SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Admin. Proc. File No. 3-10190
In the Matter of the Application of
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF ASSOCIATION ACTION
Jurisdiction to Review Action of Association
Member firm of registered securities association was denied exemption from requirement to establish special supervisory procedures resulting from firm's employment of a specified number of persons formerly employed by disciplined firms. Held, the matter is not subject to Commission review because the exemption denial does not constitute any of the actions enumerated in Section 19(d) of the Securities Exchange Act of 1934, and application for review is dismissed.
Martin P. Unger and Niral P. Kalaria, of Blank Rome Tenzer Greenblatt LLP, for Joseph Dillon & Company, Inc.
Alden S. Adkins and Norman Sue, Jr., for NASD Regulation, Inc.
Joseph Dillon & Co., Inc. ("Dillon" or the "Firm"), a member firm of the National Association of Securities Dealers, Inc. (the "NASD"), has appealed an NASD decision denying the Firm an exemption from NASD Conduct Rule 3010(b)(2) (the "Rule"). The Rule requires any NASD member firm that employs a specified number of registered persons who were, within the prior three years, associated with any "disciplined firm"1 to establish, maintain, and enforce specialwritten procedures for supervising the telemarketing activities of all of its registered persons, including tape-recording all telephone conversations between the firm's registered persons and customers. The Rule permits the NASD to grant an exemption to any member firm from the Rule's requirements "upon a satisfactory showing that the member's supervisory procedures ensure compliance with applicable securities laws and regulations and applicable rules of the Association."2
On September 16, 1999, the staff of the NASD determined that Dillon was required to adopt special supervisory procedures in accordance with the Rule because eleven of Dillon's thirty-one registered representatives previously were employed by two disciplined firms, Maidstone Financial, Inc. and Cortlandt Capital Corporation.3 On October 5, 1999, the Firm applied to the NASD's Department of Member Regulation ("DMR") for an exemption from the Rule. The DMR concluded that Dillon had failed to demonstrate that its supervisory procedures would ensure regulatory compliance without implementing a taping system and denied the Firm's exemption application on January 10, 2000. Among other things, the DMR noted that Dillon did not propose "any heightened supervisory procedures or provide for additional training for the registered persons."
Dillon then appealed the DMR's decision to the NASD's National Adjudicatory Council ("NAC"). On February 25, 2000, the NAC affirmed DMR's denial of Dillon's exemption request. By letter dated March 14, 2000, the NAC explained its denial of Dillon's request, stating that the Firm "did not demonstrate how [its] supervisory procedures ensure compliance with applicable securities laws, regulations, and NASD rules without implementing a taping system."
On April 12, 2000, Dillon applied to the Commission for review of the NASD's decision. On May 18, 2000, we issued an order directing Dillon and the NASD to file briefs addressing the issue ofwhether we have jurisdiction to review the NASD's denial of Dillon's exemption request pursuant to Section 19(d) of the Securities Exchange Act of 1934.4 The parties do not differ substantially in their description of the facts. For purposes of this motion, we accept the facts as described in the NASD's decisions and the parties' briefs.
Exchange Act Section 19(d) authorizes Commission review of an action of a self-regulatory organization, including the NASD, that:
(i) imposes any final disciplinary sanction on any member or person associated with a member;
(ii) denies membership to any applicant;
(iii) prohibits or limits any person in respect to access to services offered by such organization or member thereof; or
(iv) bars any person from becoming associated with a member.
For the reasons discussed below, we have determined that the NASD's action does not fall within any of the four jurisdictional bases of Section 19(d) and that we therefore lack jurisdiction to consider this appeal.5
In Morgan Stanley & Co., we declined to review an NASD exemption denial involving operation of Rule G-37 of the Municipal Securities Rulemaking Board because we found, among other things, that the exemption denial did not constitute a "disciplinary sanction."6 We concluded that Rule G-37's ban on municipal securities business operated automatically once a firm made the described contribution. The action did not involve any finding of wrongdoing by the NASD.
Like the applicant in Morgan Stanley, Dillon automatically became subject to the Rule's special supervisory requirements as a result of certain Firm hiring decisions. When the NASD staff notified Dillon that the Firm was subject to the Rule's special supervisory requirements, the NASD made no finding of wrongdoing. Nor did the NASD employ its disciplinary procedures in reaching its conclusion.7
Dillon argues that the NASD's action constitutes a disciplinary sanction because, as a result, the Firm will "be subject to the raised suspicions" of customers whose phone conversations will be taped. Dillon further argues that, if the Firm is forced to tape itsconversations with customers, it "will undoubtedly chase away potential, as well as existing, customers wary of having their perfectly legal telephone conversations taped." Thus, Dillon asserts, the NASD's action also constitutes a limitation of access to services. We disagree.
The taping of customer conversations, a commonly utilized practice within the securities industry, is designed to enhance customer protection. Dillon identifies no manner in which such a practice compromises a customer's ability to access services offered by the Firm, and we are unaware of any. We have held, moreover, that SRO action is not reviewable merely because it adversely affects the applicant.8
Dillon also asserts that, unlike Morgan Stanley, where the firm was precluded from doing business in a geographic location, Dillon is required to take affirmative actions. We do not consider this to be a relevant distinction. Restricting business activity, as Rule G-37 did, can have as great an impact on a firm as requiring a firm to take certain actions. The distinction, moreover, is irrelevant to the determination of whether a "punishment or sanction" has been imposed. The NASD did not require the taping of conversations by the Firm as a result of disciplinary proceedings and findings of violation against the Firm. Instead, the Firm hired certain persons -- actions which are lawful but which nevertheless triggered the Rule's taping requirement. The only action taken by the NASD was to deny Dillon an exemption from the Rule's requirement.
The NASD's action also does not constitute a denial of membership or a denial of access to services. The operation of the Rule and the NASD's exemption denial have no bearing on Dillon's membership in the NASD, which continues unchanged whether or not an exemption is granted.9 Dillon argues that its NASD membership is"now expressly conditioned upon its compliance" with the Rule and that the Firm "faces a shutdown of its operations due to its financial inability to comply." Dillon has not explained to us or the NASD the alleged costs or submitted evidence of its inability to pay these costs.10 The membership of every NASD member is conditioned on the member's continued compliance with NASD rules. Accepting, for the sake of argument, Dillon's assertion that the costs of complying with the Rule are high, we nevertheless consider such costs necessary for the protection of investors.
We also do not believe that the NASD's action bars any person from becoming associated with an NASD member. Dillon asserts that, because individuals will be able to associate with the Firm only if the Firm complies with the Rule, those individuals will effectively be barred because Dillon cannot comply with the Rule.
This, though, is true of every rule violation involving any NASD member, i.e., any member firm's failure to comply with NASD rules jeopardizes its membership and potentially inhibits the ability of registered persons to associate with that firm. Whatever the consequences to the Firm of the exemption denial, it does not constitute a bar of Dillon's registered representatives because they will remain free to associate with other firms. Dillon cites Frank R. Rubba and Exchange Services, Inc.,11 where we held that NASD action having the effect of barring an individual from association with all NASD members -- whether the individual is formally barred or not --is reviewable under Section 19(d). These cases are inapposite because Dillon's employees are not limited in their ability to associate with NASD members. Thus, unlike the individuals in Rubba and Exchange Services, Dillon's employees' status is unaffected by the exemption denial.
For the reasons discussed above, we have concluded that the NASD's decision to deny Dillon an exemption from the special supervisory requirements of the Rule is not reviewable by the Commission pursuant to Section 19(d) of the Exchange Act. We accordingly dismiss the Firm's application.
An appropriate order will issue.12
By the Commission (Chairman LEVITT and Commissioners HUNT, CAREY, and UNGER).
Jonathan G. Katz
The term "disciplined firm" is defined as any member firm "that, in connection with sales practices involving the offer,purchase, or sale of any security, has been expelled from membership or participation in any securities industry self-regulatory organization or is subject to an order of the Securities and Exchange Commission revoking its registration as a broker/dealer." Conduct Rule 3010(b)(2)(x).
Conduct Rule 3010(b)(2)(xi).
Conduct Rule 3010(b)(2)(viii) requires a member firm with at least 20 registered persons to adopt special supervisory procedures, including the tape-recording of all telephone conversations with customers, where 20% or more of its registered persons have been employed by one or more disciplined firms within the prior three years.
15 U.S.C. §78s(d). See Joseph Dillon & Co., Exchange Act Rel. No. 42795 (May 18, 2000), 72 SEC Docket 1297.
Dillon argues that, even if we determine that we lack jurisdiction under Section 19(d), we nevertheless can consider Dillon's appeal because there are "compelling reasons" for doing so. As support, Dillon cites three Commission decisions: Frank R. Rubba, Exchange Act Rel. No. 40238 (July 21, 1998), 67 SEC Docket 1775; Blinder Robinson & Co., Exchange Act Rel. No. 29496 (July 29, 1991), 49 SEC Docket 717; Exchange Services Inc., 48 S.E.C. 210 (1985). These cases do not support Dillon's argument. In Rubba and Exchange Services, we held that we had jurisdiction to review NASD action because it had the effect of barring persons from associating with an NASD member, thus implicating the fourth jurisdictional basis of Section 19(d). In Blinder, we dismissed as moot an appeal of an exemption denial by the NASD. While noting that administrative agencies have the "discretion" to issue declaratory orders, Blinder, 49 SEC Docket at 718, we did not reach the issue of whether we had jurisdiction to review thedenial of Blinder's request for an exemption. Id. at 719 n.5.
Morgan Stanley & Co., Exchange Act Rel. No. 39459 (Dec. 17, 1997), 66 SEC Docket 351, 354. See also Tague Sec. Corp., 47 S.E.C. 743, 745 (1982) ("As one court has stated, 'A disciplinary action is generally one in which a punishment or sanction is sought or intended.'") (quoting City of Newark v. Bellezzo, 159 N.J.Super. 123, 387 A.2d 378, 380 (App. Div. 1978)).
Rule G-37 prohibits a broker, dealer or municipal securities dealer from engaging in certain "municipal securities business" with an issuer for two years following any contribution to an official of such issuer by any municipal finance professional associated with that broker, dealer, or municipal securities dealer.
See also Russell A. Simpson, Exchange Act Rel. No. 40690 (Nov. 19, 1998), 68 SEC Docket 1781, 1787 (finding no jurisdiction where the NASD failed to impose a "final disciplinary sanction").
See Tague, 47 S.E.C. at 745 (noting the Philadelphia Stock Exchange's failure to employ disciplinary procedures in concluding that action was not reviewable under Section 19(d)).
See, e.g., Lance E. Van Alstyne, Exchange Act Rel. No. 40738 (Dec. 2, 1998), 68 SEC Docket 2094, 2099 (fact that applicant may have been adversely affected by NASD's denial of request to set aside default judgement did not "transform the denial into a reviewable NASD order"); Tague Sec. Corp., 47 S.E.C. 743 (1982).
We previously have reviewed denials of membership and denials of modifications to a firm's restrictive agreement. Domestic Sec., Inc., 52 S.E.C. 934 (1996); First Potomac Inv. Serv., 50 S.E.C. 848 (1992). In those cases, the NASD had imposed conditions or limited the firm's activities in permitting the firms' membership. As we stated in Morgan Stanley, however, Dillon is "seeking relief from operation of the rule, not fromany condition imposed on its membership by the NASD." Morgan Stanley, 66 SEC Docket at 356.
The DMR, in denying Dillon's exemption request, stated that Dillon had "failed to produce any evidence that the cost of implementing the taping system will have an impact on its operations disproportionate to the general consequential impact considered by the SEC when the [Rule] was approved."
Exchange Act Rel. No. 40238 (July 21, 1998), 67 SEC Docket 1775 and 48 S.E.C. 210 (1985), respectively.
All of the arguments 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 in this opinion.
UNITED STATES OF AMERICA
SECURITIES EXCHANGE ACT OF 1934
Admin. Proc. File No. 3-9289
In the Matter of the Application of
ORDER DISMISSING APPLICATION FOR REVIEW OF EXEMPTION DENIAL BY REGISTERED SECURITIES ASSOCIATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that Joseph Dillon & Co., Inc.'s application for review of the denial by the National Association of Securities Dealers, Inc. of an exemption from the special supervisory requirements of NASD Conduct Rule 3010(b)(2) be, and it hereby is, dismissed for want of jurisdiction.
By the Commission.
Jonathan G. Katz