In the Matter of the Application of  REUBEN D. PETERS and PETERS SECURITIES CO., LP For Review of NASD Denial of Application to Associate 
Securities Exchange Act of 1934 Release No. 49819, June 7, 2004


Motion for Reconsideration 
Securities Exchange Act of 1934 Release No. 51237, February 22, 2005


 A Little Background

Statutory Disqualification

  • Securities Exchange Act Section 3(a)(39), 15 U.S.C. §78c(a)(39): Deems a person to be subject to a statutory disqualification,, if, among other things, "such person . . . is enjoined from any action, conduct, or practice specified in subparagraph (c) of such paragraph (4). . . ." 

  • Article III, Section 3(b) of NASD's By-Laws: "statutorily disqualified" person cannot become or remain associated with an NASD member unless the disqualified person's member firm applies for relief from the statutory disqualification under Article III, Section 3(d) of the By-Laws. 2 15 U.S.C. §§ 77q(a)(2), (a)(3).

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 

  • the effecting of securities transactions between 1996 and 1999 while the Firm failed to maintain the minimum required net capital; 

  • the operation of offices of supervisory jurisdiction while failing to designate an appropriately registered principal in each of the locations; 

  • allowing an individual to act in the capacity of a general securities principal when the individual was not qualified or registered in that capacity; and 

  • failing to prepare, maintain and/or enforce adequate written supervisory procedures regarding both the regulatory element of the continuing education requirement and the requirement that each office have an annual inspection and a review of its activities. 

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

NASD Procedural Rule 9523: Acceptance of Member Regulation Recommendations and Supervisory Plans by Consent Pursuant to SEC Rule 19h-1 directs NASD's Department of Member Regulation to review such an application in light of the member firm's proposed plan of supervision for the disqualified person. If Member Regulation concludes that the application should be approved, the application is forwarded to the Chairman of the NASD Statutory Disqualification Committee ("Committee"), acting on behalf of the National Adjudicatory Council ("NAC"). The Chairman of the Committee can accept or reject the recommendation or refer the application to the NAC for acceptance or rejection.

If a hearing is held, NASD Procedural Rule 9524(a)(10) requires the panel to submit a recommendation in writing to the Committee, which in turn must submit a written recommendation to the NAC. 

Rule 9524(b)(1) authorizes the NAC to grant or deny the application after considering the proposed plan of supervision, the Committee's recommendation, the public interest, and the protection of investors. 

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 

SEC Rule 19h-1 requires that, if a self-regulatory organization ("SRO") proposes to allow a person subject to a statutory disqualification to associate, or continue to associate, with an SRO member firm, the SRO shall file a notice with the SEC of the proposed association except in certain circumstances not relevant here.

In October 2001, the NAC submitted an Exchange Act Rule 19h-1 Notice to the SEC advising the SEC of its intention to approve Peters Securities' and Petco's applications to employ Peters.  The 19h-1 Notice explained that the NAC was persuaded by the fact that the SEC had been required to weigh the requirements of the public interest when the SEC suspended Peters in July 2000 and that the SEC, in reaching its sanction decision, had been aware of the misconduct underlying the statutorily disqualifying injunction imposed on Peters. The Notice, citing SEC precedent of  Arthur H. Ross, 50 S.E.C. 1082 (1992), and Paul Van Dusen, 47 S.E.C. 668 (1981), found that the NAC was required to grant the Firm's application "absent other acts of misconduct or circumstances of record bearing adversely on the [F]irm's or Peters' fitness to continue in the securities industry." Finding that the record did not reveal any misconduct by Peters after the entry of the SEC's suspension order, and that Peters Securities' and Petco's "extensive, well-structured supervisory controls . . . will govern Peters' activities," the 19h-1 Notice concluded that Peters Securities' and Petco's applications satisfied the conditions necessary for Peters to continue in the securities industry in the agreed-upon capacities with Peters Securities and Petco. 

If You Don't Have A Problem, Then We Don't Either

 Because the SEC knew Peters was first enjoined --- and, as such, statutorily disqualified --- and then only imposed a two month suspension, the NASD infers that SEC didn't have a problem with Peters returning to Wall Street.  Presumably, if the SEC were troubled it might have barred him.  In the absence of any negative factors after the SEC's impositoin of the suspension, NASD concluded Peters was good to go.


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

Securities Exchange Act Section 19(f): Dismissal of review proceeding

In any proceeding to review the denial of membership or participation in a self-regulatory organization to any applicant, the barring of any person from becoming associated with a member of a self-regulatory organization, or the prohibition or limitation by a self-regulatory organization of any person with respect to access to services offered by the self-regulatory organization or any member thereof, if the appropriate regulatory agency for such applicant or person, after notice and opportunity for hearing (which hearing may consist solely of consideration of the record before the self-regulatory organization and opportunity for the presentation of supporting reasons to dismiss the proceeding or set aside the action of the self-regulatory organization) finds that the specific grounds on which such denial, bar, or prohibition or limitation is based exist in fact, that such denial, bar, or prohibition or limitation is in accordance with the rules of the self-regulatory organization, and that such rules are, and were applied in a manner, consistent with the purposes of this title, such appropriate regulatory agency, by order, shall dismiss the proceeding. If such appropriate regulatory agency does not make any such finding or if it finds that such denial, bar, or prohibition or limitation imposes any burden on competition not necessary or appropriate in furtherance of the purposes of this title, such appropriate regulatory agency, by order, shall set aside the action of the self-regulatory organization and require it to admit such applicant to membership or participation, permit such person to become associated with a member, or grant such person access to services offered by the self-regulatory organization or member thereof.

As set forth above in Exchange Act Section 19(f), the SEC must sustain NASD's denial of Peters Securities' application if  the denial: 

(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. 

In both Van Dusen and Ross, applicants had been barred by the NASD in certain associational capacities subject to a right to reapply for association after a specified period (a "conditional bar").  When Van Dusen and Ross sought permission to renew their associations with NASD member firms after the conditional period has expired, NASD denied the applications. The SEC reversed the NASD's denials and noted that where the period specified in a conditional bar had passed, in the absence of "new information reflecting adversely on [the applicant's] ability to function in his proposed employment in a manner consonant with the public interest," it was inconsistent with the remedial purposes of the Exchange Act and unfair to deny the application for reinstatement. However, the SEC warned that these decisions "[do] not mean that re-entry is to be granted automatically when an application is made after the period specified . . . ." Nonetheless, the SEC suggested it was appropriate to give some consideration of various factors, including "other misconduct in which the applicant may have engaged, the nature and disciplinary history of a prospective employer, and the supervision to be accorded the applicant," can justify the denial of such an application. 

Time Served

The SEC is saying that once a conditional bar has been passed --- for example, the third month of a three-month suspension --- that in the absence of negative, new information, if would be unfair to deny  registration.  Additional factors may be considered, such as, other misconduct you engaged in, who you're proposing to work for, and how you will be supervised; but, all in all, once you've served your time, you should be readmitted.

This policy is sound.  If a regulator want to permanently bar you, then that's the sentence they should impose.  If you've only been suspended for a limited period of time, you have an expectation of resuming your career.  Otherwise you would be getting sandbagged by agreeing to accept a conditional suspension, only to learn that it's really permanent.

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.



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