SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40671 / November 12, 1998 Admin. Proc. File No. 3-9324 : In the Matter of the Application of : : RICHARD T. SULLIVAN : 307 Clinton B Fiske Avenue : Staten Island NY 10314 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF PROCEEDINGS Practice and Procedure Need for Further Explanation of Basis for Association Action Where registered securities association determined not to reconsider revocation for failure to pay fine and costs of former principal of member firm, held, appropriate for the Commission to seek explanation from association of its determination, and proceedings remanded to association for that purpose. APPEARANCES: Michael Q. Carey, Carey & Associates, for Richard T. Sullivan. Alden S. Adkins and Norman Sue, Jr., for the National Association of Securities Dealers, Inc. Appeal filed: April 24, 1997 Last brief received: April 13, 1998 I. Richard T. Sullivan, a former principal and compliance director of F.N. Wolf & Co., Inc. ("FNW"), which was a former member of the National Association of Securities Dealers, Inc. ("NASD"), seeks review of NASD action. Pursuant to its Sanctions Rule 8320, the NASD revoked Sullivan's registration in all capacities for failure to pay a fine and costs imposed in an earlier disciplinary action. To the extent that we make findings in this opinion, we base those findings on an independent review of the record. II. From the record before us, we understand the facts to be as follows. In 1995, we sustained NASD disciplinary action against Sullivan. [1] We found that FNW, acting through, among others, Sullivan, had engaged in transactions in Treats International Enterprises, Inc. ("Treats") in contravention of Section 15(c) of the Securities Exchange Act of 1934, 15 U.S.C. 78o(c) ("Exchange Act") and then-Exchange Act Rule 15c2-6 and thereby violated Article III, Section 1 of the NASD's Rules of Fair Practice (now Conduct Rule 2110). We further found that Sullivan had failed to establish, enforce, and maintain adequate procedures for compliance with Exchange Act Rule 15c2-6, in violation of Article III, Sections 1 and 27 of the NASD's Rules (now Conduct Rules 2110 and 3010). Sullivan was censured, suspended from association in a supervisory or principal capacity for a period of one year, thereafter required to requalify before acting in such capacity, and fined $25,000, plus costs. We will refer to this proceeding as "Treats I." Sullivan appealed Treats I to the United States Court of Appeals for the District of Columbia Circuit, but, on August 7, 1996, he stipulated to a discontinuance of the appeal. On February 13, 1996, the NASD found that Sullivan had failed to establish, maintain, and enforce supervisory procedures to prevent violations of Rule 15c2-6 in connection with transactions in Nacoma Consolidated Industries, Inc. ("Nacoma"). The NASD censured Sullivan, suspended him for one year to run concurrently with the suspension in Treats I, required him to requalify before acting in a supervisory capacity, and fined him $10,000. Sullivan did not appeal the decision in Nacoma. [2] On September 11, 1996, the NASD notified Sullivan by letter that the fine and costs in Treats I were due and payable. The letter noted that Sullivan could avail himself of an installment plan by making an initial payment of twenty-five percent of the total amount due. The record includes a receipt for the letter to which Sullivan's name has been signed and the signature initialled. [3] On October 23, 1996, the United States Bankruptcy Court for the Southern District of New York entered an Order Confirming Debtors' Joint Amended Plan of Reorganization in the bankruptcy of FNW and Wolf Financial Group, Inc., Debtors (the "October 1996 Order"). [4] The October 1996 Order states, in pertinent part: 8. Except as otherwise expressly provided in the Plan, effective on the Confirmation Date, all Persons who have held, hold or may hold Claims or Equity Interests are enjoined on and after the Confirmation Date from: a. commencing, conducting or continuing in any manner, directly or indirectly, any suit, action or other proceeding of any kind (including, without limitation, any thereof in a judicial, arbitral, administrative or other form [sic]) against or affecting the Debtors or any existing officers of the Debtors, the property of the Debtors, or any property of the foregoing entities . . . ; b. enforcing, levying, attaching . . ., collecting or otherwise recovering by any manner or means, whether directly or indirectly, on any judgment, award, decree or order against the Debtors, [or] existing officers of the Debtors . . . . By letter dated November 18, 1996, the NASD informed Sullivan that, unless the NASD received payment of the fine and costs in Treats I within seven business days, Sullivan's registration would be revoked. It appears that Sullivan signed the receipt for that letter. Sometime during this period, counsel for Sullivan contacted certain members of the NASD's staff and asked that the NASD delay the revocation proceeding. Counsel noted that Sullivan had an offer of settlement in a third NASD disciplinary proceeding ("Treats II") then pending before the NASD. [5] The NASD staff informed counsel that collection of the Treats I fine and costs would continue because the collection effort was not involved in the proposed settlement. However, NASD staff also suggested that counsel could request a delay of the collection process in writing. [6] There apparently was no further communication between the NASD and Sullivan or his counsel until January 7, 1997, when the NASD informed Sullivan by letter that his registration in all capacities had been revoked for failure to pay the fine and costs in Treats I. On January 29, 1997, Sullivan's counsel wrote to the NASD requesting reconsideration of the NASD's determination to revoke the registration of Sullivan and James Petrantis, a co- respondent in Treats I. [7] On March 25, 1997, the NASD announced that it had to determined to deny Sullivan's motion for reconsideration. By letter dated April 24, 1997, Sullivan filed an appeal with us. Thereafter, Sullivan's counsel informed us that the NASD had agreed to reconsider Sullivan's revocation a second time. [8] On reconsideration, both Sullivan and the NASD's Divisions of Enforcement submitted memoranda in support of their respective positions to the NASD. By letter dated February 3, 1998, the NASD announced its determination to deny Sullivan's motion. The NASD's letter states in totality, "This is to advise you that the National Business Conduct Committee has reviewed the above-captioned matter and has determined to deny [Sullivan's] request for reconsideration of revocation of registration." III. As an initial matter, the NASD argues that we do not have jurisdiction over this proceeding. Section 19(d) of the Exchange Act, 15 U.S.C. 78s(d), delineates the scope of our authority to review actions of self-regulatory organizations. We may review any action of the NASD that imposes a final disciplinary action on a person associated with a member; denies membership to any applicant; prohibits or limits access to services offered by the organization or any of its members to any person; or bars any person from associating with a member. We have found that we have jurisdiction to review NASD actions that effectively bar the applicant from association with a member firm. For example, recently in Frank R. Rubba, [9] we concluded that the NASD's denial of a request for an exemption from a requirement that Rubba requalify by examination had the effect of barring Rubba from associating with any NASD member until his requalification. In the Rubba decision, we cited our earlier decision in Exchange Services, Inc., [10] where we had reviewed the NASD's denial of an applicant's request for examination waivers on behalf of its order takers under Section 19(f) of the Exchange Act. In Exchange Services, we concluded that the NASD's action there effectively barred the order takers from associating with the applicant until they qualified for registration by examination. Prior to the NASD's revocation of Sullivan's registrations, Sullivan was subject only to concurrent one-year suspensions from association with a member in a principal or supervisory capacity. The NASD's determination has barred Sullivan from associating with a member firm until he satisfies certain requirements. [11] Under the circumstances presented here, we conclude that our review of this matter is authorized by Section 19(d) of the Exchange Act, 15 U.S.C. 78s. [12] IV. Sullivan argues that, as an existing officer of FNW, he was protected by the October 1996 Order entered by the bankruptcy court. He claims that the October 1996 Order precluded the NASD from commencing a revocation proceeding against him or from collecting the fine imposed on him in Treats I. We disagree. The October 1996 Order was entered in the bankruptcy of FNW and its parent corporation. Sullivan was not a debtor or a party in that proceeding. The October 1996 Order applies to the enforcement of "Claims and Equity Interests." In this context, we believe the October 1996 Order is clear that the term "Claims" refers to claims against the Debtors -- FNW and its parent corporation. We further believe that the October 1996 Order prohibits efforts to collect money from FNW's officers by asserting that those officers have some form of derivative liability for a claim against the Debtors. We do not construe the October 1996 Order to prevent any assertion that FNW officers may be liable for violations committed in their individual capacities. Our construction is confirmed by earlier action by the Bankruptcy Court. In December 1994, the Bankruptcy Court ruled that the automatic stay provisions of the Bankruptcy Code (11 U.S.C. 362) did not apply to Sullivan or other FNW officers subject to NASD disciplinary proceedings for violative conduct committed in their individual capacities. Moreover, in a December 1996 hearing before the Bankruptcy Judge, in response to a motion to stay a class action against another officer of FNW, the Bankruptcy Judge stated: Based upon everything that I've heard today on this record it's clear to me that everyone agrees that this language [in the October 1996 Order] is intended only to deal with liabilities of the then existing management in its derivative capacity, to the extent that there is such liability, and not with respect to any liability of those individuals in their individual capacity or as [to their] being joint[ly] and severally liable. Similarly, a February 1997 letter to the NASD from Debtors' counsel stated that the October 1996 Order was designed to prevent any creditor from "pursuing the debtors' current officers for liabilities that are derivative in nature with respect to the officers, and which are really debts of" FNW and its parent corporation. Debtors' counsel also noted that the October 1996 Order did not release all liability against the Debtors' officers and further agreed that a claim against an FNW officer "based on his intentional actions, in which he acted in personal capacity" was permitted by the October 1996 Order. Sullivan further suggests that, based on a "layman's" understanding, he reasonably concluded from the text of the October 1996 Order that, as an existing officer of FNW, he was not required to pay the fine and costs in Treats I and the NASD was enjoined from pursuing any claims against him. [13] He asserts that he was not a party to the 1996 motion before the Bankruptcy Judge and neither was informed of nor participated in the December 1996 hearing in which the Bankruptcy Judge construed his October 1996 Order. He further notes that the Bankruptcy Judge did not modify the October 1996 Order after the December hearing and that the Bankruptcy Judge made clear that the existing officers of FNW were "beneficiaries" of his October 1996 Order. It is unclear whether Sullivan, directly or through his counsel, informed the NASD prior to January 29, 1997, that Sullivan believed that he was entitled to protection under the October 1996 Order. It is also unclear from the record when Sullivan became aware of the NASD's view that it was not enjoined by the October 1996 Order from pursuing its claims against Sullivan. We further cannot determine when Sullivan became aware of the December 1996 hearing before the Bankruptcy Judge or its outcome. We note, however that Sullivan states that, as an officer of a Debtor, FNW, he had knowledge of the bankruptcy proceedings. Even if Sullivan initially was not aware of the Bankruptcy Judge's December 1996 ruling construing his October 1996 Order, however, Sullivan received from the NASD the Division of Enforcement's memorandum opposing reconsideration in April 1997. That memorandum made clear that the NASD staff did not believe that the NASD was enjoined by the October 1996 Order from pursuing its claims against Sullivan. The memorandum attached copies of both the relevant portion of the December 1996 hearing transcript before the Bankruptcy Judge and the letter from Debtors' counsel (which gave her interpretation of the October 1996 Order). At that point, Sullivan clearly could not reasonably rely on his "layman's" understanding of the October 1996 Order to assert that the NASD was enjoined from its collection efforts in Treats I. Since that time, however, Sullivan has not sought clarification of the October 1996 Order or the December 1996 hearing from the Bankruptcy Judge. We conclude that the October 1996 Order did not prevent the NASD from attempting to collect from Sullivan the Treats I fine and costs, nor from commencing a revocation proceeding against him when he did not pay. **FOOTNOTES** [1]: Franklin N. Wolf, Exchange Act Rel. No. 36523 (Nov. 29, 1995), 60 SEC Docket 2417. [2]:See Section V. below. [3]:On October 24, 1996, the NASD sent a second letter to Sullivan again requesting payment of the fine and costs in Treats I. This letter was returned unclaimed. [4]:Case No. 94 b 44010. FNW was a wholly-owned subsidiary of Wolf Financial Group, Inc. [5]:It is unclear from the record whether, during these contacts, counsel informed the NASD that Sullivan was relying on the October 1986 Order as a basis for not paying the fine and costs in Treats I. [6]:On December 13, 1996, the NASD accepted Sullivan's offer of settlement in Treats II. Sullivan consented, for the purposes of that proceeding without admitting or denying, to a finding that he had failed to establish, maintain, and enforce supervisory procedures to prevent FNW from charging fraudulently excessive markups in transactions in Treats. Sullivan was censured, suspended from association in any principal or supervisory capacity for a period of one year (the suspension to run concurrently with the suspensions previously imposed in Treats I and Nacoma), required to requalify as a principal, and prohibited from serving as a compliance director for two years following his reemployment with a member firm. Sullivan was also fined $5,000. The settlement further provided that twenty-five percent of the fine was due and payable upon acceptance of the Offer. The balance was suspended until Sullivan became associated again with an NASD member and could thereafter be paid under the NASD installment plan. As part of his settlement offer, Sullivan had agreed to withdraw his appeal to the court of appeals in Treats I. [7]:Counsel stated that he had been delayed in communicating with the NASD because he had been in trial. It appears that there was some confusion about whether counsel sought reconsideration on behalf of both Petrantis and Sullivan, or only on behalf of Petrantis. On the one hand, the NASD general counsel's office sent letters to counsel informing him that his requests that Petrantis and Sullivan's revocations be reversed had been referred to the National Business Conduct Committee ("National Committee"). Before the National Committee, however, the NASD Division of Enforcement submitted a memorandum that discussed solely the merits of Petrantis' request. The NASD determined to deny counsel's motions on behalf of both Sullivan and Petrantis on March 25, 1997. [8]:The Division's response before the National Committee was not served on counsel for Petrantis and Sullivan until after the National Committee announced its determination in March 1997. It appears from the record that, in part because of this failure, the NASD agreed to reconsider Sullivan's motion a second time. During this second reconsideration, the NASD Division of Enforcement asserted that counsel had asked for reconsideration solely on behalf of Petrantis. In response, counsel for Sullivan attached the first page of two separate letters dated January 29th, one on behalf of Sullivan and the second on behalf of Petrantis. The record does not contain a complete copy of the January 29th letter on Sullivan's behalf. We believe that, contrary to Sullivan's assertions, the NASD's second reconsideration adequately permitted Sullivan to address the merits of his request and respond to the Division's initial memorandum opposing reconsideration, as well as the Division's submission in opposition to Sullivan's second request for reconsideration. Sullivan also suggests that the NASD somehow prejudged Sullivan's second request for reconsideration when it initially ruled on his first request for reconsideration in 1997. Sullivan, however, sought a second reconsideration from the NASD. We question how he can now claim that he requested such action from a forum that he asserts could not be impartial. [9]:Exchange Act Rel. No. 40238 (July 21, 1998), 67 SEC Docket 1775. In Rubba, we found that Membership and Registration Rule 1031(c) does not require requalification of a person whose registration is revoked pursuant to Rule 8320. 67 SEC Docket at 1778. Although, here, the NASD took action against Sullivan under Rule 8320 and thus he is not required to requalify separately if and when his revocation concludes, Sullivan, is still subject to the requirement that he requalify in a supervisory capacity under the orders imposed in the disciplinary proceedings in Treats I, Nacoma, and Treats II. [10]:48 S.E.C. 210 (1985). [11]:We believe that review of revocation for failure to pay a fine, costs, or assessment would generally not be complex or lengthy. [12]:As we stated in both Rubba and Exchange Services, we take no position on the general question of whether the determinations of self-regulatory organizations relating to requests for a waiver or an exemption from an NASD rule are reviewable. Rubba, 67 SEC Docket at 1777-78; Exchange Services, 48 S.E.C. at 215 n.14. [13]:Sullivan notes that the NASD had not attempted to collect the fine or costs imposed in Nacoma or Treats II. He concludes from this inaction that the NASD believed it was enjoined from such action. We disagree. The NASD had already revoked Sullivan's registration in all capacities for failure to pay the fine in Treats I. The NASD could have several reasons for its inaction, including conservation of its prosecutorial resources. V. On reconsideration before the NASD, Sullivan also argued that the settlement of Treats II was to be part of a global settlement encompassing Treats I and Nacoma. Sullivan notes that the Treats II settlement provided that the suspension would run concurrently with the suspensions in Treats I and Nacoma. Sullivan also notes that, as part of the settlement agreement, Sullivan agreed to, and in fact did withdraw his appeal of Treats I to the court of appeals. [14] He argues that he and his counsel believed that payment of the fines in the three NASD disciplinary proceedings would also be consolidated. Sullivan further argued before the NASD that he is unable to pay the entire amount of the fine in Treats I. He submitted an affidavit stating that his current income was $42,500 per year, that he has borrowed against nearly all the equity in his house, and that his net worth is negative $20,000. He asserted that the NASD was aware of his financial condition and thus, as part of the settlement, was willing to permit him to pay twenty-five percent of the fine in Treats II immediately, delay payment of the balance until he was employed, and thereafter accept payment on that fine under the installment plan. He therefore sought to consolidate the fines in Treat I, Nacoma, and Treats II into a single payment plan and represented that he had borrowed sufficient funds to cover the initial payment of twenty-five percent of the total of these fines, which he had deposited with his counsel. He complains to us that the NASD failed to address his arguments on the merits in its disposition of his request for reconsideration. Before the NASD, the NASD Division of Enforcement replied that Sullivan's counsel had been informed that the collection of the Treats I fine would continue and that the Treats I fine was unrelated to the settlement of Treats II. The staff expressed sympathy for Sullivan's financial condition but stated that it was "concerned by a respondent who litigates a case and then ignores notices demanding payment." [15] The staff took no position on whether Sullivan should be afforded a payment plan, noting that the plan "does not condition such payment on employment in the industry." Section 19(f) of the Exchange Act, 15 U.S.C. 78s(f), directs that we review actions barring from association to determine if the specific grounds on which such action is taken "exist in fact," that such action is in accordance with NASD rules, and that such NASD rules are, and were applied in a manner, consistent with the purposes of the Exchange Act, unless we find that the NASD's denial "imposed any burden on competition not necessary or appropriate in furtherance of the purposes" of the Exchange Act. Here, the NASD determined not to reconsider its revocation of Sullivan's registrations. This determination appears to have been made on the record and based on submissions by both Sullivan and the NASD staff. While it is clear that the NASD disagreed with Sullivan, we are uncertain about the basis for its determination. It is important that a self-regulatory organization clearly explain the basis for its conclusions. If it fails to do so, an applicant is impaired in his or her ability to urge a contrary position to us, and we cannot discharge our review function. It therefore appears appropriate to remand this case to the NASD for a statement of the basis for its determination, how it resolved the competing assertions of the parties and the basis for that resolution. [16] We do not intend to suggest any view on the outcome. By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY and UNGER). Jonathan G. Katz Secretary **FOOTNOTES** [14]:As discussed above, Sullivan withdrew his appeal in August 1996. [15]:Sullivan responds that his counsel was in contact with NASD staff during this period. [16]:We recognize that we earlier disposed of Sullivan's arguments about the applicability of the October 1996 Order. We did so because the record provided a basis for construing that order. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40671 / November 12, 1998 Admin. Proc. File No. 3-9324 : In the Matter of the Application of : : RICHARD T. SULLIVAN : 307 Clinton B Fiske Avenue : Staten Island NY 10314 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : ORDER REMANDING PROCEEDINGS TO REGISTERED SECURITIES ASSOCIATION On the basis of the Commission's opinion issued this day, it is ORDERED that these proceedings be, and they hereby are, remanded to the National Association of Securities Dealers, Inc., for further action in accordance with such opinion. By the Commission. Jonathan G. Katz Secretary