Whitehall Wellington Investments, Inc.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 44367 / May 30, 2001
Admin. Proc. File No. 3-10250
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In the Matter of the Appliation of
WHITEHALL WELLINGTON INVESTMENTS, INC. For Review of Action Taken by the NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
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OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEWABILITY OF ASSOCIATION ACTION
Jurisdiction to Review Action of Association
Member firm of registered securities association was denied exemption from the requirement to establish special supervisory procedures resulting from firm's employment of persons formerly employed by disciplined firms. Held, matter is not subject to Commission review under Section 19(d) of the Securities Exchange Act of 1934, and application for review is dismissed.
APPEARANCES:
Martin H. Kaplan of Gusrae, Kaplan & Bruno, for Whitehall Wellington Investments, Inc.
Alden S. Adkins and Norman Sue, Jr. for NASD Regulation, Inc.
Appeal filed: July 7, 2000
Briefing completed: September 18, 2000
I.
Whitehall Wellington Investments, Inc. ("Whitehall" or the "Firm"), a member firm of the National Association of SecuritiesDealers, Inc. (the "NASD"), seeks review of an NASD decision denying the Firm an exemption from NASD Conduct Rule 3010(b)(2) (the "Taping Rule"). For the reasons set forth below, we conclude that the NASD's decision is not reviewable and accordingly dismiss Whitehall's application for review. To the extent we make findings, we base them on an independent review of the record.
II.
The Taping Rule requires a member firm of Whitehall's size (i.e., a firm with at least 20 registered persons) to adopt special supervisory procedures, including the requirement to tape record all telephone conversations with existing and prospective customers for a two-year period, if 20% or more of its registered persons have been employed by one or more "disciplined firms" 1 within the prior three years. 2 The Taping Rule permits the NASD to grant to any member firm an exemption from its requirement that the firm install, operate, and review the recordings resulting from a taping system, "upon a satisfactory showing that the member's supervisory procedures ensure compliance with applicable securities laws and regulations and applicable rules of the Association." 3
On December 3, 1999, NASD staff notified the Firm that Whitehall was required to adopt special supervisory procedures in accordance with the Taping Rule because nine of Whitehall's 38 registered persons (or 23%) had been employed by disciplined firms in the prior three years. The Firm subsequently applied to the NASD's Department of Member Regulation (the "DMR") for an exemption from the taping requirement, claiming that the Firm's employment practices were "rigid" and that the firm maintained "proper procedures and supervision." The DMR denied the Firm's exemption application on March 14, 2000, concluding that Whitehall had "not provid[ed] any specifics to support this characterization [of rigor in its hiring practices], nor . . . explain[ed] how its supervisory procedures willassure investor protection . . . [and] ensure compliance with the securities laws for all its registered persons absent installation of a taping system."
Whitehall then appealed the DMR's decision to the NASD's National Adjudicatory Council (the "NAC"). In its June 19, 2000 decision affirming the DMR's denial of Whitehall's exemption request, the NAC observed that, although Whitehall on appeal had "offered to adopt 'any reasonable alternative' to a taping system," Whitehall had failed to propose any "alternative special supervisory procedures for NASD Regulation to consider." The NAC concluded that, "in the absence of any evidence of special supervisory procedures sufficient to ensure compliance with the applicable securities laws and regulations, there [was] no basis for granting an exemption from the requirement that Whitehall install a taping system."
Whitehall then applied to the Commission for review of the NASD's decision and for an emergency stay of the requirement to install a taping system. The stay request was denied. Subsequently we issued an order directing Whitehall and the NASD to file briefs addressing the issue of whether we have jurisdiction pursuant to Section 19(d) of the Securities Exchange Act of 1934 to review the NASD's denial of Whitehall's exemption request.
III.
After receiving the requested briefs on jurisdiction, we issued our decision in Joseph Dillon & Co., Inc., Exchange Act Rel. No. 43523 (Nov. 6, 2000), 73 SEC Docket 2256. We concluded in Dillon that we lacked jurisdiction to consider an NASD member firm's appeal from an NASD decision denying the firm's request for an exemption from the Taping Rule. We believe that the decision in that case determines the result here. 4 Accordingly, because, as set forth in detail in Dillon, the NASD's denial of a member firm's request for exemption from the Taping Rule does not fall within any of the four jurisdictional bases for Commission review of a self-regulatoryorganization's action enumerated in Section 19(d), 5 we conclude that we lack jurisdiction to consider Whitehall's appeal.
IV.
Further, we do not agree with Whitehall that, even if we lack jurisdiction under Section 19(d), we nevertheless should consider Whitehall's appeal because there are "compelling reasons" for doing so. 6 The reasons for review that Whitehall offers are not "compelling." These reasons include conservation of administrative resources; the need to assure that the NASD has not abused its discretion under a rule that, in Whitehall's view, confers on the NASD "a substantial amount of discretion" in "allow[ing] it to unconditionally exempt any member from the Taping Rule" (emphasis Whitehall's); and the need for resolution of Whitehall's claims that the Taping Rule, which we approved pursuant to Section 19(b) of the Exchange Act after notice and comment in April 1998, is flawed and should not be applied to Whitehall.7
V.
Because the NASD's decision to deny Whitehall an exemption from the requirements of the Taping Rule is not reviewable by the Commission pursuant to Section 19(d) of the Exchange Act, we dismiss the Firm's application seeking review of that denial.
An appropriate order will issue. 8
By the Commission (Acting Chairman UNGER and Commissioners HUNT and CAREY).
Jonathan G. Katz
Secretary
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 44367 / May 30, 2001
Admin. Proc. File No. 3-10250
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In the Matter of the Appliation of
WHITEHALL WELLINGTON INVESTMENTS, INC. For Review of Action Taken by the NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
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: |
ORDER DISMISSING APPLICATION FOR REVIEW OF EXEMPTION DENIAL BY REGISTERED SECURITIES ASSOCIATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that Whitehall Wellington Investments, Inc.'s application for review of the denial by the National Association of Securities Dealers, Inc. of an exemption from the special supervisory requirements of NASD Conduct Rule 3010(b)(2) be, and it hereby is, dismissed.
By the Commission.
Jonathan G. Katz
Secretary
1 The Taping Rule defines the term "disciplined firm" as any member firm "that, in connection with sales practices involving the offer, purchase, or sale of any security, has been expelled from membership or participation in any securities industry self-regulatory organization or is subject to an order of the Securities and Exchange Commission revoking its registration as a broker/dealer." Conduct Rule 3010(b)(2)(x).
2 Conduct Rule 3010(b)(2)(viii).
3 Conduct Rule 3010(b)(2)(xi).
4 Indeed, the arguments Whitehall makes in support of its claim that we have jurisdiction are substantially identical to those made in Dillon.
5 Exchange Act Section 19(d) authorizes Commission review of an action of a self-regulatory organization, including the NASD, that (i) imposes any final disciplinary sanction on any member or person associated with a member; (ii) denies membership to any applicant; (iii) prohibits or limits any person in respect to access to services offered by such organization or member thereof; or (iv) bars any person from becoming associated with a member. 15 U.S.C. §78s(d).
6 Whitehall cites to three Commission decisions that it asserts support Commission review here. The Dillon firm also advocated for "compelling reasons" review (see Dillon, 73 SEC Docket at 2258 n.5), citing the same precedent in support. As we explained in Dillon (id.), the cases cited do not support this argument.
7 Whitehall asserts that the Rule is "overly broad and patently unfair," and "raises serious constitutional issues of free speech and freedom of association." We do not agree. When the NASD proposed the Taping Rule, fairness, overbreadth, and privacy concerns were raised by commenters (see Notice of Filing of Proposed Rule Change by the NASD Relating to Tape Recording of Conversations, Exchange Act Rel. No. 39361 (Nov. 26, 1997), 65 SEC Docket 2892, 2894-96; Order Granting Approval of Proposed Rule Change, as Amended, and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 2 to the Proposed Rule Change by the NASD Relating to the Tape Recording of Conversations, Exchange Act Rel. No. 39883 (Apr. 17, 1998), 66 SEC Docket 3114, 3117). In response to these concerns, the NASD narrowed the scope of the rule considerably. In approving the narrowed rule, we concluded that it is consistent with the requirements of the Exchange Act and the rules and regulations thereunder and that the monitoring of registered persons' telephone conversation that the Rule requires will serve the important goals of protecting investors and the public interest. 66 SEC Docket at 3118.
Among Whitehall's other complaints is that, if Whitehall must comply with the Rule, it may as a result violate so-called"two-party statutes" adopted in various states. Those statutes require the consent of all parties to a conversation for tape recording that conversation. Whitehall, however, could avoid any conflict by following what we identified in our release approving the Rule as the "best practice" of "notify[ing] [its] registered persons and customers that their telephone calls are being tape recorded." Id. See also 65 SEC Docket at 2896 (our notice of the NASD's proposed rule change) (discussing the potential for state law conflict that arises with regard to recording conversations between persons in one-party statute and two-party statute states and concluding: "The safest course of action in each case would be to notify [a firm's] representatives and customers that their telephone calls are being tape recorded. If all parties know of the tape recording, then there is no violation of any statute.").
Whitehall further asserts that the Rule cannot fairly be applied to it. Whitehall posits that its predominantly- retail business in listed stocks and mutual funds presents "simply no opportunity for the sales practice violations that are the [Rule's] focus." To the contrary, listed stocks and mutual funds shares may be traded/"switched" excessively and without authorization, and may be the instruments of other sales practice violations, as well.
8 We have considered all of the arguments advanced by the parties. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.