SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 39544 / January 13, 1998 Admin. Proc. File No. 3-9274 : In the Matter of the Application of : : JOHN J. FIERO : 83 Montgomery Street, #302 : Jersey City, New Jersey 07302 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDINGS Violation of NASD Rules Failure to Provide Requested Testimony President and sole owner of member of registered securities association failed to provide, in a timely manner, testimony requested by association in connection with investigation. Held, association's findings of violation and sanctions imposed are sustained. APPEARANCES: Martin H. Kaplan, of Gusrae, Kaplan & Bruno, for John J. Fiero. Alden S. Adkins, Norman Sue, Jr., and Deborah F. McIlroy, for NASD Regulation, Inc. Appeal filed: March 17, 1997 Briefing completed: July 2, 1997 I. John J. Fiero, president and sole owner of Fiero Brothers, Inc. ("the Firm"), a member of the National Association of Securities Dealers, Inc. ("NASD"), appeals from NASD disciplinary action. The NASD found that Fiero violated Procedural Rule 8210 and Conduct Rule 2110 by refusing to testify in an NASD investigation. <(1)> It censured Fiero, fined him $20,000, and suspended him for six months. We base our findings on an independent review of the record. II. In 1995-1996, the NASD conducted a non-public investigation of certain short selling activity by the Firm and others. This case involves Fiero's refusal to testify on January 23, 1996 in that investigation. At that time, Fiero stated that he would not agree to be interviewed unless he was allowed to obtain a copy of his transcript as soon as it was prepared by the reporting service. Fiero had given prior testimony in the NASD's investigation on May 30, 1995, and was notified at the close of that session that the staff had additional questions and would recall him at a later date. Fiero was allowed to obtain a copy of the transcript of that session as soon as it was available. The staff determined that this was appropriate in the interests of fairness, since Fiero was being called back for further questioning. However, the staff denied the request of Fiero s counsel for a copy of the transcript of Louis Cardinale, a Firm employee who testified on June 29, 1995. Counsel was advised that the NASD was not currently authorizing the release of transcripts from the investigation, but would do so at a later time. On January 23, 1996, Fiero appeared with counsel for the scheduled resumption of his interview. Counsel informed the staff that Fiero would not proceed unless he was allowed to obtain a copy of his transcript as soon as it was prepared. The staff rejected that demand. It stated, however, that it would make the transcript available for review at the NASD's New York office as soon as it was ready, and that Fiero and his counsel would have the opportunity to examine it and point out any inaccuracies. In explaining its refusal to release the transcript, the staff expressed concern that prospective witnesses might obtain copies of investigative interviews prior to giving testimony. The staff stated that Fiero would be able to obtain a copy of his transcript as soon as the staff had completed on-the-record interviews, and that it was already "towards the end of that phase". The staff rejected various counter-proposals made by Fiero, including his offer of an agreement to keep his transcript confidential. They warned <(1)> Procedural Rule 8210 (formerly Article IV, Section 5 of the NASD's Rules of Fair Practice) requires persons associated with member firms to report orally with respect to any matter involved in an NASD investigation. Conduct Rule 2110 (formerly Article III, Section 1 of the NASD's Rules) requires adherence to high standards of commercial honor and just and equitable principles of trade. ======END OF PAGE 2====== Fiero that, if he persisted in his refusal to proceed with the interview, they would recommend disciplinary action. Fiero nevertheless refused to testify. Although there was no procedure for appealing the staff's determination, <(2)> Fiero's counsel wrote that same day to the Chairman of the NASD's Market Surveillance Committee (now Market Regulation Committee) requesting that the Committee review the staff's decision. The Committee's only response was to issue the complaint in this matter one week later. Fiero nevertheless persisted in his refusal to testify until September 19, 1996. At that point, the staff had completed all of the other interviews in its investigation and notified Fiero that, if he testified, he could obtain a copy of his transcript as soon as it was prepared. III. Fiero argues that the NASD s refusal to allow the immediate release of his transcript was an abuse of regulatory power. We have a different perspective. In our view, Fiero s refusal to testify unless the NASD allowed him to obtain a copy of his transcript as soon as it was prepared flouted a basic obligation imposed on NASD members and their associated persons. We have repeatedly stressed the importance of membership cooperation in NASD investigations. The membership's failure to provide information undermines the NASD s ability, in the absence of subpoena power, to carry out its self-regulatory functions. <(3)> We have also stressed that members and their associated persons may not impose conditions on their obligation to supply requested information. <(4)> Fiero tries to distinguish prior cases in which we rejected such attempts as instances where respondents tried to limit NASD questioning on some substantive basis. This suggested distinction has no validity. <(5)> The NASD's requests should not be second-guessed. <(2)> Contrary to Fiero's assertion, our decision in Boren & Co., 40 S.E.C. 217, 225 (1960), did not establish a procedure for him to follow. <(3)> See, e.g., Mark Allen Elliott, 51 S.E.C. 1148, 1150 (1994); Richard J. Rouse, 51 S.E.C. 581, 584 (1993); Michael David Borth, 51 S.E.C. 178, 180 (1992). <(4)> Richard J. Rouse, supra, 51 S.E.C. at 585-586; Darrell Jay Williams, 50 S.E.C. 1070, 1072 (1992); Boren & Co., 40 S.E.C. 217, 225 (1960). <(5)> For example, we found impermissible a respondent's offer to allow the NASD to inspect a firm's books and records provided the documents being sought were (continued...) ======END OF PAGE 3====== The NASD staff decided to give Fiero a copy of his initial interview transcript because it determined that, under the particular circumstances, it was fair to do so. That decision did not, as Fiero argues, commit the staff to releasing later transcripts. Nor was the staff s later refusal of a transcript a denial of due process. Fiero and his counsel were given the ability to review and comment on the transcript, <(6)> and were told they could obtain a copy in due course. The NASD staff acted reasonably in trying to prevent premature disclosure of investigative testimony. As one court stated in sustaining the similar refusal of a transcript by this Commission: [I]f witnesses were given a copy of their transcript, suspected violators would be in a better position to tailor their own testimony to that of the previous testimony, and to threaten witnesses about to testify with economic or other reprisals. <(7)> The NASD was not required to accept Fiero's offer of a confidentiality agreement, thereby relying on his willingness and ability to protect the association's interests. Moreover, Fiero's counsel conceded that the transcript of Fiero's testimony might be subject to disclosure in other proceedings in which Fiero was involved at that time. Contrary to Fiero's further contention, the refusal of a copy of the transcript did not deny him the right to counsel. Had Fiero testified, the NASD had agreed to provide Fiero and his counsel access to the transcript. Any disadvantage to counsel from the lack of an immediate copy of the transcript would have been minimal, and justified by the exigencies of the NASD's investigation. Fiero further contends that, in denying him an immediate copy of his testimony, the NASD staff improperly created a new rule without submitting it to this Commission for approval, as required by the Securities Exchange Act of 1934 ("Exchange Act"). <(8)> We cannot agree. No rulemaking was involved here, either in the staff s initial decision to let Fiero <(5)>(...continued) identified and a method of production acceptable to the respondent's counsel specified. Michael Markowski, 51 S.E.C. 553, 558 n.16 (1993), aff'd, 34 F.3d 99 (2d Cir. 1994). <(6)> Thus, Fiero's concern that his stuttering might result in inaccuracies in the transcript would have been alleviated by the opportunity to examine the transcript and point out the necessary corrections to the NASD staff. <(7)> Commercial Capital Corporation v. SEC, 360 F.2d 856, 858 (7th Cir. 1966). <(8)> See Exchange Act Section 19(b) and Rule 19b-4. ======END OF PAGE 4====== obtain a transcript or in its later determination to withhold one. In each instance, the decision was a discrete determination in a particular investigation, <(9)> which rested within the staff s sound discretion. <(10)> We find no abuse in those determina- tions. <(11)> In light of the foregoing, we find, as did the NASD, that Fiero violated Procedural Rule 8210 and Conduct Rule 2110. <(12)> IV. <(9)> As Fiero points out, he testified in another NASD investigation on February 7, 1996, and was allowed to purchase a copy of his transcript as soon as it was available. <(10)> Contrary to Fiero's contention, the staff's ad hoc determinations cannot be transformed into "rules" by characterizing them as "stated policies, practices [or] interpretations" of the NASD within the meaning of Section 3(a)(27) of the Exchange Act and Rule 19b-4(b) under the Act. <(11)> The NASD subsequently adopted Procedural Rule 8210(f) which provides in relevant part as follows: "Upon written request, a person who has submitted . . . testimony in an Association investigation may procure . . . the transcript of the person's testimony upon payment of the appropriate fees, except that prior to the issuance of a complaint arising from the investigation, the Association staff may for good cause deny such request. <(12)> Fiero notes that Conduct Rule 2110 requires adherence to ethical standards "in the conduct of [one's] business." He asserts that the charges against him do not relate to his customer business or to his market activities. We do not agree. Fiero impeded an investigation into his business activities. That conduct must be viewed as a violation of his obligation to conduct those activities in accordance with ethical standards. Moreover, courts have construed the NASD's rule to provide broad protection to the securities markets. See Vail v. SEC, 101 F.3d 37, 39 (5th Cir. 1996); Alderman v. SEC, 104 F.3d 285, 288-289 (9th Cir. 1997). In any event, Fiero's violation of Procedural Rule 8210 is alone sufficient to justify the sanctions imposed on him by the NASD. ======END OF PAGE 5====== Fiero argues that the sanctions imposed on him are "draconian," far harsher than those assessed in comparable cases. He asserts that his conduct was not egregious, recurrent, or a threat to the public, and points out that he ultimately testified in the NASD's investigation. We consider that the sanctions imposed on Fiero are fully justified. Fiero's obstructionist tactics threatened the public by impeding the NASD in carrying out its regulatory mandate to protect public investors. The fact that Fiero ultimately testified (eight months after refusing to do so, at a time when the NASD was willing to meet his terms) has already been taken into account by the NASD's National Business Conduct Committee, which reduced the bar imposed by the Market Surveillance Committee to a six-month suspension. No further reduction in the sanctions imposed is warranted. Under all the circumstances, we do not find the NASD's action excessive or oppressive. <(13)> An appropriate order will issue. <(14)> By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY and UNGER). Jonathan G. Katz Secretary <(13)> It is well established that appropriate sanctions depend on the facts and circumstances of each particular case, and cannot be precisely determined by comparison with the action taken in other proceedings. See Butz v. Glover Livestock Commission Co., Inc., 411 U.S. 182, 187 (1973); Hiller v. SEC, 429 F.2d 856, 858- 859 (2d. Cir. 1970). <(14)> All of the contentions advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. ======END OF PAGE 6====== UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 39544 / January 13, 1998 Admin. Proc. File No. 3-9274 : In the Matter of the Application of : : JOHN J. FIERO : 83 Montgomery Street, #302 : Jersey City, New Jersey 07302 : : For Review of Disciplinary Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : ORDER SUSTAINING DISCIPLINARY ACTION TAKEN BY REGISTERED SECURITIES ASSOCIATION On the basis of the Commission's opinion issued this day, it is ORDERED that the disciplinary action taken by the National Association of Securities Dealers, Inc. against John J. Fiero be, and it hereby is, sustained. By the Commission. Jonathan G. Katz Secretary