SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37954 / November 15, 1996 Admin. Proc. File No. 3-8893 _________________________________________________ : In the Matter of the Application of : : ASHVIN R. SHAH : 148 East Van Buren : Elmhurst, IL 60126 : : 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 Rules of Fair Practice Unregistered Person Associated with Member Firm Accepted Commissions For Securities Transactions Where associated person not registered with the Association accepted commissions in connection with a customer's mutual fund purchases, held, association's finding of violation and the sanctions it imposed sustained. APPEARANCES: Ashvin R. Shah, pro se. T. Grant Callery and Carla J. Carloni, for the National Association of Securities Dealers, Inc. Appeal filed: December 8, 1995 Last brief filed: March 27, 1996 I. Ashvin R. Shah ( A. Shah ) appeals from disciplinary action taken by the National Association of Securities Dealers, Inc. ("NASD" or the Association ). The NASD found that A. Shah, although not registered with the Association, accepted commissions for four securities transactions in a customer s ==========================================START OF PAGE 2====== account, in contravention of Schedule C to the NASD s By- Laws. -[1]- The NASD determined that this conduct violated Article III, Section 1 of the Association s Rules of Fair Practice ( NASD Rules ). -[2]- The NASD censured A. Shah, fined him $3,255 and ordered him to requalify by examination before acting in any capacity requiring qualification. -[3]- This is the second time A. Shah has appealed to us. In 1993, A. Shah appealed the NASD's determination that he had violated Article III, Section 1 of the NASD Rules and then sought to adduce additional evidence, which he claimed demonstrated, among other things, that he was justified in believing at the time of payment that the commissions were insurance-related. The NASD requested that we remand the proceeding for its consideration of this evidence. We remanded the proceeding to the Association, over A. Shah's objection, so that the NASD [could] have an opportunity to consider Shah s proffered evidence as well as any other relevant evidence. -[4]- The National Business Conduct Committee ("National Committee") in turn remanded the proceeding to the District Business Conduct Committee ("District Committee"), which heard additional testimony and received additional exhibits. The District Committee found, among other things, that A. Shah, at the time he received and negotiated the check for the commissions, knew the source of the payment and was not registered as a representative. On appeal, the National Committee affirmed the District Committee's findings and imposed the sanctions now under review. Our findings are based on an independent review of the record. ---------FOOTNOTES---------- -[1]- The NASD recently revised and renumbered its Rules of Practice; no substantive changes were made to the particular rules at issue here. Part III, Section 1 of Schedule C to the NASD s By-Laws [new Rule 1031] provides that all persons engaged in the solicitation or conduct of securities business who are to function as representatives must be registered as such with the Association. -[2]- Article III, Section 1 [new Rule 2110] requires that members "observe high standards of commercial honor and just and equitable principles of trade." -[3]- The NASD also assessed costs. -[4]- Ashvin R. Shah, Order Granting Motion to Remand and Denying Motion to Adduce Additional Evidence, Admin. Proc. File No. 3-8159 (Jan. 31, 1994). ==========================================START OF PAGE 3====== II. In June 1988, A. Shah worked as a life insurance broker for Phoenix Mutual Life Insurance Company ( Phoenix ). At that time, A. Shah and his supervisor, Jay A. Olshein, -[5]- agreed that A. Shah would sell securities through Phoenix Equity Planning Corporation ( Phoenix Equity ), an NASD member firm and a broker-dealer subsidiary of Phoenix. On June 24, 1988, A. Shah submitted a Uniform Application for Securities Industry Registration ( Form U-4 ) to Phoenix to register as an investment company and variable contracts products representative. -[6]- In signing the Form U-4, A. Shah agreed to submit himself to the jurisdiction of the Association and comply with its rules. A notation on the Form U-4 indicates that A. Shah became employed by Phoenix Equity on July 11, 1988. In July 1988, one of A. Shah s insurance clients expressed an interest in purchasing some mutual funds. A. Shah provided prospectuses and other information on those mutual funds to the customer, as well as Phoenix Equity applications for their purchase. The customer purchased four Phoenix Equity proprietary mutual funds on July 12, 1988 (the July 12 transactions ), investing a total of $20,480. A. Shah submitted the completed application forms to Olshein for the purchases, listing A. Shah's wife, Smita Shah ( S. Shah ), as the account representative of record. -[7]- ---------FOOTNOTES---------- -[5]- Olshein was also a respondent before the District Committee in this matter but did not appeal its determination to sanction him. -[6]- A. Shah's registration as a representative limited to selling investment company and variable contracts products became effective on August 19, 1988. A. Shah previously had been registered with the Association from September 8, 1981 until December 27, 1983, as a limited registered representative selling direct participation program securities through another NASD member firm. -[7]- It appears that the Shahs substituted S. Shah's name for A. Shah's on the mistaken assumption that S. Shah was registered with the NASD. In fact, while S. Shah previously had been registered as a general securities representative, she was not registered at the time of the transactions. S. Shah had been registered from May 1982 to January 24, 1985 as a general securities representative and a direct participation programs representative with Ogilvie & Taylor. ==========================================START OF PAGE 4====== When the applications were returned by the home office because S. Shah was not registered with the Association, A. Shah and Olshein came to an understanding that Olshein would act as the registered representative for the July 12 transactions. The customer signed a letter dated July 13, 1988 stating that he understood that Olshein would be handling the July 12 transactions. Olshein never met the customer in connection with these securities transactions. A. Shah and Olshein also agreed that, once A. Shah's NASD registration became effective, Olshein would pay A. Shah the commissions for the July 12 transactions. The customer's applications thereafter were submitted to Phoenix Equity with S. Shah s name crossed out and Olshein s name written in next to S. Shah s. A. Shah then asked for an advance on the securities commissions. Olshein wrote a check to A. Shah dated August 5, 1988 for $755.46, the amount of the commissions for the July 12 transactions. -[8]- Attached to the check was a copy of Olshein s Phoenix Equity commission statement that reflected that the four mutual fund purchases generated total commissions of $755.46. -[9]- III. ---------FOOTNOTES---------- -[8]- In January 1989, after A. Shah became registered with the NASD, he replaced Olshein as the representative of record on the customer s account. Olshein then asked Phoenix Equity to reverse the commissions on the July 12, 1988 transactions -- that is, pay the commissions to A. Shah and deduct them from Olshein's commission total -- but Phoenix Equity refused to do so. -[9]- A. Shah submitted to the NASD a copy of this attachment in response to a 1991 Association query. He had written on the Phoenix Equity statement, Paid by Northern Illinois Consultants Check #2729; Dated 8/5/88 Commission $755.46, and had circled the July 12 transactions. A. Shah contends that another document listing his commissions in 1988, which he introduced at the remand rehearing, "confirm[s] and prove[s] that the NASD Complaint . . . is false." On the contrary, this document tellingly omits the source of a listed $755.46 commission payment but provides client names in connection with various insurance- related commission payments not at issue in this proceeding. ==========================================START OF PAGE 5====== We find that, before his NASD registration became effective, A. Shah requested payment of and accepted commissions for mutual fund purchases through an NASD member firm, Phoenix Equity, in contravention of Schedule C. -[10]- A. Shah testified before the District Committee, on its initial review of this matter and on remand, that he was unaware that the commission check related to the mutual fund purchases. However, the District Committee specifically found A. Shah's testimony on this point "wholly lacking in credibility" and contradicted both by Olshein's testimony, which the panel found credible, and by A. Shah's earlier representation to the NASD (before the complaint was filed in this matter) that the Phoenix Equity commission statement had arrived with the check. 11/ We see no reason to question the District Committee's assessment. 12/ Accordingly, like the NASD, we conclude that A. Shah violated Article III, Section 1 of the NASD Rules. IV. A. Shah erroneously contends that he was not subject to the NASD's jurisdiction in early August 1988 because his NASD ---------FOOTNOTES---------- -[10]- A. Shah contends that the NASD falsely charged him with being the registered representative of record for the July 12 transactions. The charge against him, however, is that he accepted commissions for securities transactions when he was not registered with the Association, not that he was the representative of record. A. Shah also points to the date stamp on the purchase forms relating to the July 12 transactions that reflect that Phoenix Equity processed them on August 22, 1988 -- three days after he was registered with the Association. The date that Phoenix Equity processed the forms is irrelevant to this proceeding. 11/ The District Committee further noted that, in its experience, it is common industry practice to identify for representatives the sources of the commissions they are being paid. 12/ The credibility determinations of an initial fact-finder are entitled to considerable weight and deference, since they are based on hearing the witnesses' testimony and observing their demeanor. E.g., Jonathan Garrett Ornstein, 51 S.E.C. 135, 137 (1992) (citing Universal Camera Corp. v. NLRB, 340 U.S. 474 (1951)). Only where the record contains "substantial evidence" to the contrary will we reject such determinations. Helene R. Schwartz, 51 S.E.C. 1207, 1208 n.5 (1994). ==========================================START OF PAGE 6====== registration was not then effective. A. Shah's untenable claim, essentially, is that an unregistered person never may be disciplined for engaging in conduct that requires registration. Article V, Section 1 of the NASD Rules, however, authorizes the NASD to sanction any person associated with a member for violations of the NASD Rules. 13/ Article I(m) of the Association s By-Laws defined person associated with a member to include any person engaged in the securities business and who is controlled by such member, whether or not that person is registered with the NASD. 14/ A. Shah's involvement in the mutual fund purchases through Phoenix Equity, an NASD member firm, afforded the NASD jurisdiction over A. Shah's conduct. 15/ V. A. Shah accuses the NASD of treating him unfairly and of being prejudiced against him. Among other claims, 16/ he 13/ This provision has been renumbered as Rule 8310. 14/ This provision has been renumbered as Article I(q) of the NASD By-Laws. 15/ See First Capital Funding, Inc. and Patrick J. Allen, 50 S.E.C. 1026, 1029-30 (1992) (holding that an unregistered person who acted as a representative of a member firm is subject to NASD jurisdiction); Stephen M. Carter, 49 S.E.C. 988, 989 (1988) (determining that a clerical employee of a member firm whose actions -- receiving securities and checks, recording them in the firm's computer system, preparing firm checks for signature in payment of customer balances, preparing deposit slips, and furnishing account balances and other information to customers -- were part of the conduct of a securities business was subject to NASD jurisdiction); Voss & Co., Inc., 47 S.E.C. 626, 630 (1981) (finding that individuals who received orders for securities and ultimately derived compensation from those orders acted in a capacity requiring registration). 16/ A. Shah claims that his career was harmed by the NASD's allegedly improper publication to his then-current employer of the District Committee s decision on remand. The NASD's notification to Shah's employer was appropriate. As the standard transmittal notice accompanying the District Committee decision advised, "This information is given to [the respondent's employer] so that [it] may fulfill [its] supervisory and other obligations under securities industry rules and regulations." Moreover, the NASD makes available to the public information on all NASD disciplinary actions. (continued...) ==========================================START OF PAGE 7====== contends that the NASD did not comply with this Commission s remand order, which he asserts required the NASD to introduce new evidence. A. Shah is mistaken in his characterization of our order. We did not require the NASD to produce additional evidence that it had not introduced prior to our initial consideration of this matter. We simply required that the NASD consider any new record evidence adduced in this matter. On remand, the District Committee accepted and reviewed A. Shah's additional submissions and heard additional testimony from A. Shah and the customer who had purchased the mutual funds. That the NASD staff did not choose to introduce further evidence in support of the allegations is not evidence of NASD unfairness to A. Shah. A. Shah also asserts, without support, that the NASD, on remand, failed to comply with its own Rules of Procedure. 17/ A. Shah has not suggested how he was prejudiced by the actions complained of and has waived any objection to the NASD's process on remand. 18/ 16/(...continued) Additionally, A. Shah contends for the first time before us that the NASD regional counsel improperly allowed a Phoenix representative to testify at the original District Committee hearing without affording A. Shah notice that the representative would testify. A. Shah did not raise this objection with the District Committee and accordingly waived it. 17/ A. Shah points to his requests that certain NASD examiners be made available to testify at the District Committee hearing on remand and that the NASD provide him its investigative reports. In response to this request, the Association advised that one of the examiners no longer worked for the NASD and asserted a confidentiality privilege over investigative reports generated by its examiners. Thereafter, A. Shah failed to respond to a NASD follow-up inquiry as to whether the appearance of the NASD examiner was still an issue. A. Shah also complains about the NASD's failure to offer Olshein's testimony at the remand rehearing. The NASD's regional counsel stated, at that time, that Olshein was on vacation and unavailable for the hearing. A. Shah s counsel affirmatively stated that he had no objection to Olshein s absence. 18/ See, e.g., Sheen Financial Resources, Inc. and Brian Jeffrey Sheen, Securities Exchange Act Rel. No. 35477 (Mar. 13, 1995), 58 SEC Docket 2791, 2803 n.36; Eric M. Diehm, Securities Exchange Act Rel. No. 33478 (Jan. 14, 1994), 55 SEC Docket 2830, 2834 n.13. ==========================================START OF PAGE 8====== VI. Turning to A. Shah's motion to adduce additional evidence, Rule 452 of our Rules of Practice states that such a motion shall show with particularity that such additional evidence is material and that there were reasonable grounds for failure to adduce such evidence previously. 19/ The evidence A. Shah would have us admit either is not relevant to the matter of whether A. Shah accepted securities-related commissions without being registered with the NASD, or is cumulative of documents already in the record. A. Shah also has not shown why he previously was unable to adduce these items. As we have stated, it is the respondent s obligation to marshall evidence in his defense, absent compelling circumstances. 20/ VII. A. Shah s misconduct strikes at the heart of securities regulation. The requirement that an associated person be registered before engaging in any securities business provides an important safeguard in protecting public investors. Consequently, strict adherence to the registration requirement is essential. 21/ A. Shah also has demonstrated on this record a troubling lack of understanding of the NASD Rules. Under these circumstances, we find the sanctions neither excessive nor oppressive. 19/ 17 C.F.R. 201.452. 20/ We also deny A. Shah's motion to subpoena certain evidence. A. Shah seeks certain documents that are strikingly similar to ones he produced in connection with his motion to adduce (and thus are either irrelevant to this matter or are cumulative of record documents). He also seeks other cumulative documents. The NASD advises that it does not have copies of the identified documents, other than those documents that already are part of the record. The NASD also persuasively contests their materiality. 21/ Patricia H. Smith, Securities Exchange Act Rel. No. 35898 (June 27, 1995), 59 SEC Docket 2023, 2026; First Capital Funding, Inc. and Patrick J. Allen, 50 S.E.C. 1026, 1029-30 (1992). See also L.B. Securities Corp., 42 S.E.C. 885, 889 (1966) ( The requirement of NASD approval of registration before a member s employee may engage in dealings with the public serves a significant purpose in the policing of the securities markets and in the protection of the public interest. . . . ). ==========================================START OF PAGE 9====== ==========================================START OF PAGE 10====== An appropriate order will issue. 22/ By the Commission (Chairman LEVITT and Commissioners WALLMAN, JOHNSON, and HUNT). Jonathan G. Katz Secretary 22/ 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. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 37954 / November 15 1996 Admin. Proc. File No. 3-8893 _________________________________________________ : In the Matter of the Application of : : ASHVIN R. SHAH : 148 East Van Buren : Elmhurst, IL 60126 : : 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 Ashvin R. Shah, and the Association s assessment of costs, be, and they hereby are, sustained. By the Commission. Jonathan G. Katz Secretary