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Finra Sanctions Upheld - No Action Letter Not A Defense

FCS Securities and Dale Edward Kleinser, Exchange Act Rel. 64852, July 11, 2011

Kleinser was the sole proprietor of FCS. Finra sanctioned them based on FCS' failure to file annual audited reports in 2006 and 2007. They argued that FCS was exempt from the requirement to file audited reports as it was a BD that limited its business to buying and selling mortgage backed debt instruments (such firms being exempt from the audit requirement). Finra argued that the exemption applied only to firms that were actively engaged in business and that FCS was in fact dormant and did no business. It therefore was not eligible for the exemption.

Finra fined FCS and Kleinser $5,000 and suspended the firm for four months. The Commission upheld the sanctions. It found that FCS had the burden of establishing eligibility for the exemption. It reasoned that FCS had never proved any actual transactions and that as a dormant firm it could not claim the exemption.

The opinion is of interest primarily because it discusses the importance (or lack thereof) of Commission no-action letters. These letters are staff pronouncements whereby the staff will indicate that no enforcement action will be recommended to the Commission if the party adheres to the conduct described in the letter.

"No action letters express the views of the Commission staff. they do not constitute Commission precedent, nor do they limit subsequent Commission action. We are not bound by statements of Commission staff ...." (footnotes omitted)

In other words, only the individual sending the letter can rely on the staff response according to the Commission. This of course begs the question of whether or not a due process argument could succeed by someone whose conduct mirrored that of the no action requestor.

Kleinser argued that his conduct was covered by a previous no-action letters. The opinion notes that the no action letters simply did not address the issue of what constituted transactions and exactly what kind of instruments were covered by the exemption and were too vague to be relied on.