SECURITIES AND EXCHANGE COMMISSION
In the Matter of the Application of
BFG SECURITIES, INC.
For Review of Action Taken by the
OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- REVIEW OF DENIAL OF MEMBERSHIP APPLICATION
Registered securities association denied application for membership on the ground that the long-term suspension of firm-applicant's corporate powers, rights, and privileges meant that the firm could not lawfully be engaged in the securities business and therefore could not be a viable candidate for association membership. Held, appeal proceeding dismissed.
Alfred E. Barr, President, for BFG Securities, Inc.
Alden S. Adkins, Norman Sue, Jr., Susan L. Beesley, and Shannon V. Lane, for NASD Regulation, Inc.
Appeal filed: May 9, 2000
Last brief received: August 31, 2000
BFG Securities, Inc. ("BFG"), a suspended California corporation registered with the Commission as a broker-dealer, appeals from the denial by the National Association of SecuritiesDealers, Inc. ("NASD") of BFG's application for NASD membership.1 The NASD denied the application on the ground that BFG's corporate powers, rights, and privileges had been suspended in 1997 for nonpayment of taxes and at no subsequent point revived by the California authorities. The NASD reasoned that, given this suspension, BFG, as a corporate applicant, could not lawfully be engaged in the securities (or any other) business, and thus could not be a viable candidate for NASD membership. We base our findings upon an independent review of the record.
BFG's membership application has a long history. In May 1993, BFG applied for NASD membership as a corporation incorporated under the laws of the State of California and doing business in Signal Park, California, by filing a Uniform Application for Broker-Dealer Registration ("Form BD"). The next month, BFG registered with the Commission as a broker-dealer. In June 1995, while BFG's membership application was under review by the NASD Los Angeles office staff,2 the firm filed an amended Form BD disclosing that the Firm's principal place of business had changed to Tampa, Florida. As required under NASD rules, responsibility for consideration of the application then was transferred to the NASD's Florida-based staff.3
In January 1996, a membership subcommittee of the District Committee for District No. 7 ("District Committee") denied BFG's membership application. The basis for denial was BFG's failure tosatisfy the qualification requirements under the NASD's then-existing By-Laws because of a 1991 disciplinary action brought against Alfred E. Barr, BFG's President, by the Commissioner of the Kentucky Department of Insurance for alleged conversion of customer funds. That action had resulted in revocation of Barr's license with the Kentucky Department of Insurance, among other sanctions. In 1995, on Barr's appeal of the Department's decision, a Kentucky circuit court determined that the revocation decision was issued consistent with due process.
In February 1996, BFG appealed the subcommittee's denial of its NASD membership application to the District Committee, but soon thereafter asked that the hearing date be postponed, as BFG anticipated that the Kentucky Court of Appeals would resolve shortly Barr's appeal of the 1995 circuit court decision. In September 1996, when the NASD had not heard further from BFG, the NASD withdrew BFG's application as lapsed. The Court of Appeals affirmed the circuit court's order in November 1996.4 Some months later, Barr contacted NASD staff and requested that BFG's application and request for hearing be reinstated. The District Committee then held a hearing on BFG's application and at that hearing permitted Barr to collaterally attack the decision of the Kentucky Insurance Commissioner.5 In June 1998, the District Committee reversed the membership subcommittee's 1996 denial of the application, noting that, "[b]ased upon the evidence offered by Mr. Barr, the Kentucky Department of Insurance findings with respect to his culpability appear questionable." The District Committee ordered that BFG's membership application be "reinstated," and directed the NASD's staff "to complete the membership process with BFG."
In response to that order, the NASD staff waived the payment of a new membership application fee and requested certain additional information from BFG to complete its processing of BFG's application. BFG, through Barr, provided a portion of the requested informationbut at the same time claimed that it was not required to submit additional information, as, in BFG's view, the District Committee's June 1998 order stated, "plain[ly], and clear[ly]," that BFG was to be immediately admitted to NASD membership. Ultimately, on December 7, 1998, a membership subcommittee of the District Committee denied BFG's application for failure to supply information in support of the application requested by the NASD staff. BFG then filed a second appeal with the District Committee.
After an evidentiary hearing that was postponed for some months at Barr's request, the District Committee issued a decision in July 1999 denying BFG's application. The District Committee found that the NASD staff had acted consistently with the District Committee's June 1998 order directing reinstatement of BFG's application, that the information the NASD staff requested from BFG, including updated financials, "was critical to the NASD staff's analysis" of BFG's suitability for NASD membership, and that BFG had failed to supply the requested information timely or, with respect to certain of the information, at all.
BFG appealed this second denial of its application to the National Adjudicatory Council ("NAC"). Before the scheduled NAC subcommittee hearing, the NASD staff filed a motion to dismiss the proceeding. The motion asserted that (1) BFG's corporate powers, rights, and privileges had been suspended by the State of California in 1997 for nonpayment of taxes, rendering BFG ineligible for membership; and (2) Barr was permanently enjoined by a federal district court in May 1999 from further violations of Section 204 of the Investment Advisers Act of 1940.6 The NAC subcommittee advisedthe parties that it would refer to the full NAC the motion and any opposition thereto, because the motion, if granted, could terminate the proceeding. BFG thereafter filed a brief opposing the NASD staff's motion, the NASD staff filed a reply, and BFG was afforded an opportunity to file, and did file, a surreply brief. On April 5, 2000, the NAC granted the NASD staff's motion to dismiss the appeal and denied the application on the ground that, due to the long-term suspension of BFG's corporate powers, rights, and privileges by the State of California, BFG could not lawfully be engaged in the securities (or any other) business, a prerequisite for NASD membership.7 This appeal followed.
The standards that govern our review of the NASD's action are contained in Section 19(f) of the Securities Exchange Act of 1934. If we find that "the specific grounds" on which the NASD based its action "exist in fact," that the NASD's determination to deny BFG's membership application is in accordance with its rules, and that such rules are and were applied in a manner consistent with the purposes of the Exchange Act, we must dismiss BFG's appeal unless we find that the NASD's action imposes an undue burden on competition.8
A. The NASD's Specific Grounds for Denial Exist in Fact.
The NASD By-Laws provide that, generally, any broker or dealer that (a) is registered with the Commission under the Exchange Act and (b) that is authorized to transact, and whose regular course of business consists of actually transacting, securities business in the United States, under the laws of the United States, is eligible for NASD membership.9 The record establishes that BFG is a Californiacorporation that registered with the Commission as a broker-dealer in 1993. Because BFG's Commission registration remains effective, BFG meets the first prong of the NASD's membership eligibility standard.
BFG does not meet the second prong of this eligibility standard. While a corporate applicant, it is not authorized under California law (the law of the state of its incorporation) to transact securities business because, as the NAC found, BFG is a long-suspended California corporation. BFG's 1993 membership application on Form BD represented that the firm is a California corporation. The Secretary of State for the State of California suspended BFG's corporate powers, rights, and privileges on January 15, 1997.10 Under California law, a suspended California corporation is not authorized to transact any business, securities or otherwise.11 In the words of one California court, the suspended corporation is "prohibit[ed] . . . from enjoying the ordinary privileges of a going concern."12 Indeed, under California law,any contract made by a company during its suspension is voidable at the option of a party to the contract other than the suspended company.
In its briefs BFG does not contest the fact that its corporate powers long have been suspended by the California authorities.13 Instead, BFG suggests that it somehow transferred its corporate status to the State of Florida when it moved its principal place of business to Florida. Any reliance on BFG's status under Florida law is misplaced, however. BFG is not a Florida corporation.14 In sum, BFG's long-term corporate suspension renders it powerless to engage lawfully in the securities business, and, thus, the basis for the NAC's denial of BFG's application - ineligibility for NASD membership - exists in fact.
We reject BFG's and Barr's attempt to shift to the NASD responsibility for the lapse in BFG's corporate status on the ground that the lapse was a consequence of the NASD's assertedly "unreasonable delay and demands" in processing BFG's membership application. The failure to maintain, pending resolution of BFG's membership application, BFG's status as a corporation that could sue and be sued, enter into enforceable contracts, and otherwise engage in lawful business in its state of incorporation, can be only BFG's and Barr's responsibility.
Further, we cannot agree with BFG that, "[b]y the NASD district office having never raised these issues [of threshold eligibility] during its evaluation and denial of the application, . . . the District . . . waived its rights to argue this point for dismissal of the appeal." Such a result would be particularly inappropriate in these circumstances: it was BFG that failed to disclose to the NASD during the pendency of its membership application facts regarding its California suspension (and its Florida revocation) that were within the company's particular knowledge.15
B. The NASD's Determination To Deny BFG's Membership Application Is In Accordance With Its Rules, Which Are And Were Applied Here Consistent With The Purposes Of The Exchange Act, And That Determination Did Not Impose An Undue Burden On Competition.
BFG argues that under Schedule C of the By-Laws it was entitled to a hearing before the NAC subcommittee,16 and its rights were "usurp[ed]" when the NASD dismissed the appeal without a hearing on the merits of BFG's claim of District Committee error and NASD staff improprieties. We conclude that the NASD acted in accordance with its rules and fairly determined not to proceed with a further appeal hearing once the NASD's staff brought to the NAC's attention BFG'slong-suspended corporate status and moved to dismiss the proceedings because BFG could not lawfully be engaged in the securities business.
The membership rules governing this matter, Part I of Schedule C of the NASD By-Laws, do not provide expressly for motions to dismiss (or, for that matter, for motions of any other type) in membership proceedings.17 The NASD, in its role as adjudicator, nonetheless has implicit authority, which it exercised here, to rule on a dispositive motion in a membership proceeding in order to conserve its resources where an applicant could not lawfully be engaged in the securities (or any other) business, a prerequisite for NASD membership.18
In exercising that authority in this matter, the NASD gave BFG a full and fair opportunity to be heard concerning the specific issue of BFG's asserted incapacity to engage in securities business. BFG's response to the motion attached no document and made no proffer of testimony refuting the NASD staff's claim - which was fully supported by documentary evidence - that BFG lacked corporate capacity. That being the case, the NASD properly denied the application without further hearing.19
As a national securities association registered under Section 15A of the Exchange Act,20 the NASD is required to conduct fair proceedings and has been given the authority and responsibility -consistent with the purposes of the Exchange Act - to ensure that firms applying for membership meet appropriate qualifications and standards for membership including standards of "operational capability."21 BFG sought NASD membership as a corporation. During the pendency of its application for NASD membership, it became, and remained, an entity unable lawfully to exercise any corporate powers and engage in any business. We conclude that the NASD's determination to deny the application without further hearing once the NASD staff established that BFG, a corporate applicant, failed to meet a threshold operational capability standard specified in the NASD's By-Laws -- legal authority to transact securities business -- was consistent with the purposes of the Exchange Act. We further find that the determination imposed no undue burden on competition.
BFG charges that the NASD's determination here demonstrates its failure to "adher[e] to the agreement and conclusion settlement" we reached with the NASD in our Section 21(a) Report regarding The Nasdaq Stock Market issued in August 1996.22 BFG sees the ultimate resolution of BFG's application as the culmination of "five years of delay and obstruction" with respect to processing that application. BFG also claims, among other things, that both the firm and Barr have been "targeted . . . for regulatory and disciplinary action, with and without hearings," and that the firm has been required to satisfy criteria not enumerated in the rule and to comply with "unfair, unnecessary burdens . . . that no other applicant has had to complete." The record, however, includes nothing suggesting any basis for BFG's claims of unfairness and dilatoriness. In fact, to the contrary, it reflects that the NASD's District Committee gave BFG wide latitude here, reviving BFG's application on the basis of conclusions the District Committee reached from evidence adduced aspart of BFG's collateral attack on the order issued by the Commissioner of the Kentucky Department of Insurance.23
In accordance with Section 19(f) of the Exchange Act, we find that "the specific grounds" on which the NASD based its action "exist in fact," that the NASD's determination to deny BFG's membership application imposes no undue burden on competition and is in accordance with the NASD's rules, and that such rules are and were applied in a manner consistent with the purposes of the Exchange Act. We therefore dismiss this appeal proceeding.24
An appropriate order will issue.25
By the Commission (Acting Chairman UNGER and Commissioner HUNT).
Jonathan G. Katz
Admin. Proc. File No. 3-10202
In the Matter of the Application of
BFG SECURITIES, INC.
For Review of Action Taken by the
ORDER DISMISSING PROCEEDING TO REVIEW REGISTERED SECURITIES ASSOCIATION'S DENIAL OF MEMBERSHIP APPLICATION
On the basis of the Commission's opinion issued this day, it is
ORDERED that the proceeding to review the denial by the National Association of Securities Dealers, Inc. of the application filed by BFG Securities, Inc. for membership in that association be, and it hereby is, dismissed.
By the Commission.
Jonathan G. Katz
|1||Some weeks after BFG timely filed with the Commission its application for review, BFG filed another document styled "Amended Complaint for Review." This document alleges that the NASD both mishandled BFG funds placed into BFG's Central Registry Depository account and misrepresented through "willful false statements" the NASD's disposition of such funds. These matters do not relate to the appeal before us. In furtherance of our NASD oversight responsibilities, BFG's pleading and a copy of BFG's application for review, which includes other allegations of NASD staff misconduct, have been referred to the Commission's Division of Enforcement for such action as may be appropriate.|
|2||Consistent with the terms of our 1997 order approving the NASD's revised Code of Procedure establishing the new Membership and Registration Rules, the NASD considered the application under the pre-existing membership rules found in Schedule C, Part I, of the NASD's By-Laws.|
|3||See Article III, Section 1(b) of the NASD By-Laws, NASD Manual ¶1783 at 1531 (April 1993).|
|4||Barr subsequently sought review in the Supreme Court of Kentucky, which was denied in August 1997.|
|5||In the National Adjudicatory Council ("NAC") decision that is the subject of the instant appeal, the NAC - citing our decision in Joseph Frymer, 49 S.E.C. 1181, 1182 (1989) -expressly noted that it "in no way condone[d]" the District Committee's determination to permit Barr to collaterally attack the Commissioner's final decision. In Frymer, and subsequently in Charles Phillip Elliott, 50 S.E.C. 1273, 1277 n.16 (1992), and Robert J. Sayegh, 52 S.E.C. 1110, 1112 (1996), among other cases, the Commission held that principles of collateral estoppel dictate that a respondent must not be permitted to retry the merits of a proceeding that results in conviction or an injunction.|
|6|| Final Judgment of Permanent Injunction and Other Relief, SEC v. The Barr Financial Group, Inc. and Alfred E. Barr, Civ. Action No. 98-106-CIV-T-17E (M.D. Fla.). The district court ruled that The Barr Financial Group ("The Barr Group"), a registered investment adviser, aided and abetted by its Chief Executive Officer, Barr, willfully refused to allow the Commission staff to examine The Barr Group's books and records and to produce copies of certain legally-required documents, in violation of Section 204. See SEC Litigation Rel. No. 16159 (May 24, 1999), 69 SEC Docket 2671.
The Commission in June 1999 instituted an administrative proceeding against The Barr Group and Barr to determine (1) whether allegations are true that The Barr Group made certain false statements in its registration filings signed by Barr, and that The Barr Group and Barr are enjoined from violating Section 204, and (2) if so, what, if any, remedial sanctions are appropriate and in the public interest. See The Barr Financial Group, Inc. and Alfred E. Barr, Investment AdvisersAct Rel. No. 1802 (June 16, 1999), 69 SEC Docket 2947. That administrative proceeding is pending before an administrative law judge.
|7||With regard to the alternative ground for dismissal put forward by the NASD staff, the NAC noted that "[a]lthough it appears that the Firm would be ineligible for membership based on Barr's apparent statutory disqualification due to the injunction entered against him in the Middle District of Florida, [the NAC did] not base [its] denial on that fact."|
|8||Section 19(f) of the Exchange Act, 15 U.S.C. § 78s(f). See also M.J. Coen, 47 S.E.C. 558, 563 (1981) (explaining the Section 19(f) standard).|
|9||Article II, Section 1 of the NASD By-Laws, NASD Manual ¶1121 at 1101 (April 1993), renumbered as Article III, Section 1, NASD Manual at 1303-3 (April 2000).|
|10||A certificate attesting to this suspension is in the record and, under California law, such certificate is prima facie evidence of the suspension. See Cal. Rev. & Tax Code § 23302 (West Group 2000). We reject BFG's claim that California statutes are inapposite here because "the NASD bylaws [sic] . . . do not include these statutes as current rules for membership" and "California states laws [sic] has no jurisdiction in these such matters." It is well established that private corporations can exist and exercise their corporate powers only under the express laws of the state or sovereignty by which they were created. See, e.g., Chicago Title & Trust Co. v. Forty-One Thirty-Six Wilcox Bldg. Corp., 302 U.S. 120, 124-25, 128 (1937).|
|11||See Cal. Rev. & Tax Code § 23301 (West Group 2000) (Suspended corporation is disqualified from exercising any corporate power, right, or privilege, except that it may apply for tax-exempt status or to amend its articles of incorporation as necessary either to perfect that application or to set forth a new name.). Under California law, a suspended corporation may be reinstated by payment of all taxes, interest, and penalties due, and upon the issuance of a certificate of revivor from the Franchise Tax Board. Cal. Rev. & Tax Code § 23305 (West Group 2000).|
|12||Grell v. Laci Le Beau Corp., 73 Cal. App. 4th 1300, 1306,87 Cal. Rptr. 2d 358 (Cal. App. 1999) (citation and internal quotations omitted).|
|13|| The following facts establish that BFG's suspension is enduring: (1) BFG's corporate powers had been suspended for almost three years at the time the suspension came to the NAC's attention; (2) BFG did not suggest to the NAC that it had any intention to cure the long-term deficiency by paying BFG's accrued California taxes, interest, and penalties, in order to obtain reinstatement of BFG's corporate powers (see Cal. Rev. & Tax Code § 23304.1 (West Group 2000)); and (3) BFG has not made such a proffer to the Commission.
We note that Barr argued before the NAC that BFG's corporate incapacity should not be an impediment because Barr himself could have applied for NASD membership as a sole proprietor. Barr does not make that argument before the Commission. In any event, while sole proprietors may apply for membership in the NASD, Barr did not apply on this basis (he applied, rather, on behalf of corporate entity BFG), nor did he register with the Commission as a sole proprietorship broker-dealer.
|14||On its relocation to Florida, BFG undertook, as required by Florida law, to register as a foreign corporation authorized to transact business in the State of Florida. Such registration was granted in December 1995, based on the fact of BFG's incorporation in California. In September 1997, however, the Department of State for the State of Florida revoked outright BFG's authority to transact business in the State of Florida. Accordingly, BFG's representation, in its brief to us, that its corporate status under Florida law is "inactive" and "can be reinstated in the State of Florida "within twenty four hours," is, at best, wishful thinking.|
|15|| Compare Matter of Christian and Porter Aluminum Co., 584 F.2d 326, 332 (9th Cir. 1978) (terming as "without merit" and to "be disregarded" contention that failure to plead in the trial court appellant's lack of capacity to sue due to appellant's suspension under the California Revenue Code barred appellate consideration of the claim under waiver).
The record does not reflect from what source the NASD staff learned of the suspension.
|16||BFG asserts that the NAC's decision not to hold a hearing but to "allow District No. 7 to change the focus of the appeal" and, ultimately, dispose of BFG's appeal through resolution of the NASD District staff's motion to dismiss violated BFG's rights to "appear before a subcommittee panel,. . . present evidence[,] and have a record established."|
|17||Nor do the current Membership and Registration Rules expressly provide for such a procedure.|
|18|| Compare Climax Molybdenum Co. v. Sec'y of Labor, Mine Safety & Health Admin., 703 F.2d 447, 451 (10th Cir. 1983) ("[A]gency's determination of mootness is informed by an examination of the proper institutional role of an adjudicatory body and a concern for judicial economy.").
In ruling on the dispositive motion in this case, the NASD used as a model procedures set forth in NASD Code of Procedure Rule 9146, NASD Manual at 7322-23 (April 2000), a specific motions rule that applies to disciplinary and other Rule 9000 proceedings, but not to membership proceedings. For example, consistent with the rule's directive that any "motion for disposition of a cause of action shall be decided by the National Adjudicatory Council," the NASD staff's motion to dismiss was considered and resolved by the full NAC. Further, BFG was fully informed of the motion, given a reasonable time period within which to respond to the motion, and permitted to file a surreply to the NASD staff's reply brief. See NASD Code of Procedure Rule 9146(b) & (d), NASD Manual at 7323 (April 2000).
|19||BFG also claims that the NAC decision includes "falseinformation" that BFG "called no witnesses" in the District Committee 1999 appeal hearing challenging the membership subcommittee's decision to deny BFG's application. It is a fact, however, that BFG called no witnesses.|
|20||15 U.S.C. § 78o-3.|
|21||See Section 15A(g)(3)(A) of the Exchange Act, 15 U.S.C. § 78o-3(g)(3)(A).|
|22||See Report and Appendix to Report Pursuant to Section 21(a) of the Exchange Act Regarding the NASD and The Nasdaq Stock Market, Exchange Act Rel. No. 37542 (Aug. 8, 1996), 62 SEC Docket 1375.|
|23||See Section II of this opinion, supra.|
|24||We hereby deny as, variously, outside our authority in this proceeding or contrary to the public interest and public policy, BFG's requests that we (1) find that the NASD has not complied with the District Committee's June 1998 order and "order a new hearing on the evidence at hand for the purpose of sanctions" against the NASD; (2) order the NASD to approve its NASD membership application; (3) prohibit the NASD and its affiliates, from all further "harassment" of BFG and from all further contact regarding BFG with this Commission, other agencies, other self-regulatory organizations, insurance departments, newspapers, and other media; (4) order the NASD to turn over immediately to BFG all internal and other documents regarding BFG and Barr; and (5) convene a full hearing on all of the issues raised by BFG, "with full rights of witnesses, and the presentation of evidence for the record," at which we "den[y] with prejudice" all submissions by the NASD.|
|25||We have considered all of the applicant's contentions. We reject or sustain them to the extent that they are inconsistent or in accord with the views expressed in this opinion.|