In September 2005, a State 1 court sentenced X to five years’ probation, revoked her driver’s license for one year, and fined her $2,000. On that same date, the State1 judge granted X a Certificate of Relief from Disabilities, which the SEC had held restores certain rights and responsibilities of citizenship, but does not remove a person from statutory disqualification. X’s counsel acknowledged at the hearing that X’s certificate does not excuse her statutory disqualification and that X must fully disclose the felony charge and conviction.

X was previously employed by Firm1 from October 1983 until November 1997, and Firm2 from November 1997 until April 2005. Firm2 discharged X in April 2005, stating on the Uniform Termination Notice for Securities Registration (“Form U5”) that she “violated firm policy by accepting from a customer oral discretion to place certain trades in his account.” X stated that she did not exercise oral discretion, and maintained that Firm2 had terminated her because it wanted to eliminate her and save money by distributing her clients and income between the remaining two members of her partnership “team.”

NASD’s Central Registration Depository ("CRD"®) reflects that four customer complaints have been filed against X. 

• 1996: alleged that X made two unauthorized sales of stock and engaged in churning while she was associated with Firm1. In May 1997, Firm1 settled the complaint for $2,042. X did not contribute individually to the settlement.

• October 1998: alleged that X engaged in misrepresentations while she was associated with Firm1. In November 1998, Firm1 settled the complaint for $3,000. X did not contribute individually to the settlement.

• December 2000: alleged that X made unsuitable recommendations when she was associated with Firm2. In January 2001, Firm2 and X denied this complaint, and there is no record of any further action taken by the customer.

• March 2001: alleged that X made unsuitable recommendations and failed to follow client instructions while she was with Firm2. This complaint went to NASD arbitration, and the claimant sought compensatory damages of $200,000. CRD indicates that records related to this matter were "lost on September 11, 2001." In April 2002, the arbitration panel awarded the claimant compensatory damages of $175,000. X did not contribute individually to the award.

Member Regulation consulted with NASD’s Department of Registration and Disclosure on this issue, and, in March 2006, Member Regulation advised the Firm that NASD was withdrawing its earlier approval of X’s registration due to her failure to disclose her April 2005 guilty plea on the May 2005 Form U4 submitted to the Sponsoring Firm. The Firm terminated X in March 2006, and filed a Form U5 in March 2006.

The Proposed Supervisor was previously associated with FirmA from February 1988 until April 1990 and FirmB from April 1990 until August 1996.The Proposed Supervisor has been associated with the Sponsoring Firm since August 1996 and is the branch manager at the Firm’s home office, where he supervises 11 registered representatives at that location. He has been employed in the securities industry as a general securities representative (Series 7) since February 1988. He qualified as a uniform securities agent (Series 63) in March 1988, and a general securities principal (Series 24) in February 1998.8

The Proposed Supervisor has been the subject of six customer complaints.

• October 1990: for an unauthorized transaction and withdrew it shortly thereafter with no action having been taken.

• April 1993: engaged in unauthorized, unsuitable, and excessive trading. The alleged compensatory damages were $75,000. Firm B settled the complaint in December 1994 for $12,000. The Proposed Supervisor did not contribute individually to the settlement.

• November 1993: alleging misrepresentation, unsuitable transactions, and unauthorized trades. The alleged compensatory damages were $150,000. Firm B settled the complaint in July 1994 for $57,000. The Proposed Supervisor did not contribute individually to the settlement.

• November 1994: alleging unsuitable transactions and churning. The alleged compensatory damages were $40,000. Firm B settled the complaint for $4,000 in May 1995. In addition, CRD indicates that the Proposed Supervisor settled with the customer for $15,000. At the hearing, the Proposed Supervisor testified that the CRD information regarding his contribution is incorrect and that he had not contributed to this settlement.

• January 1995: alleging unauthorized transactions, churning, unsuitable transactions, and failure to follow customer directions. The customer requested $110,000 in compensatory damages. Firm B settled the complaint for $15,000 in July 1995, and the Proposed Supervisor was dismissed from the case with no liability.

• August 1997: alleging unauthorized trading, churning, excessive margin, and over-concentration, and requesting $150,000 in compensatory damages. Firm B settled the complaint for $20,000 in September 1998, at which time the Proposed Supervisor was dismissed from the case.

At the hearing, the Proposed Supervisor testified that the six complaints stemmed from his employment with Firm B. According to the Proposed Supervisor, during the 1990s, Firm B was engaged in massive litigation regarding sales of limited partnerships. The Proposed Supervisor stated that Firm B’s media exposure from the settlement of such suits led other customers to file complaints against Firm B representatives for various alleged infractions. The Proposed Supervisor denied culpability as to each customer complaint.

1. X’s felony conviction is recent, and she will remain on probation until 2010;
2. she failed to disclose her 2005 felony conviction to the Firm;
3. she was dismissed from Firm2 in April 2005 for violating firm policy. 

Member Regulation noted the Firm’s lack of formal disciplinary history and the Proposed Supervisor’s history of old customer complaints. However, concerns with X’s background outweighed the Firm’s relatively clean record and the Proposed Supervisor’s history of old customer complaints.

X was convicted of a felony DWI in 2005 that resulted in her being statutorily disqualified. The question is when that conviction occurred. Member Regulation asserts that X was convicted of the felony DWI when she entered a guilty plea to the felony charge in April 2005, and therefore she improperly completed the Form U4 with the Sponsoring Firm in May 2005.  X argues that when she submitted her Form U4 to the Sponsoring Firm in May 2005, she did not believe that her guilty plea was "final" and did not understand that she was "convicted" until she was sentenced for the felony in September 2005, at which time she informed the Sponsoring Firm and the Firm amended her Form U4. Of note to the NAC was the fact that the Certificate of Disposition issued in October 2005, by the State1 court that processed X’s felony criminal matter, stating that "[in April 2005], [X] was convicted of . . . a class ‘D’ Felony . . . in satisfaction of this Superior Court Information." The NAC found that X was convicted of the felony charge in April 2005.

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).

The term "convicted" is not defined in either the Securities Exchange Act of 1934 ("the Exchange Act") or NASD’s By-Laws. The Commission has advised NASD to look first to federal securities laws for guidance on this issue and instructed NASD to turn to Section 2(a)(10) of the Investment Company Act of 1940 and Section 202(a)(6) of the Investment Advisers Act of 1940, which define "convicted" to include: "a verdict, judgment or plea of guilty, or a finding of guilt on a plea of nolo contendere, if such verdict, judgment, plea or finding has not been reversed, set aside, or withdrawn, whether or not sentence has been imposed." Interpretative letter dated February 21, 1992, from Joseph M. Furey, Assistant Director, Division of Market Regulation, SEC, to Bruno Lederer, Associate General Counsel, NYSE. Commission staff have concluded that "[w]hen a court accepts a plea of guilty . . . [the] conviction remains in effect until reversed, set aside or withdrawn irrespective of whether a sentence has been imposed." 

The Commission has also stated that a state’s interpretation of its laws may provide guidance concerning the question of when a defendant has been convicted of a felony. The parties agree that in December 2004, X was arrested and charged with felony DWI. The record also shows that in April 2005, X entered a guilty plea to the felony DWI. State 1 Consolidated Law Service, Criminal Procedure Law, section 1.20(13) defines "conviction" as "the entry of a plea of guilty." This provision became effective on September 1, 1971, and the term "conviction" was to clarify a previously uncertain meaning and "accord formal recognition to the word ‘conviction’ as a verdict or plea of guilty (without a sentence)." See N.Y. Crim. Proc. Law Sec. 1.20 staff notes (consd.).

A guilty plea nonetheless constitutes a conviction from the time it is entered, until the court has agreed to withdraw or vacate the plea. See New York v. D’Amico, 556 N.Y.S. 2d 456, 458 (Sup. Ct. 1990), appeal denied, 594 N.E.2d 947 (N.Y. 1992); see also New York v. Alexander, 769 N.E.2d 802, 804 (N.Y. 2002). 

The Commission has described the Form U4 as a "vital screening device" that is relied on by "all the self-regulatory organizations, including the NASD, state regulators, and broker-dealers to monitor and determine the fitness of securities professionals." Rosario R. Ruggiero, 52 S.E.C. 725, 728 (1996) (stating that "[t]he candor and forthrightness of [individuals making these filings] is critical to the effectiveness of this screening process"); see also Daniel Richard Howard, Exchange Act Rel. No. 46269, 2002 SEC LEXIS 1909, at *9-10 (July 26, 2002).