SECURITIES AND EXCHANGE COMMISSION
In the Matter of the Applications of
MARSHALL FINANCIAL, INC.
For Review of Action Taken by
Registered securities association found that member failed to pay fees related to arbitration proceedings but never imposed suspension and dismissed proceedings because member paid the fees before association's decision was served. Held, review proceedings dismissed.
John J. Jagiela, for Marshall Financial, Inc.
Marc Menchel, Alan Lawhead, and Michael J. Garawski, for NASD.
Appeal filed: January 15, 2004
Last brief received: April 22, 2004
Marshall Financial, Inc. ("Marshall"), an NASD member firm, appeals from two decisions by an NASD Hearing Officer involving Marshall's failure to pay member surcharges and administrative fees (collectively "the Fees") incident to four arbitration proceedings. In both decisions, the Hearing Officer found that NASD properly imposed the Fees upon Marshall and ordered that Marshall's NASD membership be suspended until it provided evidence that it had paid the Fees, made arrangements to pay the Fees through an installment payment plan, or declared bankruptcy. The suspensions were to take effect upon service of the orders. Marshall paid the Fees after the Hearing Officer entered the orders but before they were served on Marshall. As soon as Marshall paid the Fees, NASD dismissed both proceedings.1 Marshall then appealed the Hearing Officer's decisions to the Commission asserting, as the basis for its appeals, that the assessment of the Fees was "a breach of the contractual agreement between Marshall" and NASD. We base our findings on an independent review of the record.
A. Background. In late 2000 and early 2001, several customers brought arbitration claims against Miller & Schroeder Financial, Inc. ("M&S"), an NASD member. Following the initiation of those proceedings, some M&S stockholders and employees formed a new broker-dealer, which they named "Marshall, Miller & Schroeder Financial, Inc." and later renamed "MM&S Financial, Inc."2 This firm, the applicant in these appeals, was subsequently renamed "Marshall Financial, Inc."
In July 2001, Marshall agreed to purchase selected M&S assets, including certain of that firm's accounts receivable, transferrable licenses, and the exclusive right to the "Miller & Schroeder" name. As part of this agreement, Marshall assumed certain of M&S's debts and liabilities but expressly did not assume "[l]iabilities arising out of any litigation or administrative or arbitration proceeding to which [M&S] . . . or any of [its] . . . affiliates is a party."3
Notwithstanding Marshall's disclaimer of liability for arbitration claims against M&S, a number of former M&S customers named Marshall as a party in their initial notices of claim, asserting that Marshall was liable as a successor in interest to M&S.4 Among these claimants were Leroy R. and Bonnie J. Cates and John R. Rohner who filed for arbitration in late 2001 and early 2002, respectively. Other claimants who already had commenced arbitration proceedings against M&S amended their claims to add Marshall as a party. These customers included Philip J. Salley and George E. McCauley who, on behalf of various family members or trusts, added Marshall as a party in their respective arbitration proceedings in January and August 2002.
Although Marshall was ultimately dismissed as a party in each of these proceedings,5 NASD Dispute Resolution staff assessed various fees against the firm in accordance with NASD rules. These fees included member surcharges,6 prehearing and hearing processing fees,7 and forum fees.8 Marshall paid a portion of these fees, and NASD withdrew funds from accounts Marshall maintained with NASD to cover certain of the other fees that had been assessed. Despite these payments and credits, NASD Dispute Resolution determined that Marshall still owed a total of $5,950 with respect to the Cates, Rohner, and McCauley proceedings and $4,300 with respect to the Salley proceedings.
B. NASD Proceeding. Marshall refused to pay the balance of the amounts that had been assessed. Consequently, on March 17, 2003, NASD gave Marshall written notice that, in accordance with NASD Code of Procedure Rule 9531,9 Marshall would be suspended from NASD membership based on its failure to pay amounts assessed in connection with the Cates, Rohner, and McCauley arbitrations. On August 7 and September 10, 2003, NASD gave Marshall notice that Marshall would be suspended based on its failure to pay the amounts assessed in connection with the Salley arbitration. Marshall requested a hearing to challenge NASD's determinations to suspend its membership, which NASD granted.10
Marshall argued before the NASD Hearing Officer that, among other things, the Fees were not properly imposed because the arbitrations involved transactions that occurred before Marshall existed. Marshall further argued that the Fees were wrongly imposed on Marshall because the claimants were not and had never been customers of Marshall.
The NASD Hearing Officer found, in both proceedings, that Marshall owed the Fees and had not paid them.11 In ruling against Marshall, the Hearing Officer noted, among other things, that the rules at issue contain no requirement that a party named in a complaint "be ultimately determined to be liable or even correctly named." The Hearing Officer further observed that there is no "requirement in the rules that the subject matter of the complaint be determined to be arbitrable" and that, upon becoming an NASD member, Marshall (like all NASD members) "agreed to pay the dues, assessments, and other charges as shall be fixed in the arbitration forum in accordance with the NASD Rules."12
In both proceedings, the Hearing Officer ordered that Marshall be suspended until it provided evidence that it had paid the Fees, made arrangements to pay the Fees through an installment payment plan, or declared bankruptcy. The suspensions were to take effect "as of the date of service" of the Hearing Officer's decisions. Before each of the decisions was served, however, Marshall paid the respective Fees and NASD dismissed both of the proceedings.
Marshall does not directly challenge the action of the NASD Hearing Officer in determining to suspend the firm based on its failure to pay the Fees.13 Rather, Marshall argues that the Commission should set aside the earlier action of NASD staff in assessing the Fees which, Marshall asserts, was a "breach of the express written contract to arbitrate between the NASD and the member."14 According to Marshall, because it had no customer relationship with any of the parties seeking arbitration, it cannot be a party to an arbitration proceeding brought by them, nor subject to the imposition of the Fees.
NASD argues that we should deny Marshall's appeal for lack of jurisdiction. According to NASD, the action of its Hearing Officer did not implicate any of the four jurisdictional bases presented in Section 19(d) of the Exchange Act.15 NASD further argues that Marshall's appeal should be dismissed as moot.16
In late 2003, we dismissed a similar appeal by Marshall on the basis of mootness, Marshall Financial, Inc.17 ("Marshall I"). In that earlier appeal, Marshall challenged NASD's assessment of fees related to certain arbitration proceedings which were subsequently dismissed as to Marshall. As we held in Marshall I, "[i]t is well-recognized that the federal courts will dismiss a matter as moot unless the complaining party has 'suffered some actual injury that can be redressed by a favorable judicial decision.'"18 Although the NASD Hearing Officer ordered that Marshall be suspended because of its failure to pay the Fees, the orders were not to take effect until they were served on Marshall. As it has done here, Marshall paid the amounts due before NASD served the suspension orders, and, consequently, Marshall was never suspended.
Marshall expressly concedes, in its briefs to us, that the "parties and issues are identical as those raised in [Marshall I]."19 It nevertheless argues (as it did in Marshall I) that the matter is not moot because a favorable Commission decision would result in Marshall being "reimbursed for the fees which it was erroneously assessed and more importantly, it would have a precedent to use in order to prevent the NASD from incorrectly assessing those fees in the first place." Marshall further argues that, in the event we decline to consider the firm's appeals, Marshall will be denied due process and we will be thwarting "the fundamental purpose of the securities laws which [is] 'to achieve a high standard of business ethics in the securities industry.'" We are unpersuaded by Marshall's arguments.
Section 19 of the Securities Exchange Act of 1934 authorizes NASD members or persons associated with such members to seek review by us of action taken by NASD. Exchange Act Section 19(e), which applies to disciplinary actions, authorizes us to "set aside" a sanction imposed in such a disciplinary action and, "if appropriate, remand to the self-regulatory organization for further proceedings."20 In the event Marshall had been suspended because of its failure to pay the Fees, Section 19(e) would authorize the setting aside of that suspension under appropriate circumstances. The suspension, however, was never imposed, and therefore cannot now be set aside.21
As one court has recently stated, "'[t]he test for mootness is whether the relief sought would, if granted, make a difference to the legal interests of the parties.'"22 "Although we, like other administrative agencies, have 'substantial discretion to determine whether the resolution of an issue . . . is precluded by mootness,'"23 we have "declined to consider an appeal where 'even a favorable decision by the Commission would entitle [the applicant] to no relief.'"24 Such a situation confronts us here.
We perceive no relief that is available here. Specifically, there was no suspension imposed on Marshall, so there is no suspension that we can lift. Marshall's desire for helpful precedent, without anything more substantial at stake in the controversy, does not persuade us that this case is not moot. Under the circumstances, we have determined to dismiss Marshall's appeals.25
An appropriate order will issue.26
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID, and CAMPOS); Commissioner ATKINS not participating.
Jonathan G. Katz
In the Matter of the Applications of
MARSHALL FINANCIAL, INC.
For Review of Action Taken by
On the basis of the Commission's opinion issued this day, it is
ORDERED that Marshall Financial, Inc.'s applications for review of NASD action related to the assessment and payment of surcharges and fees in connection with certain arbitration proceedings be, and they hereby are, dismissed.
By the Commission.
Jonathan G. Katz
We note that, although Marshall asked NASD, in January 2002, to abate amounts NASD had assessed in connection with the arbitration proceedings in which Marshall had then been named, there is no indication that the firm subsequently sought a reduction or refund of any of those amounts or amounts subsequently assessed, including the Fees.
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