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NOTE:
Offers of Settlement (OS) and Letters of Acceptance, Waiver, and Consent (AWC)
are entered into by Respondents without admitting or denying the
allegations, but consent is given to the described sanctions and to the
entry of findings.
STATUTORY
DISQUALIFICATION APPLICATION
2005
By
Bill Singer
In
the Matter of the Association of X as an Investment Company
Products/Variable Contracts Representative with The Sponsoring Firm
Redacted Decision Notice Pursuant to Section 19(d) Securities Exchange Act
of 1934 SD Decision No. 05008
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| In the Matter
of the Association of X as an Investment Company Products/Variable
Contracts Representative with The Sponsoring Firm Redacted
Decision Notice Pursuant to Section 19(d) Securities Exchange Act
of 1934 SD Decision No. 05008 |
X
subsequently appealed this decision to the SEC. The SEC remanded
the matter back to NASD’s NAC, where the matter is currently
pending.
DENIED
by National Adjudicatory Council
In April 2005, a subcommittee ("Hearing
Panel") of NASD's Statutory Disqualification Committee held a
hearing on the matter. X appeared in person at the hearing,
accompanied by his proposed supervisor, and his counsel, MB. LL
and JV appeared on behalf of NASD's Department of Member
Regulation ("Member Regulation").
On August 2, 2004, the Sponsoring Firm (“the
Firm") completed a Membership Continuance Application
("MC-400" or "the Application") seeking to
permit X, a person subject to a statutory disqualification, to
associate with the Sponsoring Firm as an investment company
products/variable contracts representative.
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| SD
Event |
X is statutorily disqualified pursuant to Art.
III, Sec. 4(f) of NASD's By-Laws because, in 2003, NASD's
Department of Enforcement ("Enforcement") accepted his
submission of a Letter of Acceptance, Waiver and Consent ("AWC").
NASD suspended X for six
months in any capacity and imposed a $7,500 fine. The AWC
also specifically provided that:
X understands that this settlement includes a
finding that . . . he willfully
failed to disclose a material fact on a Form U-4, and . .
. he willfully misrepresented a material fact on a Form U-4
amendment, and that . . . he is therefore subject
to a statutory disqualification with respect to
association with a member.
In the AWC, X consented to NASD's finding that, in
October 1999, he willfully failed to disclose material facts on a
Uniform Application for Securities Industry Registration or
Transfer ("Form U4") filed on his behalf by his former
securities industry employer, Firm 1. The material facts at issue
were that:
1) in September 1987, the United States
Attorney's Office for State 1 charged
X with two felony counts
of filing false 1981 federal income tax returns by
under-reporting his taxable income as $15,061 rather than
$48,879; and
2) in September 1987, X pleaded
guilty to one felony
count of filing a false federal income tax return.
|
| Sentence
Expiration |
September 1997 for
ten-year felony window. |
| Prior
Industry Activity |
X had been employed in the
aerospace defense industry.
In 1978, he founded a company named Firm 2 that acted as an
engineering specialist and a manufacturer's representative and
distributor specializing in process control and factory automation
equipment. X sold certain of his Firm 2 interests in 1998 and
began working in the insurance industry. He primarily sold
insurance products in State 1, his state of residence, although he
filed applications to be permitted to sell insurance in several
other states.
X first registered in the securities industry
with Firm 1 as an investment company products/variable
contracts representative (Series 6) in March
2000. He also passed
qualifying examinations for uniform securities agent state law
(Series 63) in March 2000, general securities representative
(Series 7) in September 2001, and uniform investment advisor
(Series 65) in November 2001.
Firm 1 employed X from January 2000 until January 2003, when it
discharged him for violating company policies relating to
correspondence and seminar review.
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| Background |
According to the Uniform Termination Notice for
Securities Industry Registration ("Form U5") and X's
testimony at the hearing, Firm 1 placed X under heightened
supervisory conditions in December 2001, after it became aware of
NASD's investigation into the circumstances underlying the AWC. X
violated certain of those conditions when he failed
to submit written materials to Firm 1 prior to conducting
seminars, and therefore Firm 1 terminated him.
X also consented in the AWC to NASD's finding that
in April 2000, he misrepresented
on an amended Form U4 that he submitted to Firm 1 that these
criminal charges and his guilty plea involved a misdemeanor,
when he knew, or should have known, that they involved a felony.
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| Sponsoring
Firm |
NASD member in 1994. Home office in State 2.
Employs 1 registered principal and 2 registered representatives.
It is engaged in retail sales of mutual funds and acts as a broker
or dealer selling variable life insurance and annuities.
NASD's last two routine examinations of the Firm
resulted in a finding of Filed Without Action in 1999, and a
Letter of Caution ("LOC") in 2003. NASD issued the 2003
LOC to the Firm for failing to have written
supervisory procedures addressing continuing education;
allowing an individual to become inactive due to failure to comply
with continuing education requirements; and failing to file a Form
U5 within 30 days of an individual's termination. |
| Proposed
Activity |
As an investment company products/variable
contracts representative in its home office in State 2. The Firm
will compensate him solely through commissions.
|
| Proposed
Supervisor |
The proposed primary responsible supervisor is the
President of the Sponsoring Firm, and he has been with the Firm
since its inception in August 1994. The Proposed Supervisor has
been employed in the securities industry since 1973, having
qualified as a general securities representative (Series 7) in
October 1973, and as an investment company products/variable
contracts principal (Series 26) in May 1987 and October 1994.
The record shows no disciplinary or regulatory proceedings,
complaints, or arbitrations against the Proposed Supervisor.
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| Member
Regulation Recommendation |
Denial.
X's actions in repeatedly failing properly to report his felony
charge and felony conviction "create a troubling trail of
serious dishonest misconduct." |
| Considerations |
1) The Commission's Van Dusen Decision is Not Applicable
The NAC considered and rejected X's
argument that its analysis in this matter was governed by the Securities and
Exchange Commission's line of decisions beginning with Paul
Edward Van Dusen,
47 S.E.C. 668 (1981).
Van Dusen
enunciated the standards for NASD to apply in situations in which an individual
is applying to re-enter the securities industry after previously
having been subject to a permanent injunction and a bar by the Commission, with
a right to reapply. In such situations, the Commission advised
that, because it had already addressed the individual's misconduct through its
administrative process and had chosen to impose certain sanctions for that
misconduct, NASD should not again
consider the individual's underlying misconduct when it evaluates a
statutory disqualification application. The Commission stated that such
applications for re-entry generally should be acted upon favorably, and that
NASD should look only to:
1) whether the individual had engaged in intervening
misconduct;
2) whether the prospective
employer had any disciplinary history, and, if so, the nature of that
disciplinary history; and
3) whether the supervisory
structure proposed for the applicant was sufficient.
The Van Dusen analysis is limited, however, to
matters involving an injunction and an accompanying administrative order by the
Commission with regard to the underlying statutorily disqualifying misconduct. Here,
NASD's Department of Enforcement – not the Commission – was the entity that
took action on the misrepresentations contained in X's Form U4 and
amended Form U4 with Firm 1. Enforcement negotiated the AWC with X and had the
option of proceeding with the action as a non-willful action, with no statutory
disqualification consequences. Enforcement determined, however, to include a
specific finding that X had engaged in willful misconduct when he placed the
false information on the Form U4 in October 1999 and on the amended Form U4 in
May 2000. Enforcement also included in the AWC the precise language that "X
understands that this settlement includes a finding that . . . he willfully
failed to disclose a material fact . . . and . . . he willfully misrepresented a
material fact . . . and that . . . he is therefore subject to a statutory
disqualification."
The AWC evidences the agreement of the parties
that X would be subject to the full process ordinarily applied by NASD to
statutorily disqualified individuals, which includes:
1) consideration of the nature and gravity of the
disqualifying event;
2) the length of time that has elapsed since the
disqualifying event;
3) any intervening misconduct;
4) other disciplinary history;
5) any other mitigating or aggravating
circumstances that exist;
6) the precise nature of the securities-related
activities proposed in the application; and
7) the disciplinary history and industry
experience of both the member firm and the proposed supervisor.
The NAC
also rejected X's argument that it would bee "punishing"
him a second time by considering his AWC and the events leading to it in
assessing the Application. Statutory disqualification cases are not the same as
disciplinary cases. In contrast, a statutory disqualification proceeding
is not a disciplinary action – with an attendant sanction – but is a process
that allows a disqualified person to seek to associate with an NASD member firm
in spite of the disqualification. In a statutory disqualification proceeding, NASD makes no
determination that a statutorily disqualified individual has violated any rule.
There is no adjudication of liability. NASD neither seeks nor intends punishment
by denying an individual's re-entry into the securities industry.
The NAC concluded that the record
raised serious questions as to X's integrity. X's initial wrongdoing –
filing a false federal income tax return for 1981– was financially related and
involved deceitful misconduct. In 1987, X pleaded guilty to a felony for that
misconduct. Moreover, X's subsequent actions cause us to further question
X's honesty. When X first entered the securities industry in October 1999 with
Firm 1, he falsely represented on the Form U4 that he had never been charged with, or convicted of, a
felony or a misdemeanor. When X was given the opportunity to correct this
mistake in an amended Form U4 filing with Firm 1 in May 2000, he falsely
represented that he had been charged with, and convicted of, a misdemeanor.
The record further demonstrated that at the same time that X was
filing false Form U4 information with securities regulators, he was also making
misrepresentations in numerous applications for insurance registration.
-
In
September 1999, X replied "No" in a New York insurance registration
application that asked if he had "ever been convicted in any criminal
action."
-
In October 1999, he answered "No" in an application with
an insurance company that asked if he had "ever been convicted of a felony,
misdemeanor, DWI, etc."
-
In February 2000, he replied "No" on a
Connecticut application for insurance registration that asked if he had
"ever been convicted of or pled nolo contendere (no contest) to any felony
or misdemeanor involving dishonesty or breach of trust."
-
In August 2000, he
answered "No" when asked in a State 3 insurance registration
application whether he had "ever been convicted, found guilty, or pleaded
guilty or nolo contendere (no contest) to a felony" or "to a crime
punishable by imprisonment of one (1) year or more."
-
Both State 3 and State
2 insurance regulators took action against X for these misrepresentations. In
February 2002, State 3 placed him on probation for one year and fined him
$1,500; in July 2002, State 2 fined him $500.
During this period when X was routinely answering "No"
to questions about his criminal past, however, he answered "Yes" in
January 2000 in a State 1 insurance application that asked if he had "been
indicted or convicted of a crime, or convicted of a misdemeanor." X had no
credible explanation for the discrepancy in his answers to these applications.
At various times, he offered that he had been confused by the different language
contained in each application, had "blocked" all thoughts about his
conviction from his mind, had not appreciated the importance of full disclosure
on licensing applications in a regulated profession, and had been unable to
reach his former attorney (who was deceased) or one of his associates to
determine whether the 1987 false tax return offense had been a felony or a
misdemeanor. The NAC concluded that it was suspect for X to have answered
correctly only on the State 1 application, given that he had been convicted by a
federal court in that state, resided there, and did most of his insurance
business there.
The NAC was also troubled by X's continuing inability to acknowledge
his history of misrepresenting fac about his background to regulators. When
asked by the Hearing Panel how many times he had incorrectly failed to admit to
his felony conviction, X replied "Three times. State 3, State 2, and NASD."
X did not admit, until specifically questioned by Member Regulation, that he had
also supplied false information on an October 1999 application with an insurance
company and on a February 2000 insurance registration application with State 4.
In addition to X demonstrated an inability to act responsibly and
comply with established rules and regulations. In December 2001, Firm 1
initiated an internal review and placed X on "special supervision"
when it discovered that NASD was investigating him for the Form U4 violations
that led to the November 2003 AWC. In January 2003, Firm 1 terminated X for
failing to follow "certain firm policies in regard to correspondence review
and seminar review." A statutorily disqualified person must comply not only
with the standard supervisory policies of his or her firm, but with heightened
supervisory conditions as well. X's failure to comply with Firm 1's
"special supervision" indicates that he may not be able to comply with
heightened supervisory conditions placed on him if he were to be permitted to
associate with the Sponsoring Firm.
Finally, X's disqualifying event – the November 2003 AWC –
occurred very recently.
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| Citations |
In Reuben D.
Peters,
Exchange Act Rel. No. 49819, 2004 SEC LEXIS 1245 (June 7, 2004), reconsideration
denied,
Exchange Act Rel. No. 51237, 2005 SEC LEXIS 419 (Feb. 22, 2005), and Morton
Kantrowitz,
Exchange Act Rel. No. 51238, 2005 SEC LEXIS 423 (Feb. 22, 2005), the Commission
extended the rationale of Van
Dusen to apply
to any statutorily disqualified individual whose disqualifying conduct has led
the Commission to take administrative action that has resulted in sanctions that
are less serious than a bar with the right to reapply.
The Commission has defined a disciplinary action as "an
action that responds to an alleged violation of an SRO rule or Commission
statute or rule, or an action in which a punishment or sanction is sought or
intended." Russell
A. Simpson, 53 S.E.C. 1042, 1046 (1998).
In the context
of a statutory disqualification case, the Commission has recognized that "NASD
has not expelled [a statutorily disqualified person] from the securities
industry. Nor is it imposing a penalty on [an] applicant . . . or even a
remedial sanction." Halpert & Co.,
50 S.E.C. 420, 422 (1990); see
also Frank Kufrovich,
Exchange Act Rel. No. 45437, 2002 SEC LEXIS 357, at *23 (Feb. 13, 2002) (finding
that NASD had not imposed a penalty but had "simply determined that it
would not grant relief from a disqualification previously incurred");
Dennis
Milewitz, 53 S.E.C. 701, 706 (1998) (finding that NASD's decision to deny a statutorily
disqualified applicant's request to re-enter the securities industry "does
not constitute an additional penalty, or even a remedial sanction").
See Frank Kufrovich, Exchange Act Rel. No.
45437, 2002 SEC LEXIS 357, at *16 (Feb. 13, 2002) (upholding NASD’s
denial of a statutory disqualification applicant, who had
committed non-securities related felonies, "based upon the
totality of the circumstances" and NASD’s explanation of
the bases for its conclusion that the applicant would present an
unreasonable risk of harm to the market or investors).
One of
NASD's primary purposes is to promote a "high standard of business
ethics" in "every facet of the securities industry." Bateman
Eichler, Hill Richards, Inc. v. Berner,
472 U.S. 299, 315 (1985); see
also Citadel Sec. Corp.,
Exchange Act Rel. No. 49666, 2004 LEXIS 49666, at *12 (May 7, 2004) (upholding
NASD's denial of a statutory disqualification application and finding that a
purpose of the Securities Exchange Act of 1934 was "ensuring the integrity
of the securities industry"). As the Commission has noted, the securities
industry presents many opportunities for abuse and overreaching and depends
heavily upon the integrity of its participants. Halpert
& Co., 50 S.E.C. 420, 422 (1990) (stating that the securities industry is a "field
that is rife with opportunities for abuse").
Willfully means that
one knew, or reasonably should have known under the
particular facts and circumstances, that his conduct was improper – that he
was required to make the disclosures and failed to do so. Christopher
LaPorte,
Exchange Act Rel. No. 39171, 1997 SEC LEXIS 2058, at *8 (Sept. 30, 1997).
The Sponsoring Firm has the burden of demonstrating to
us why it is in the public interest for X to become employed with the Sponsoring
Firm. See
Gershon Tannenbaum,
50 S.E.C. 1138, 1140 (1992) (in eligibility proceedings, burden is on applicants
to demonstrate that association is in public interest); M.J.
Coen, 47 S.E.C.
558, 561 (1981) ("[A]ny member wishing to employ such a [statutorily
disqualified] person . . . must 'demonstrate why the application should be
granted.'").
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| THE ARTICLES PUBLISHED HERE REPRESENT THE PERSONAL VIEWS OF THE
AUTHOR, AND NOT NECESSARILY THE VIEWS OF ANY LAW FIRM OR ORGANIZATION
WITH WHICH HE MAY BE AFFILIATED. ALL STATEMENTS MADE IN THESE ARTICLES
ARE FOR GENERAL INFORMATION ONLY AND ARE NOT INTENDED TO PROVIDE,
NOR SHOULD THEY BE RELIED ON AS, LEGAL ADVICE. READERS MUST CONSULT
WITH QUALIFIED LEGAL COUNSEL BEFORE RELYING UPON ANY CONTENT CONTAINED
HEREIN. STATEMENTS MADE IN THESE ARTICLES MAY BE INCORRECT FOR YOUR
JURISDICTION OR AT THE TIME WHEN YOU READ SUCH STATEMENTS THE UNDERLYING
RULES, REGULATIONS AND/OR DECISIONS MAY NO LONGER BE CONTROLLING OR
PERSUASIVE AS A MATTER OF LAW OR INTERPRETATION. |
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