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Howard Brett Berger, Exchange Act Rel. 55706 (May 4, 2007)

NASD disciplinary decision – challenges to NASD jurisdiction

Days between appeal and decision – 8 months, 20 days
Days between last brief and decision – 5 months, 21 days
Pages – 17


Respondent was barred by the NASD for failure to cooperate with a NASD investigation. He failed to appear at two scheduled interviews with NASD staff. The Commission affirmed the NASD action.

Respondent claimed that he was not subject to NASD jurisdiction. The NASD found that by filing an application for registration, respondent had subjected himself to NASD jurisdiction.

The Commission relied on two previous cases to the effect that persons may not challenge NASD jurisdiction before they are required to provide information to the NASD.

This was a very simple, straightforward matter. It raised no new issues of law and applied clear precedent. The only issue of note was whether NASD has jurisdiction over persons who have applied for registration. In this case, the issue was decided based on the particular facts of the case. NASD by-laws clearly provide for such jurisdiction. Under these circumstances, one must wonder why the Commission took 17 pages and more than 5 months after the briefs were filed to render a decision.

Key points

  • Failure to appear before the NASD staff demonstrates a prima facie violation of NASD Rule 8210.
  • NASD bylaws provide for jurisdiction over both registered persons and persons who have applied for registration.
  • The standard for review of evidence in an administrative proceeding is preponderance of the evidence.
  • Circumstantial evidence is appropriate in administrative proceedings.
  • An initial fact finder's credibility findings are entitled to substantial weight and will not be ightly overturned.
  • Where witnesses do not have specific recall, standard business practice may be relied upon as persuasive evidence.
  • The Federal Rules of Civil Procedure and the Commission's Rules Relating to Investigations do not provide respondent any substantive rights.
  • It is not fundamentally unfair that the NASD has no procedure for challenging its jurisdiction before a person is required to provide information to its staff.
  • The only way for a person to challenge NASD jurisdiction is to fail to provide information to the NASD and then challenge any resulting NASD disciplinary action.
  • The Commission declined to find that the sanction was excessive or oppressive.
  • To establish advice of counsel as a mitigating defense a respondent must provide evidence that that he made complete disclosure to counsel, sought advice on the legality of the intended conduct, received advice that the intended conduct was legal, and relied in good faith on counsel’s advice.


On April 15, 2003, four days before his licenses expired, respondent filed a registration form with the NASD and later filed two amendments. His registration was never successfully completed and the firm he was seeking to associate with later filed a form with the NASD terminating his association. The interviews that respondent failed to appear for were scheduled in January and February 2004.

Respondent argued that he was not subject to NASD jurisdiction because his previous registration had lapsed and his 2003 application had not been successfully completed.

The Commission found that because respondent had signed the initial application and two amendments he was an associated person because he had applied for registration and was therefore subject to NASD jurisdiction.

The Commission rejected respondent's claim that because the registration form and amendments were electronically filed and "signed" with his purported signature without proof that he actually mechanically signed the form, the NASD had no jurisdiction. It noted that he testified that he wanted to register to enable himself to receive commissions. It found unpersuasive respondent's claim that the firm had failed to comply with NASD regulations that it maintain a hard copy of the mechanically signed application. Here the Commission found substantial circumstantial evidence that respondent had signed and submitted the application. Particularly persuasive were first person answers to amendments to the form explaining disciplinary matters. Also, a compliance employee of the firm testified that it was his normal practice not to fill in details in amended forms.

The Commission rejected respondent's claim that he should be entitled to challenge NASD jurisdiction without first appearing before the NASD staff. He claimed it was unfair to punish him for failure to appear when that failure was based on his challenge to NASD jurisdiction. The Commission reiterated earlier cases holding that the only way to challenge NASD jurisdiction is to fail to cooperate and then defend any action seeking sanctions (this despite the fact that NYSE disciplinary proceedings permit such challenges).

Respondent argued that the he relied on advice of counsel in not appearing before the NASD staff and that this should mitigate the sanction. The Commission rejected this argument because respondent submitted not evidence that he had fully complied with the requirement for invoking such a defense, namely that he had made full disclosure to counsel, sought advice from counsel, and relied in good faith on counsel's advice.