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2004 In
the Matter of MARK H. LOVE For Review of Disciplinary Action Taken by the
NASD
Mark H. Love, an RR formerly associated with NASD member PaineWebber Inc. seeks review of a May 2003 NASD disciplinary action, which found that he had participated in private securities transactions while employed at PaineWebber without giving prior written notice of such transactions in violation of NASD Conduct Rule 3040 and NASD Conduct Rule 2110, and imposed on Love a $25,000 fine and a suspension of 30 business days in all capacities.
Q. Is an RR required notify his member firm in writing of a private securities transaction if there hasn't been the payment of any fee or compensation? Rule 3040 requires written notice "prior to participating in any private securities transaction," (whether for compensation or not) See, e.g., Terry Don Wamsganz, 48 S.E.C. 257, 258 (1985)( "in any manner"). Moreover, Rule 3040 subparts (b), (c), and (d) specify, respectively, that the required written notice must state whether the representative may or will receive compensation for his or her participation in the transaction, that the representative must receive written authorization from the member firm to engage in the transaction if receiving compensation therefore, and that the firm may apply specific conditions to the representative's participation, even if the representative is not receiving compensation. Q. But is the mere referral and assistance in transferring customer accounts sufficient to constitute participation in a private securities transaction? The SEC analyzed it this way. Love's clients came to him with specific investment goals and asked for help to accomplish those goals. None of Love's customers knew of Foster or Summit West before Love mentioned them, and, without his introduction, they would not have made the investments. See Keith L. Mohn, Securities Exchange Act Rel. No. 42144 (Nov. 16, 1999), 71 SEC Docket 198,at 203 (citing the fact that clients did not know about investments prior to representative's introduction as a factor in finding that representative participated in the transactions for purposes of Rule 3040). The SEC concluded that Love went further than merely passing along a telephone number. He effectively vouched for Foster, telling the customers that Foster was a close friend of Zirbel and that Zirbel, whom Love knew well from their prior work together, was considering going to work for Foster. In addition, Love told at least one customer of his own interest in investing with Foster during the initial conversation in which the customer's potential investment with Foster was discussed. He also facilitated the transfers of funds from the customers' PaineWebber accounts to Summit West to make the investments. When the customers had difficulty withdrawing funds from Summit West, Love interceded with Foster on their behalf. Although the SEC emphasized that a broker who does nothing more than refer a customer to another investment opportunity should not ordinarily run afoul of Rule 3040, where, as here, the broker becomes involved in a customer's investment choice through a specific recommendation and by facilitating the mechanics of transactions, such participation fits within the broad range of behavior prohibited by Rule 3040. Nonetheless, the NASD Sanction Guidelines for violations of Rule 3040 provide that fines ranging from $5,000 to $50,000, and a suspension ranging from ten days to a bar, depending on the severity of the violation. Love's thirty-day suspension falls on the low end of the range of potential suspensions under the Guidelines, and his fine falls at the mid-range. In fact, in reducing Love's suspension from ninety days, as recommended by the hearing panel, to thirty business days, the NASD National Adjudicatory Council recognized that his participation in his customers' Summit West transactions was not as great as that found in some other violations of Rule 3040. Q. Okay, but it seems clear that the customers were looking for more aggressive returns and would likely have gone elsewhere anyway. Love disclosed the personal relationships, told them to independently investigate Summit, and tried to help his customers. So what's the big deal? The SEC held in Stephen J. Gluckman, Exchange Act Rel. No. 41628 (July 20, 1999), 70 SEC Docket 418, that the "responsibility to give notice under Rule 3040 does not hinge on whether the investors also independently discussed and negotiated the transactions with [the sponsor]." Rule 3040 serves not only to protect investors, but also to permit securities firms, which may be subject to liability in connection with transactions in which their representatives become involved, to supervise such transactions. Gilbert M. Hair and Vladimir Chorny, 51 S.E.C. 374, 378 (1993). Love's involvement in his customers' Summit West transactions was, in many respects, analogous to his involvement in any investments the customers made through PaineWebber, in that he made specific recommendations, vouched for the validity of the investments, and facilitated to some degree the transaction process. If the investments had been made through PaineWebber, however, PaineWebber would have had the ability to exercise its supervision to protect its customers. The notice provisions thus serve the interests of both the member firm employer and the investing public, to which the member firm is obligated. Q. Isn't the key issue here the fact that Love's customers lost money? Oddly, the answer is no. In Gilbert M. Hair and Vladimir Chorny, 51 S.E.C. 374, 378 (1993)., the SEC sustained a finding of violation of Rule 3040 in a "selling away" case in which the customers were apparently satisfied with their investments. Q. Isn't this a First Amendment violation? Doesn't anyone --- even an RR --- have the right to make a referral of a customer to another individual or entity? The SEC notes that even if NASD were deemed to be a state actor, commercial speech, such as Love's referral of his customers to Summit West, receives a lesser degree of constitutional protection than do other forms of speech, and the restrictions on speech imposed by Rule 3040 are within the constitutional parameters set forth under applicable precedent. Martin Lee Eng, Exchange Act Rel. No. 44224 (Apr. 26, 2001), 74 SEC Docket 1194A, 1194D (First Amendment not applicable to NASD). See also Desiderio v. Nat'l Ass'n of Securities Dealers, Inc., 191 F.3d 198, 206-07 (2d Cir. 1999), cert. denied, 531 U.S. 1069 (2001)(NASD is not a state actor, and constitutional requirements generally do not apply to it). STALE PROSECUTIONSThe record indicates that NASD filed its complaint against Love approximately seven years after Love initially referred one of his customers to Foster, approximately six-and-one-half years after the last of Love's customers made an initial investment in Summit West, approximately four years after the date that NASD learned of Love's potential participation in the transactions, and approximately three-and-one-half years after NASD commenced its investigation of Love. Love claims that NASD delayed in filing its complaint against him and, in doing so, rendered the proceedings unfair. The Exchange Act requires that self-regulatory organizations, such as NASD, provide a fair procedure for the disciplining of associated persons of member firms.15 U.S.C. § 78o-3(b)(8). In recent years, the SEC has addressed the effect that a delay by a self-regulatory organization ("SRO") in the filing of a complaint against a representative may have on the overall fairness of proceedings against the representative. Jeffrey Ainley Hayden, Exchange Act Rel. No. 42772 (May 11, 2000), 72 SEC Docket 1125; William D. Hirsh, Exchange Act Rel. No. 43691 (Dec. 8, 2000), 73 SEC Docket 3597. These decisions, however, do not establish bright line rules about the impact of the length of a delay in filing a complaint on the fairness of the disciplinary proceedings. In William D. Hirsh, he SEC affirmed the consistently-held principle that no statute of limitations applies to disciplinary actions of SROs. For this reason, a comparison of the length of the time lags at issue in Jeffrey Ainley Hayden and Hirsh against the corresponding periods in this matter does not, in itself, resolve the fairness question here. The SEC notes that it has never employed a mechanical test and declines to endorse a de facto statute of limitations using the time frames presented by the facts in Hayden as limits defining the border of fairness in SRO proceedings. Although the SEC stated in Hayden that it was unable to find, as a factual matter, that the respondent's ability to mount an adequate defense had been prejudiced by the delay in his proceedings, the SEC determined that the record in this case clearly established that Love suffered no prejudice.
VERDICT The disciplinary action taken by NASD against Mark H. Love was sustained. |
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Love
disputes that his limited involvement in the transactions
amounts to "participation" in a private securities transaction under Rule 3040.
He took
no fee and received no other form of compensation. Essentially, he argued
that all he did was make a referral. 