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FINRA Sanctions Upheld After Circuit Remand - Bar For Failure To Cooperate Not Punitive - Ruling Deferred On Advice of Counsel As Mitigation

Howard Brett Berger, Exchange Act Rel. 58950, November 14, 2008

Time since appeal - 1 year
Time since last brief - 9 months 20 days
Pages - 21
Footnotes - 74!


The Commission sustained findings by NASD that Berger had not cooperated in an investigation and upheld NASD's bar. After Berger appealed to the Second Circuit, the Commission asked that the matter be remanded to it for reconsideration of the sanction in light of the D.C. Circuit opinion in Paz Sec., Inc. v. SEC, 494 F.3d 1059 (2007). This opinion considers only whether the bar is appropriate. Paz ordered the Commission to reconsider NASD sanctions "whether the sanctions were excessive or oppressive 'in light of the factors raised in mitigation and to consider . . . whether the sanctions serve[d] a remedial purpose as required by the [statute]."

Berger applied to register with a firm just as his registration status was about to expire (two years after association ceases). His reapplication was not completed and his registered status expired. NASD then began an investigation of Berger's conduct during the period when he was still deemed registered. He failed to appear as required by a NASD notice and his appearance was rescheduled. Berger got new counsel who advised him not to appear based on a claim that NASD had no jurisdiction over him. The Commission previously ruled that Berger was an associated person and subject to NASD jurisdiction because he had applied to associate with a firm.

As it has often stated in the past, the Commission noted that because NASD has no subpoena power and its rules mandate cooperation with investigations failure to cooperate seriously undermines the self-regulatory obligations of NASD. The opinion in essence holds that there is a per se rule supporting bars for such persons. NASD sanction guidelines provide for a bar should be standard when there is no response. They provide for a two year suspension when there are mitigating factors. Only two other NASD rule violations have a bar as the recommended sanctions. A complete failure to cooperate with no mitigation merits a bar and is for a remedial purpose - the preservation of the effectiveness of the self-regulatory system in aid of investor protection.


Berger argued that he had a good faith belief he was not subject to NASD jurisdiction and also that he relied on the advice of counsel which should be considered a mitigating factor.

NASD has no mechanism for a person to contest its jurisdiction before a requested appearance. The appropriate way to contest jurisdiction is to appear and challenge jurisdiction using the NASD forum. It was appropriate for NASD to consider Berger's previous disciplinary history that involved "significant, multiple acts of past misconduct." It is not appropriate to judge the seriousness of Berger's lack of cooperation by whether or not the investigation resulted in separate disciplinary proceedings. The fact that NASD does not condition bars on eventual cooperation does not render the sanction punitive. NASD should not have to bring disciplinary proceedings to obtain compliance with its rules. Because NASD does not have subpoena power or other methods of enforcing its information demands, cases involving conditional sanctions in the context of civil contempt and similar situations are not applicable.

Berger claimed that his counsel advised him not to appear because NASD had no jurisdiction over him and that counsel never advised him that his failure to appear could result in a bar. Reliance on SEC v. Howard, 376 F.3d 1136(D.C.Cir. 2004) is not appropriate because advice of counsel in that case went to scienter, which is not an element of the failure to cooperate defense. Howard did not address the issue of whether advice of counsel qualifies as a mitigating factor in considering sanctions. The Commission ruled that to establish advice of counsel as a sanction mitigating factor, all elements of the formal defense must be established. Here, Berger did not present the actual advice rendered by counsel, but only submitted his own "say so." SEC v. McNamee, 481 F.3d 451, 456 (7th Cir. 2007). He should have produced an opinion letter from counsel or the counsel's testimony. As a result, the Commission did not consider whether advice of counsel could be a mitigating factor because Berger failed to prove it.


The Paz case will be an ongoing saga as it prohibits sanctions that are punitive rather than remedial. It will be interested to see how the Commission navigates this hair splitting exercise and the reaction of the D.C.Circuit. One has to wonder whether the distinction insisted on by the circuit is actually workable. Stay tuned. The requirement that the elements of the advice of counsel defense be very strictly adhered to even when attempting to establish mitigation is significant and the opinion provides a clear road map for defense counsel who wish to do so. The opinion leaves unresolved the issue of whether a properly established advice of counsel defense should be considered a mitigating factor.