==========================================START OF PAGE 1====== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37075 \ April 5, 1996 Admin. Proc. File No. 3-8654 : In the Matter of the Application of : : ELI BOGGS COMBS : 5802 Brook Valley Drive : Austin, TX 78724 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DENIAL OF APPLICATION TO ASSOCIATE Where registered securities association denied member's application to allow individual to associate with member, but offense which association found to be the basis for individual's disqualification was not specified as disqualifying in association's rules governing association's exercise of its disqualification authority, held, association's action set aside. APPEARANCES: Lee Buckstein, of Tuck & Eilers Law Mart, LLP, for Eli Boggs Combs. T. Grant Callery and Craig L. Landauer, for the National Association of Securities Dealers, Inc. Appeal filed: March 27, 1995 Briefing completed: June 1, 1995 I. Eli Boggs Combs appeals from a final decision of the National Association of Securities Dealers, Inc. ("NASD"). Under NASD rules, the NASD evaluates the fitness for registration of persons who are subject to certain types of criminal convictions. In this proceeding, which was instituted under those rules, the NASD denied the application of FFP Securities, Inc. ("FFP"), an ==========================================START OF PAGE 2====== NASD member firm, to employ Combs as a registered representative notwithstanding what the NASD determined to be Combs' disqualification. Our findings are based on an independent review of the record. II. The pertinent facts are as follows. On December 2, 1992, Combs entered a nolo contendere plea in Texas district court to two felony counts of aggravated sexual assault. Combs entered the plea pursuant to Texas' "deferred adjudication" statute. -[1]- As a result, Combs was placed under continuous supervision and fined. No findings of guilt or judgments were entered. Subsequent to Combs' plea in Texas district court, FFP, by application to the NASD, sought to continue in NASD membership with Combs in its employ. -[2]- The NASD, after a hearing, denied the application. The NASD found that Combs' plea made him subject to a statutory disqualification with respect to association with any NASD member. The NASD also observed that Combs, at the time of the decision, was on probation and would remain so for the next five years. The NASD further explained that, in determining to deny the application, it had considered that Combs would not be subject to on-site supervision by a registered principal. On appeal of that denial, Combs argues that Texas deferred adjudication proceedings do not constitute "convictions" and thus are not a basis for statutory disqualification. Because of our disposition of this matter, we do not reach that issue. ---------FOOTNOTES---------- -[1]- Texas Code Crim. Proc. art. 42.12 5 (West 1996). -[2]- FFP proposes to employ Combs as an investment company and variable contracts representative and direct participation program representative. Combs has been selling insurance through FFP. He also performs fee-based planning services through FFP Advisory Services, Inc. Combs also serves as a vice president of Southern Trust Associates, an estate and financial planning corporation, where he is engaged in insurance sales. He is compensated separately by FFP and Southern Trust. When informed by the NASD that it considered Combs subject to a statutory disqualification, Combs' attorney sought to convince the Association otherwise, through submission of documentation assertedly demonstrating that Combs in fact never had been convicted. The NASD was unpersuaded and directed Combs and FFP to file the instant application. ==========================================START OF PAGE 3====== ==========================================START OF PAGE 4====== III. The NASD has adopted rules that permit it to disallow the association of certain individuals with NASD member firms. -[3]- However, these rules, as in effect during the NASD's consideration of FFP's application on Combs' behalf, -[4]- for the reasons detailed in our recent opinions in Matthew H. Fleeger -[5]- and Patrick Joseph O'Connor, -[6]- did not permit the NASD to disallow Combs' association with an NASD member firm. ---------FOOTNOTES---------- -[3]- Article II of the NASD's By-Laws and Articles VI and VII of the NASD's Code of Procedure set forth the duties of members and associated persons and the applicable procedures generally related to the NASD's processes in this regard. -[4]- While the NASD's eligibility criteria found in Article II, Section 4 of the By-Laws generally have conformed to the statutory disqualification provisions found in the Securities Exchange Act of 1934 ("Exchange Act"), the NASD's By-Laws -- as in effect during the NASD's consideration of this matter -- unlike the relevant Exchange Act provision, did not specify that an individual convicted of "any felony" may be disqualified from NASD membership or association. We recently approved an NASD-proposed revision to these rules that specifies that a person who "has been convicted within ten years preceding the filing of any application for membership in the Corporation, or to become associated with a member of the Corporation, or at any time thereafter of any ... felony" is subject to a "disqualification" with respect to NASD membership or association with a member. Exchange Act Rel. No. 36466 (November 8, 1995), 60 SEC Docket 1992, 1993. -[5]- Exchange Act Rel. No. 35861 (June 19, 1995), 59 SEC Docket 1793, 1795. -[6]- Exchange Act Rel. No. 35857 (June 19, 1995), 59 SEC Docket 1776, 1778-79, reh'g denied (Sept. 28, 1995). ==========================================START OF PAGE 5====== -[7]- Thus, as we did in Fleeger and O'Connor, consistent with the directives of Section 19(f) of the Exchange Act, -[8]- we set the NASD's action aside and order the NASD to permit Combs' association with FFP. -[9]- An appropriate order will issue. By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary ---------FOOTNOTES---------- -[7]- As noted above, we do not reach the question of whether Combs was in fact "convicted" of the offense of aggravated sexual assault. Cf. Fleeger, 59 SEC Docket at 1795. -[8]- Section 19(f) of the Exchange Act, 15 U.S.C. 78s(f), permits us to sustain an action of this nature only if we find, among other things, that the action accorded with the self-regulatory organization's rules. Section 19(f) further directs that if we "do[] not make any such finding" we shall, by order, set aside the action and require the self- regulatory organization to permit association with a member. -[9]- As we noted in both Fleeger and O'Connor, our decision here is narrow (relating only to the NASD By-Laws provisions as in effect during the NASD's consideration of this matter), and the disqualification process is governed by an array of interrelated statutory provisions and Commission and self-regulatory organization rules. While we are constrained by Section 19(f) to direct the NASD to permit Combs' association, our order should not be read to suggest that the NASD is foreclosed from exercising as to Combs -- after notice and opportunity for hearing -- its recently-expanded disqualification authority. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 34-37075 \ April 5, 1996 Admin. Proc. File No. 3-8654 : In the Matter of the Application of : : ELI BOGGS COMBS : 5802 Brook Valley Drive : Austin, TX 78724 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : : ORDER SETTING ASIDE ACTION OF REGISTERED SECURITIES ASSOCIATION On the basis of the Commission's opinion issued this day, it is ORDERED that the final action taken by the National Association of Securities Dealers, Inc. against Eli Boggs Combs, be, and it hereby is, set aside, and it is further ORDERED that the NASD shall permit Eli Boggs Combs to become associated with FFP Securities, Inc. By the Commission. Jonathan G. Katz Secretary