in October 2001 when it filed the Notice, than in September 2003!
The September 23 decision also expressed concern about Peters' ability to control the Firm given the level of his and his family's ownership interest, but there is no indication in the record that this was a changed circumstance from when the 19h-1 Notice was filed in 2001. Clearly, the SEC doesn't understand how the NASD knew of something two years earlier, had no issue with it, and now raises that same fact as a troubling "recent" development. Similarly, the September 23 decision identified the issue of off-site supervision of Peters as significant. However, it does not discuss Membership Regulation's examination of the proposed off-site supervisory procedures, and its consultation with NASD's Market Regulation division, in support of Member Regulation's conclusions that the procedures would be adequate. While the NAC is not obligated to follow the recommendations of NASD staff, the September 23 decision does not make clear its views of the staff's position. Unequivocally, the SEC tells the NASD to go back to the drawing board and do its job --- and set forth in understandable fashion what you considered, how you weighed it, and why you reached whatever conclusion you do.
Accordingly, because the SEC was unable to conclude that the September 23 decision applied NASD's rules in a manner consistent with the purposes of the Exchange Act, the matter was remanded to NASD for further consideration of the matters we have discussed.
The SEC remanded to NASD the review proceeding of the application by Peters Securities Co., LP to continue to employ Reuben D. Peters as a registered representative.
NASD Motion to Reconsider
NASD argued that the SEC's Decision required clarification because it created a "bizarre result" wherein a a disqualified individual who is barred without a right to reapply is in a better position than a disqualified person with a right to reapply. NASD sought to have Ross and Van Dusen limited to only apply to a "statutorily disqualified person whose disqualifying conduct has also resulted in an administrative suspension of less than 12 months imposed by us [the SEC] pursuant to Section 15 of the Exchange Act."
The SEC commented that in the case of an unqualified permanent bar, based on the nature and seriousness of the misconduct, the public interest requires that the respondent be barred from the industry without a finding that there is a time period after which it would be appropriate to consider reentry. A decision by NASD to deny such person's application to associate would not be inconsistent – indeed, it would be consistent – with the sanction determination made by the SEC.
Accordingly, the SEC did not find that the NASD had presented any exceptional circumstances required for reconsideration and denied the motion.