SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Admin. Proc. File No. 3-10133
In the Matter of the Application of
For Review of Disciplinary Action Taken by the
Opinion of the Commission
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DISCIPLINARY PROCEEDING
Violations of By-Laws, Membership and Registration Rules, and Conduct Rules
Acting as Principal when Barred
Failure to Comply with Registration Requirements
Just and Equitable Principles of Trade
Registered representative who was barred from acting as a principal performed principal duties in violation of Commission order and registration requirements. Held, association's findings of violation and its assessment of sanction are sustained.
Gordon Kerr, pro se.
Alden S. Adkins, Norman Sue, Jr., Susan L. Beesley, and Alan B. Lawhead, for NASD Regulation, Inc.
Appeal filed: January 12, 2000
Gordon Kerr, a registered representative with a National Association of Securities Dealers, Inc. ("NASD") member firm, appeals from NASD disciplinary action. The NASD found that Kerr, who wasthen barred from acting as a principal, nonetheless acted in a principal capacity without application for relief from his bar and while not registered as a principal. The NASD found that Kerr's actions violated Article III, Section 3(b) of the NASD's By-Laws, Membership and Registration Rule 1021, and Conduct Rule 2110. 1 The NASD barred Kerr in all capacities. We base our findings upon an independent review of the record.
In 1983, without admitting or denying the allegations of the Order Instituting Proceedings, Kerr consented to Commission findings that he willfully aided and abetted violations of Sections 15(c) and 17(a) of the Securities Exchange Act of 1934 and Exchange Act Rules 15c2-4, 15c3-3, 17a-3, 17a-4, 17a-5, and 17a-11. 2 The Commission barred Kerr "from acting as a principal, financial principal, officer, director, owner, or employee of a broker or dealer other than as a supervised employee." 3 Our order permitted Kerr to apply for permission to act as a principal after fourteen months. 4
In August 1995, Kerr became associated with J. Alexander Securities, Inc. ("J. Alexander" or the "Firm") and became registered as a general securities representative in October 1996. Kerr testified that, between August 1995 and July 1997, he held the title of Compliance Director. Among other duties, Kerr drafted or reviewed sections of the Firm's compliance manual, including the descriptionof the Compliance Director's responsibilities. 5 The Firm's compliance manual identified the Compliance Director as one of the Firm's "Supervisory Positions" and identified Kerr as the Compliance Director. The manual assigned the Compliance Director responsibility for reviewing all account transactions and approving the opening of new accounts.
The record contains numerous trade tickets initialed by Kerr. The record also includes several new account forms that are signed by Kerr in the box titled, "Managing Director's/ Principal's Signature." None of these forms is signed by a registered principal of the Firm.
By letter dated February 28, 1997, the NASD asked the Firm to respond to a customer complaint about one of the Firm's registered representatives, M. Blaine Riley. Among other things, the NASD asked the Firm to identify Riley's supervisor and to obtain a signed statement from Riley's supervisor about the customer's allegations. By letter dated March 20, 1997, Kerr stated that he was Riley's supervisor and attached a two-page statement detailing how he had handled the customer's complaint in his capacity as Riley's supervisor.
By letter dated May 30, 1997, the NASD asked the Firm to identify the person responsible for approving Riley's transactions. By letter dated June 11, 1997, Kerr responded, "[The customer's] account is not a discretionary account. Gordon Kerr approved these trades as he does all trades." Kerr again identified himself as Riley's supervisor. Kerr signed both responses, as well as his two-page statement, as "Compliance Director."
The Commission's 1983 order barred Kerr from acting in a supervisory capacity, unless he applied for permission to associate in that capacity. Under Exchange Act Section 3(a)(39)(B)(i)(II), Kerr is subject to a statutory disqualification. 6 Under Article III, Section 3(b) of the NASD's By-Laws, a statutorily disqualified person cannot become or remain associated with a member of the NASDunless the disqualified person's member firm applies for relief from the statutory disqualification under Article III, Section 3(d) of the By-Laws.
Kerr cites the language in our 1983 order that permits Kerr to act as "a supervised employee." Kerr claims that he did not violate our order because James Alexander, the Firm's president, supervised him whenever he performed his duties. 7 Our order provides that Kerr is barred "from acting as a principal, financial principal, officer, director, owner, or employee of a broker or dealer other than as a supervised employee." The order further states that, after fourteen months, "Kerr may apply to the Commission for permission to work in the capacity of principal (other than financial principal)." 8 The words "other than a supervised employee" modify only "employee of a broker or dealer." The requirement that Kerr apply to associate in a principal capacity would be surplusage if he could function in this capacity so long as he was supervised.
Kerr argues that our order permits Kerr "to apply to the Commission for permission to work in the capacity of principal." Kerr asserts that the NASD deprived him of due process when it informed him through conversations with NASD staff and by a 1998 letter from the NASD General Counsel that Kerr was required to seekrelief from his disqualification through the NASD. 9 However, Kerr did not apply to the Commission to become associated as a principal until 1998, approximately a year after the events at issue.
In any event, the NASD correctly informed Kerr that he would have to seek the NASD's permission to associate as a principal with the Firm. In 1984, we adopted former Rule of Practice 29 (now Rule of Practice 193), 10 which governs applications to associate by barred persons. In the accompanying release, we stated, "Commission consent to associate . . . with a registered entity should not be construed to be consent of an SRO [self-regulatory organization] for the individual to associate with one of its members. That consent must be given by the particular SRO." 11 Thus, even if the Commission had approved Kerr's application to associate as a principal, Kerr would still have had to obtain the approval of the NASD to become a principal with a member firm. 12
Kerr also argues that he did not function as a principal. Membership and Registration Rule 1021(b) defines the term "Principal" as any person who is "actively engaged in the management of the member's investment banking or securities business, including supervision" of persons associated with a member. Kerr asserts that compliance directors are not necessarily supervisors. 13 In determining whether an individual official is a supervisor, we look at the responsibilities assigned to the associated person by the firm and at the activities the individual actually performed. 14
Kerr's role as Compliance Director was, according to the Firm's compliance manual, a supervisory position.
Conduct Rule 3010(d) further requires member firms to establish written procedures for review and endorsement in writing by a registered principal on an internal record of all transactions. The Firm's compliance manual charged the Compliance Director, i.e., Kerr, with this duty. 15
Kerr claims that he performed only a perfunctory review and that James Alexander, the Firm's president, satisfied Rule 3010(d)'s requirement by reviewing a daily blotter of the Firm's trades. The record contradicts Kerr's assertion. Kerr admitted that he knew that the Firm had delegated to him the responsibility to review trades. Kerr's initials are the sole endorsement on the trade tickets in the record. In his June 1997 letter to the NASD, Kerr stated that he reviewed "all trades" by the Firm. 16 While some of the Firm'sblotters are in the record, there is no evidence that any registered Firm principal reviewed or endorsed these blotters.
NASD Conduct Rule 3110(c)(1) requires that new accounts be reviewed and accepted by a registered principal. The Firm's manual also assigned this duty to Kerr. Kerr was the sole signatory, as"Managing Director/Principal," on new account documents in the record. 17
In 1997, Kerr represented to the NASD that he supervised Riley and that he reviewed Riley's trades and responded to a customer's complaints about Riley. 18 While Kerr admits making this representation, he testified that he claimed to be Riley's supervisor only for "expediency reasons." We find unpersuasive Kerr's claim that the representations he made to the NASD were untrue. Kerr was asked on two separate occasions by the NASD whether he was Riley's supervisor. On both occasions, Kerr stated that he was the supervisor and provided the NASD with a lengthy statement about the actions that he took in that capacity.
Under NASD Rules 1021(b) and 1022(a), a person acting in a supervisory capacity must be registered as a general securities principal. Kerr was not so registered.
We sustain the NASD's findings that Kerr violated Article III, Section 3(b) of the NASD's By-Laws, Membership and Registration Rule 1021, and Conduct Rule 2110.
Kerr seeks to introduce eleven additional exhibits on appeal. Our Rule of Practice 452 provides that a motion to introduce new evidence must "show with particularity that such additional evidence is material and that there were reasonable grounds for failure to adduce such evidence previously." 19 The NASD objects to two of Kerr's proposed exhibits, arguing that they are not material and thatKerr has not made a showing of the reasons for his delay in introducing them. 20
Kerr offers as an exhibit a letter from the NASD scheduling Riley for testimony at the NASD's office. Kerr asserts that this letter demonstrates that Riley testified before the NASD that James Alexander, not Kerr, was Riley's supervisor. We do not believe that this exhibit is material. While the letter confirms that the NASD requested Riley's testimony, Kerr's proposed exhibit does not demonstrate that Riley gave testimony with respect to Kerr's role or that any of Riley's testimony was favorable to Kerr.
Moreover, Kerr does not explain the delay in tendering this exhibit. Kerr apparently was aware of this letter at the time he appeared before the NASD because he first mentioned Riley's testimony at the pre-hearing conference in this matter. The NASD staff responded that there was no transcript of Riley's testimony, and that Riley had not given testimony in connection with the complaint against Kerr. The hearing officer nonetheless offered to call Riley as a witness. Kerr declined, stating, "it is really not going to be that important." Kerr's request to adduce this evidence is denied.
Kerr also seeks to introduce a letter that is undated, but apparently written in 1998, from James Alexander to the Commission, in which Alexander states that Kerr has not acted as a principal. Kerr represents that this letter was written in support of Kerr's 1998 application to the Commission to associate with the Firm as a principal. It appears that both Kerr and one of the NAC panelists referred to and quoted from this letter during the argument before the NAC. Kerr's request to adduce this letter is granted. 21
Exchange Act Section 19(e)(2) provides that the Commission may reduce an NASD sanction if we conclude that the sanction is excessiveor oppressive or imposes an undue burden on competition. 22 Kerr argues that the NASD's bar is "unreasonable." He asserts that he did not violate any securities laws, did not harm the public, has not violated "the public trust," was "in no way enriched," and was treated unfairly in this proceeding.
Kerr was not properly registered as a principal. Our order, moreover, barred Kerr from acting in that capacity without consent. He nonetheless violated the NASD's registration and qualification requirements and our order for over two years. The requirement that a statutorily disqualified person obtain consent to associate permits both the self-regulatory organization and the Commission to evaluate and determine the appropriateness of the scope of activities in which the disqualified person seeks to engage, the regulatory history of the disqualified person's proposed firm and supervisors, and any special supervisory procedures that the firm will impose. 23 Kerr, who was an experienced securities professional and who had worked for many years in compliance departments, chose to circumvent this process. Kerr's statements before the NASD and on appeal demonstrate that he does not appreciate the gravity of his misconduct. We do not conclude that the sanction imposed is excessive or oppressive, or unduly burdens competition. 24
An appropriate order will issue. 25
By the Commission (Chairman LEVITT and Commissioners HUNT, CAREY, and UNGER)
Jonathan G. Katz
UNITED STATES OF AMERICA
SECURITIES EXCHANGE ACT OF 1934
Admin. Proc. File No. 3-10133
In the Matter of the Application of
For Review of Disciplinary Action Taken by the
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 Gordon Kerr be, and it hereby is, sustained.
By the Commission.
Jonathan G. Katz
1 Article III, Section 3(b) of the NASD's By-Laws prohibits any person who is subject to a statutory disqualification from becoming or remaining associated with an NASD member. Membership and Registration Rule 1021 requires that any person who acts a principal must be registered with the NASD in that capacity. Conduct Rule 2110 requires members to observe "high standards of commercial honor and just and equitable principles of trade." NASD Rule 0115 provides that associated persons have the same duties and obligations as NASD members under the NASD's rules.
2 15 U.S.C. §§ 78o(c) & 78q(a); 17 C.F.R. §§ 240.15c2-4, 240.15c3-3, 240.17a-3, 240.17a-4, 240.17a-5, & 240.17a-11. See Harold Junior Morris, Exchange Act Rel. No. 19805 (May 23, 1983), 27 SEC Docket 1740, 1741.
3 Harold Junior Morris, Exchange Act Rel. No. 19805 (May 23, 1983), 27 SEC Docket at 1742.
4 Id. at 1743. After eighteen months, Kerr was permitted to apply to act as a financial principal, officer, director, or owner of a broker-dealer. Id.
5 Kerr testified that he had prepared much of the text of the Firm's manual while working for his former member firm, Crowell Weedon & Co. When Kerr was hired by J. Alexander, the Firm's president asked Kerr to revise Crowell's manual for use at J. Alexander. Kerr drafted certain new sections and revised other provisions in the Crowell manual. In some instances, Kerr merely substituted references to the Firm for references to Crowell.
6 15 U.S.C. § 78c(a)(39)(B)(i)(II) (providing that a Commission order barring an individual comes within the definition of "statutory disqualification").
7 We understand Kerr to argue that the distinguishing characteristics of a principal are that the principal has discretion to act and that a principal is not supervised by any other person in the firm. Kerr argues that, because he was supervised, he could not be a principal.
NASD Rule 1021(b) defines the term "principal" as any person actively engaged in the management of the member's securities business, "including supervision, solicitation, conduct of business, or training. . . ." While principals may exercise discretion or have a greater range of responsibilities than other associated persons within a broker-dealer, the firm and its officers have the obligation to supervise principals. Thus, we have upheld discipline where a firm or its officials failed to supervise principals. See, e.g., Rita H. Malm, 52 S.E.C. 64, 69-73 (1994) (president's failure to supervise offices of supervisory jurisdiction); Donald T. Sheldon, 51 S.E.C. 79-80 (1992) (president's failure to supervise branch office and its manager), aff'd, 45 F.3d 1515 (11th Cir. 1995); Kirk A. Knapp, 50 S.E.C. 858, 862 (1992) (president's failure to supervise Firm's chief shareholder who continued to function as supervisor after being barred).
8 Harold Junior Morris, Exchange Act Rel. No. 19805 (May 23, 1983), 27 SEC Docket at 1742.
9 Kerr apparently objects to the cost associated with the NASD proceeding.
10 17 C.F.R. § 201.193.
11 Exchange Act Rel. No. 20783 (Mar. 28, 1984), 30 SEC Docket 85, 86. In the same release, the Commission encouraged a barred person who could apply directly to the Commission instead to have his or her prospective employer apply directly to the SRO. We observed that, in the event that the SRO approved the application, the Commission would review the SRO's determination under Exchange Act Rule 19h-1, 17 C.F.R. § 240.19h-1. We noted that, "an application pursuant to the Rule 19h-1 process would eliminate the necessity for two separate applications which require substantially the same information." Id.
12 Kerr claims that the requirement that he apply to the NASD through its MC-400 procedures to become associated with the Firm is a violation of the Constitutional prohibition against ex post facto laws. He asserts that these procedures came into existence in 1986, after he entered into his settlement with the Commission.
In 1975, Congress enacted amendments to the Exchange Act that made clear that self-regulatory organizations have the authority to determine whether to exclude persons subject to statutory disqualifications. Moreover, prior to 1986, the NASD had procedures to determine whether to permit the association of such disqualified persons. See, e.g., Paul Edward vanDusen, 47 S.E.C. 668, 671 (1981) (reviewing NASD determination whether to permit disqualified person to become associated with NASD member firm); M.J. Coen, 47 S.E.C 558, 563-64 (1981) (same). Thus, the MC-400 procedures imposed no additional legal consequences resulting from Kerr's statutory disqualification. Compare Koch v. SEC, 177 F.3d 784, 786 (9th Cir. 1999) (holding that Remedies Act does not authorize imposition of penny stock bar for misconduct predating passage of Remedies Act).
Kerr's reliance on the Ex Post Facto Clause of the Constitution is inapposite. The Ex Post Facto Clause prohibits the application of a law retroactively that "inflicts a greater punishment, than the law annexed to the crime, when committed." Calder v. Bull, 3 U.S. (3 Dall.) 386, 390 (1798); see Landgraf v. USI Film Products, Inc, 511 U.S. 244, 266, n.19 (1994) ("We have construed [the Ex Post Facto Clause] as applicable only to penal legislation.")
13 Kerr now asserts to us that he was neither hired nor acted as the Firm's Compliance Director. However, he testified before the NASD that he was hired as the Firm's Compliance Director. Kerr held himself out as the Firm's Compliance Director in correspondence with the NASD and with a customer.
14 James A. Pasztor, Exchange Act Rel. No. 42008 (Oct. 14, 1999), 70 SEC Docket 2611, 2620-21 (firm's grant of powers to branch manager and his exercise of powers demonstrated supervisory authority over employee); Steven Sanders, Exchange Act Rel. No. 40600 (Oct. 26, 1998), 68 SEC Docket 982, 994-98 (firm manual assigned supervisory authority to president, who exercised it); Houston A. Goddard, 51 S.E.C. 688, 672 (1993) (applicant's activities evidenced supervisory authority over employee).
Kerr argues that he was not paid as much as the Firm's registered principals, which, he asserts, evidences that he did not act as a principal. Kerr, however, introduced an exhibit in which he complained to James Alexander that he was not paid sufficiently for his services. In any event, we believe that the evidence here is compelling that Kerr functioned as a supervisor and a principal.
15 Kerr states that he acted as compliance manager or a "supervisor" at other firms without complaint from the NASD or the Commission. The issue before us is Kerr's activities at J. Alexander between 1995 and 1997.
To the extent that Kerr is suggesting that the NASD and we failed to detect his conduct, it appears that an examination of J. Alexander in the summer of 1997 disclosed his activities. In any event, we have repeatedly held that an associated person cannot shift his or her obligation to comply with applicable regulatory requirements to a regulatory authority. See, e.g., William K. Cantrell, 52 S.E.C. 1322, 1326, n.34 (1997).
16 Alexander also testified that Kerr reviewed and initialed trade tickets. Alexander and the Firm were initially named in the complaint in this matter, but they entered into a settlement with the NASD.
Kerr contends that the settlement gave Alexander an incentive to give false testimony in this and other instances in therecord, and the NASD knowingly acquiesced in Alexander's misstatements. In support of his assertions, after briefing was completed, Kerr filed three memoranda, dated September 11, 16, and 19, 1998, respectively, between the Firm's counsel and Rick Hubert, of the Firm's compliance department. Kerr represents that these memoranda were prepared to assist counsel in formulating Alexander's and the Firm's answer in this proceeding. In the memoranda, Hubert suggests that Alexander reviewed and approved all transactions and new accounts, that Kerr did not supervise any Firm representatives, and that Kerr was supervised by Alexander. Rule of Practice 452 requires that, if a party seeks to adduce additional evidence, the party demonstrate that the evidence is material and that there were reasonable grounds for failure to adduce the evidence previously. Kerr, who is copied on the transmissions, does not explain why he did not introduce these documents before the NASD. Moreover, we do not believe that the documents are material since other documents in the record, including the answer filed on Alexander's and the Firm's behalf, make similar assertions. See also text accompanying n.21, infra (admitting similar documents). The memoranda do not explain the basis for Hubert's assertions, and Kerr did not call Hubert at the hearing in this matter.
Moreover, while Alexander may have altered his explanation of Kerr's position and responsibilities at the Firm, that change does not alter the conclusions established by the remainder of the record: that Kerr held a "Supervisory Position" at the Firm; that the Firm's compliance manual assigned Kerr the responsibility to review transactions and open new accounts; that Firm trade tickets were initialed only by Kerr and no other document reflects review of these transactions by a Firm principal; that new account documents were signed only by Kerr for the Firm; and that Kerr represented to the NASD that he reviewed all transactions and was Riley's supervisor. We believe that the documents in the record, Kerr's testimony, and his statements demonstrate that Kerr acted as a principal.
17 Kerr argues that NASD Conduct Rule 3110(g)(1)(D) permits an office of supervisory jurisdiction to accept new accounts. Kerr infers from this provision that principals need not authorize new accounts. Since Membership and Registration Rule 1021(b)(4) requires the manager of each office of supervisory jurisdiction to be a registered principal, a principal is available in these offices to accept and endorse new accounts.
18 See L.H. Alton & Co., Inc., 53 S.E.C. 1182, __ (1999) (person who acts or holds himself out a principal must qualify as principal), aff'd, No. 99-70383 (9th Cir. Jul. 14, 2000); William J. Blalock, 52 S.E.C. 77, 84 (1994) (same), aff'd, 96 F.3d 1457 (11th Cir. 1996) (Table).
19 17 C.F.R. § 201.452.
20 The remaining exhibits consist of the 1984 Commission release accompanying the promulgation of former Rule of Practice 29, a Commission order in an unrelated proceeding under Exchange Act Rule 19h-1, certain NASD rules, and NASD releases. Two of the exhibits, copies of NASD Rules 1021 and 3010, were previously admitted before the NASD. Because the remaining exhibits are matters of which we may take official notice under Rule of Practice 323, 17 C.F.R. § 201.323, we admit them.
21 We have considered this letter in evaluating Alexander's testimony. We conclude that the record demonstrates by a preponderance of the evidence that Kerr functioned as a principal. See n.16 supra.
22 15 U.S.C. § 78s(e)(2).
23 Exchange Act Rule 19h-1, 17 C.F.R. § 240.19h-1; Rule of Practice 193, 17 C.F.R. § 201.193. See, e.g., William J. Haberman, 53 S.E.C. __, __ (1998) (finding proposed supervisory structures and procedures inadequate to permit association of statutorily disqualified individual), aff'd, 205 F.3d 1345 (11th Cir. 2000) (unpublished opinion).
24 On September 27, 2000, we received a request for a stay from Kerr. In light of our conclusions here, we deem Kerr's request to be moot.
25 We have considered all the parties' contentions. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed in this opinion.