NOTE: Stipulations of Fact and Consent to Penalty (SFC); 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.

Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.


By Bill Singer

In the Matter of Harry M. Richardson
For Review of Action Taken by NASD  

Securities Exchange Act of 1934 Release No. 51236, February 22, 2005


1999 Permanent Injunction/Statutory Disqualification
Conditional Bar  (Right to Reapply)

On March 4, 1999, Harry M. Richardson ("Richardson") settled a civil action filed against him by the SEC by consenting to the entry of an injunction against future violations of Section 17(a) of the Securities Act of 1933; Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder; Section 15B(c)(1) of the Securities Exchange Act of 1934,1 and Municipal Securities Rulemaking Board ("MSRB") Rules G-17 and G-19. 

Richardson also settled a related administrative proceeding without admitting or denying the Commission's allegations that he "in connection with two 'pool' municipal bond offerings made material misrepresentations and omissions pertaining to the size of the pools and the intended use of the bond proceeds, and advised the pools to purchase unsuitable securities." The SEC further alleged that Richardson "in connection with three land development municipal bond offerings made material misrepresentations and omissions pertaining to the value of the land, developer, and capitalization of the project."  Pursuant to the settlement, Richardson consented to being barred from association with any broker, dealer, investment adviser, investment company or municipal securities dealer, with a right to reapply for association after three years.


Under Securities Exchange Act Section 3(a)(39), 15 U.S.C. § 78c(a)(39), a person is 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), . . . ."

Under NASD By-Laws, Article III, Section 4(h), a person is subject to a "disqualification" if, among other things, such person "is permanently or temporarily enjoined . . . ." 

Under NASD By-Laws, Article II, Section 3(b), the NASD may bar a person from becoming associated or continuing association with a member if such person is subject to a disqualification

2003 Application to Re-enter

In April 2003, more than three years after the entry of the SEC's bar order, Emmett A. Larkin Company, Inc. ("Emmett Larkin" or "the Firm"), applied to NASD to allow the Firm to continue in NASD membership with Richardson as an employee. The application was necessary because Richardson was subject to two statutory disqualifications: an injunction and a bar order imposed by the Commission with a right to reapply after three years. After obtaining an agreement from Emmett Larkin for special supervisory conditions for Richardson, NASD's Department of Member Regulation recommended that the application be approved

After a hearing, NASD's National Adjudicatory Council ("NAC") in February 2004 denied the Firm's application. 

The NAC based its decision solely on the municipal bond misconduct underlying both Richardson's injunction and the SEC's bar order, finding that misconduct to be so serious that readmitting Richardson would not be in the public interest or consistent with investor protection. 

Richardson appeals the NASD's denia lto the SEC.  

A The Van Dusen Standard

What does the NASD understand the Van Dusen standard requires?

The NASD views the SEC's Van Dusen standard as requiring that

  1. in cases where the SEC has settled an administrative proceeding involving the same misconduct that underlies a permanent injunction; and 
  2. has imposed a bar with the right to reapply after a specified time, 
  3. that upon the expiration of the limited bar,
  4. the NASD may not consider the underlying misconduct in a subsequent application by the barred person to re-enter the securities industry.

What's the policy issue here?

The SEC is basically directing the NASD to admit an applicant after the right to reapply comes into existence unless there are new facts that warrant denying the application.  Essentially, the SEC is saying that when it settles an administrative proceeding by imposing a bar with the right to reapply, that such a sanction was intended to fully address the underlying misconduct.  As such, if an applicant for readmission is then prevented from returning to the industry because the NASD reconsiders the underlying misconduct, the NASD is imposing what amounts to a permanent bar for the very same misconduct that the SEC imposed a limited bar.  In plain English, the SEC seems to be defending its territory by saying "if we wanted to permanently bar the applicant, we would have." 

Why does the NASD have a problem with the Van Dusen standard?

The NASD argues that the SEC's standard wrongly merges two separate processes: 

  1. The barring from the industry with the right to reapply after a specified period of time, and 
  2. the duty to evaluate whether an applicant can be permitted to function in a particular registered capacity consistent with the public interest and investor protection.

The NASD perceives a conflict between its By-Laws that require it to consider such applications and what it sees as an SEC standard that usurps the SRO's independence.  The SEC is equally insistent that NASD toe the line.  In fairly blunt language, the federal regulator reminds the self-regulator to mind its place:

NASD contends that its by-laws, not the policy set forth in Van Dusen, provide the applicable standard for NASD review of applications that would allow the association of statutorily disqualified persons. Congress has made clear, however, that NASD's regulatory authority is subject to Commission oversight. See S. Rep. No. 94-75, 23 (cautioning against fallacious impression that industry and government fulfill same function in regulatory framework, enjoy same order of authority, or deserve same degree of deference and noting that SROs "exercise authority subject to SEC oversight" and "have no authority to regulate independently of the SEC's control"). To the extent that NASD by-laws might allow consideration of Richardson's underlying misconduct beyond that permitted under Commission precedent, Commission precedent controls. We note, however, that NASD has not specifically identified anything in its by-laws that is inconsistent with Van Dusen or Ross. (footnote 26)

The Van Dusen and Ross Standards

Paul Edward Van Dusen, 47 S.E.C. 668 (1981) involved an NASD denial of association to a person subject to two statutory disqualifications, an injunction and a Commission bar from association with a broker-dealer in a supervisory capacity, with a right to apply after 18 months.  The denial was premised on the NASD's finding that the underlying misconduct that had led to Van Dusen's statutory disqualification was sufficiently egregious that Van Dusen's association would not be consistent with the public interest. The SEC determined that the denial of the application on that basis was inconsistent with the purposes of the Exchange Act and unfair. 

Arthur H. Ross, 50 S.E.C. 1082 (1992) involved a person subject to statutory disqualification based on a Commission order that barred him from associating in any proprietary or supervisory capacity, with the right to apply after three and one-half years. NASD denied Ross's application to perform supervisory functions and become a principal in the firm that employed him. Although the record contained new information that perhaps reflected adversely on Ross's ability to function in his proposed employment in a manner consistent with the public interest, it appeared that "NASD also gave substantial weight to matters related to the Commission Order," and the SEC could not determine the degree to which NASD's action was based upon the behavior that resulted in the bar order rather than the new information and remanded the proceeding. 

Van Dusen/Ross provide that 

1. where the time period specified in a conditional bar order has expired


2. where
no "new information" or additional misconduct has been raised,

it is inconsistent with the remedial purposes of the Exchange Act to deny an application for reentry.

The Battle Begins

Van Dusen is a rigid exclusionary rule that prevents us from considering all relevant factors in reviewing applications. The Van Dusen and Ross standards encourage analysis that looks at all relevant factors, including, among others, 
  • misconduct in which a statutorily disqualified person may have engaged since the misconduct that gave rise to the statutory disqualification, 
  • the nature and disciplinary history of a prospective employer, and 
  • the proposed supervisory structure to which the statutorily disqualified person would be subject.

Isn't the NASD correct that Van Dusen and Ross  preclude consideration of the misconduct that led to the statutory disqualification and the bar with a right to reapply?

The SEC says "no." Rather, these cases require that the misconduct be considered in an appropriate context and given appropriate weight. For example, the misconduct could be considered as forming a part of a pattern, or in evaluating how well the employer firm's proposed scheme of supervision was designed to prevent the type of conduct that had resulted in the bar order.  

Quite simply, Van Dusen and Ross instruct that an SRO ordinarily may not deny reentry based solely on the underlying misconduct that led to the statutory disqualification and the conditional bar; something more is needed.


Van Dusen (and implicitly Ross) should be overturned. The SEC "committed two fundamental errors" in deciding Van Dusen: 
  1. "misread the relevant statutory provision when it imported the requirement [found in Section 19(e)(2) of the Exchange Act, 15 U.S.C. § 78s(e)(2)] that sanctions in [self-regulatory organization or "SRO"] disciplinary actions should not be excessive into its review of the application of a statutorily disqualified individual [under Exchange Act Section 19(f), 15 U.S.C. § 78s(f)]." 
  2. "incorrectly relied on its 1975 policy regarding disqualified individuals who apply directly to the Commission for readmission into the securities industry" because NASD has never adopted such a policy and should be allowed to follow its own policy, "which includes analyzing the seriousness of the misconduct that relates to a permanent injunction."

In determining a sanction in a disciplinary action, the SEC engages in an analysis that determines the public interest by weighing the alleged misconduct and the need to avoid visiting unnecessarily harsh consequences on wrongdoers. The reference to disciplinary actions does not suggest that the same analysis used in disciplinary actions should be used in considering applications to associate. To the contrary, the reference acknowledges that an analysis of public interest requirements based solely on the underlying misconduct has already been performed and that an application to associate after the time determined to be in the public interest has expired requires a different analysis.

NASD correctly states that the policy quoted by the SEC in Van Dusen -- "When hereafter the Commission specifies a date after which [an] application [for re-entry] may be made, the Commission upon a proper showing will generally act favorably upon the application" -- originally appeared in a release that dealt with applications for association that were directed to the Commission itself, not an SRO.  By relying on that policy in Van Dusen , however, we clearly indicated our view that it also was relevant in SRO consideration of applications to associate.  Ross expanded on Van Dusen  by suggesting ways in which consideration of the underlying misconduct might appropriately be part of an SRO's process.

Van Dusen was incorrectly decided because it inappropriately articulated a substantive fairness requirement. NASD contends that the purposes of the Exchange Act do not encompass such a requirement, but only basic procedural guarantees. Congress clearly intended that the substantive fairness of NASD deliberations be subject to the SEC's review; one of the goals of the 1975 Amendments was to strengthen the SEC's oversight of SROs. The SEC has an obligation to ensure "that [self-regulatory power] is used effectively to fulfill the responsibilities assigned to the self-regulatory agencies, and that it is not used in a manner inimical to the public interest or unfair to private interests."  Among the SEC's responsibilities in reviewing SRO actions under Section 19(f) is to determine whether the rules of the SRO have been applied "in a discriminatory or unfair manner," i.e., whether the action is substantively fair.


The SEC held that Van Dusen and Ross remain the appropriate standards by which NASD should evaluate Richardson's application.  Consequently, since the NASD did not conduct its evaluation of Richardson's application consistently with those precedents, instead focusing exclusively on the municipal bond misconduct underlying the SEC bar order against Richardson, the SEC remanded the case to NASD.

Also read's extensive analysis of similar cases In the Matter of Morton Kantrowitz and In the Matter of Reuben D. Peters and Peters Securities Co., LP.

What's this big inter-regulator battle about?  Okay, here it is in fairly simple terms.  

You commit act X.  X is a pretty bad act.  The SEC is so upset with you that it wants a permanent injunction to prevent you from ever doing X again.  The SEC also files a complaint against you to seek sanctions beyond the injunction.  It wants to stop you and punish you.  Your lawyer says you really made a terrible mistake when you did X and there's not much chance that a court won't impose the injunction and if you go to trial on the SEC's Complaint, you're going to lose too.  Your lawyer fears you could be permanently barred and heavily fined. Moreover, you're going to have to pay a ton of legal fees (which your lawyer isn't necessarily that upset about).

Thing's just ain't looking that good for you.  You go back to your lawyer and ask his advice.  He tells you to let him try and get the best possible settlement he can.  After much negotiating, the SEC fully considers all the points your lawyer raises and agrees that as bad as X was, it will settle the case if you agree to the injunction, a $100,000 penalty, and a bar with the right to reapply after three years.  Your lawyer tells you that's a pretty fair deal --- you have the chance to come back to Wall Street after three years and the SEC also agreed to take a smaller fine than its Staff first demanded.  You still think you're innocent and the SEC is wrong, but given your lawyer's advice and the fact that you understand you can reapply in three years, you grudgingly accept the settlement.  You start marking off the days on your calendar.

Three years pass and you decide to return to Wall Street, a much wiser fellow than when you left.  You have lived an exemplary life since, and now hope to get back to work.  Lo and behold, the NASD decides that X was such a bad act that they don't care about anything else and say "no," we're not letting you back in.  You immediately start yelling at your lawyer.  Why didn't you tell me that the NASD would never let me back in?  I've been set up by the SEC Staff because they knew that I was really going to be permanently barred?  I served my time . . . why doesn't that constitute full payment for my misconduct (which, mind you, I still don't think I did anything wrong)?

So, what's Richardson all about?  Well, the SEC says that once it okays a reapplication in conjunction with an injunction and a conditional bar, that the NASD must let you back in unless you've engaged in new misconduct.  Moreover, the SEC and NASD are clearly engaged in a turf war, and the SEC understands all too well the danger of losing this battle to the junior regulator:

If persons contemplating settlements with the Commission know that SROs, through denial of reentry applications, may, in effect, routinely extend those persons' bar from the securities industry beyond the period after which the settlement would allow them to reapply, based solely on the misconduct leading to the settlement, the incentive to settle would diminish markedly. Thus, allowing NASD to ignore Van Dusen and Ross would undermine our ability to settle cases in pursuance of our anti-fraud and investor protection goals.