Days between appeal and decision – 9 months, 29 days
Days between last brief and decision – 6 months, 2 days
Pages – 8
Comment
This is a routine appeal construing NASD Sanction Guidelines. The Commission had earlier heard an appeal of this matter and remanded it to NASD for reconsideration of the sanction. NASD Sanction Guidelines distinguish between failure to respond "in any manner" and other failure to respond timely or completely. The Commission reduced Respondents' bar to a two year suspension, finding he had partially complied with the NASD request and imposed a $5,000 fine. While it explained the reasoning for imposing the suspension, the explanation for imposing the fine was somewhat conclusory. The Commission has faced difficulty in recent years in connection with its explanations for its sanctioning decisions. See, for example a case I handled at the trial level, e.g., The Rockies Fund, Inc. v. SEC, 428 F.3d 1088 (D.C. Cir. 2005) ("Accordingly, because the SEC did not explain its reasoning, we hold that the SEC arbitrarily and capriciously imposed third-tier sanctions on the petitioners.")
This case illustrates two recurring issues with SEC opinions. First, this was a routine matter involving basic interpretation of the NASD's Sanctions Guidelines. Yet the decision took almost 10 months. Second, despite criticism noted above, there is only limited explanation of why the Commission chose the amount of the fine.
Key points
- "[NASD] Rule 8210 is an essential tool for NASD's enforcement responsibilities . . . . "
- "[R]ecipients of requests under Rule 8210 must respond to the requests or explain why they cannot and may not set conditions for their compliance." (fn omitted)
- The NASD is not required to justify its information request.
- When a Respondent fails to produce information he has a duty to explain that inability. Stating that a complete search has been made is an insufficient explanation and the details of the search should be explained.
- The NASD is not a state actor and is not subject to the Eighth and Fourteenth Amendment prohibitions against discriminatory prosecution.
- Respondent alleging discriminatory prosecution has the burden of producing evidence to support such claims.
Summary
Respondent was barred from all NASD association (on remand from the Commission) for violation of NASD Rule 8210 which requires associated persons to provide information to NASD in NASD investigations.
Respondent was associated worked out of his home and was associated with a NASD member in 1999 and 2000. The NASD investigation began in 2001 and concerned customer complaints about forged transactions, unauthorized transactions, and undisclosed outside business activities.
Respondent testified before the NASD staff who then sent respondent a written request to provide certain information and documents. Although he eventually provided some of the requested information after some delay and several NASD follow-up requests, ultimately, Respondent was unable to provide information to the NASD about the whereabouts of two of his former staff who he claimed might have been responsible for the allegedly forged documents. He claimed that due to computer malfunction, his computer based address book records were no longer available. Respondent's lawyer testified that Respondent had no other current records of the whereabouts of those employees.
NASD Sanction Guidelines provide different sanctions depending on whether the respondent has failed "in any manner " to respond or whether there is mitigation or the person did not respond in a timely manner. In the first instance the guidelines provide for up to a bar and $50,000 fine. In the second the maximum guideline penalty is a two year suspension and a $25,000 fine.
Here the NASD contended that respondent failed to respond in any manner. The Commission agreed that Respondent had failed to respond to two NASD requests for information. It found that he partially responded to five NASD staff requests. Further, the Commission found Respondent's explanation for failing to produce, stating only that he had searched his files and not found the information was inadequate. It held that he should have identified which files he actually reviewed and should have contacted his accountant to attempt to find the missing information.
The Commission held that under these circumstances it was not appropriate to conclude that Respondent had not responded "in any manner." Therefore, a bar was excessive under the NASD's Sanction Guidelines. The Commission found that Respondent should be sanctioned at the high end of the Sanction Guidelines, and therefore suspended him for the maximum two years provided for persons who partially respond. Further, the Commission imposed a $5,000 fine.
The Commission's only explanation for the imposition of the $5,000 fine was as follows, "because [Respondent] is no longer subject to a bar, we find it appropriate to impose the $5,000 fine identified by NASD as appropriate for the unauthorized transactions but not imposed."
The Commission also found lacking Corespondents' argument that the bar was a violation of the Eighth and Fourteenth Amendments to the Constitution. It ruled that those Amendments do not apply to the NASD because it is a private actor. The fact that The Exchange Act authorizes it to discipline members does not convert it into a state actor. Perpetual Securities, Inc. v. Tang, 290 F.3d 132 (2d Cir. 2002); Desiderio v. NASD, 191 F.3d 198 (2d Cir. 1999).
The Commission rejected Respondent's claim he was subject to selective prosecution because of his race. The Commission found that he had not met his burden of producing evidence to support this claim.
