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2004
CASE
ANALYSIS
In
the Matter of the Application of GINA M. GUZZONE
For Review of NASD
Action Denying Waiver of Examination Requirements
Securities Exchange Act of 1934 Release No. 49727, May 19, 2004
http://www.sec.gov/litigation/opinions/34-49727.htm
A Little
Background
After nearly a year's unemployment, Gina M. Guzzone was hired by a
broker-dealer in August 2002. She filled out the necessary paperwork,
provided her
fingerprints, and thought that her
new employer submitted her Series 7 and Series 55 registrations.
Unfortunately, that job only lasted three months and Guzzone was once
again unemployed. Seven months after she was laid off, Guzzone
finally found another job on Wall Street and was hired. Within a few
days she was terminated when her new employer learned that her last
broker-dealer had failed to get
her registered and she was now deemed inactive. Faced with the
unpleasant prospect of having to re-take the two examinations, Guzzone
expected some compassion from the NASD when they heard her tale
of registration woe. After all, the
ensuing years covered 9/11, the Tech Wreck and Dot.com Bust,
and a whole host of shocking disclosures about Wall Street's fraud and
conflicts of interest. Thousands of hardworking men and women had lost
their jobs. It had been a tough time.
NASD Membership and
Registration Rule 1031. Registration Requirements
(a) All Representatives Must Be Registered
All persons engaged or to be engaged in the
investment banking or securities business of a member who are to
function as representatives shall be registered as such with NASD in
the category of registration appropriate to the function to be
performed as specified in Rule 1032. Before their registration can
become effective, they shall pass a Qualification Examination for
Representatives appropriate to the category of registration as
specified by the Board of Governors. A member shall not maintain a
representative registration with NASD for any person (1) who is no
longer active in the member's investment banking or securities
business, (2) who is no longer functioning as a representative, or (3)
where the sole purpose is to avoid the examination requirement
prescribed in paragraph (c). A member shall not make application for
the registration of any person as representative where there is no
intent to employ such person in the member's investment banking or
securities business. A member may, however, maintain or make
application for the registration as a representative of a person who
performs legal, compliance, internal audit, back-office operations, or
similar responsibilities for the member, or a person who performs
administrative support functions for registered personnel, or a person
engaged in the investment banking or securities business of a foreign
securities affiliate or subsidiary of the member.
(b) Definition of Representative
Persons associated with a member, including
assistant officers other than principals, who are engaged in the
investment banking or securities business for the member including the
functions of supervision, solicitation or conduct of business in
securities or who are engaged in the training of persons associated
with a member for any of these functions are designated as
representatives.
(c) Requirement for Examination on Lapse of
Registration
Any person whose registration has been revoked
pursuant to Rule 8310 or whose most recent registration as a
representative or principal has been terminated for a period of two
(2) or more years immediately preceding the date of receipt by the
Association of a new application shall be required to pass a
Qualification Examination for Representatives appropriate to the
category of registration as specified in Rule 1032.
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The NASD
Membership and Registration Rule 1070:
Qualification Examinations and Waiver of Requirements
(a) Qualification
Examinations specified in this Rule 1000 Series shall consist of a
series of questions based upon topics contained in study outlines
provided by the Association, a list of which is available from the
Qualifications & Examination Department.
(b) Examinations shall
be given at such times and places and under such conditions as shall
be prescribed by the Board of Governors and shall be graded according
to the procedure prescribed by the Board.
(c) Examination results
shall be reported to member firms and may be accompanied by an
analysis of the candidate's performance on the examination. Passing
scores assigned to each examination series shall be determined by the
Board of Governors, or its designee.
(d)
Pursuant to the Rule 9600 Series, NASD may, in exceptional
cases and where good
cause is shown, waive the applicable Qualification Examination
and accept other standards as evidence of an applicant's
qualifications for registration. Advanced age or physical infirmity
will not individually of themselves constitute sufficient grounds to
waive a Qualification Examination. Experience in fields ancillary to
the investment banking or securities business may constitute
sufficient grounds to waive a Qualification Examination.
(e) Any person
associated with a member who fails to pass a qualification examination
prescribed by the Association shall be permitted to take the
examination again after either a period of 30 calendar days has
elapsed from the date of the prior examination or the next
administration of an examination administered on a monthly basis,
except that any person who fails to pass an examination three or more
times in succession shall be prohibited from again taking such
examination either until a period of 180 calendar days has elapsed
from the date of such person's last attempt to pass the examination or
until the sixth subsequent administration of an examination
administered on a monthly basis. |
What
Happened Here?
The key to understanding an
examination-waiver-request case is in getting a clear picture of the dates
and timeframes involved. To facilitate that perspective, let's set
everything out in a table:
| Date |
Event |
Comment |
| 1996 |
Guzzone first becomes registered |
|
| October 30, 2000 |
Guzzone hired by Abel/Noser Corp |
General Securities Rep and Equity Trader Limited Rep (Series
7 and Series 55) capacities. |
| June 6, 2001 |
Guzzone terminates registrations with Abel/Noser Corp |
Rule 1031(c): the 2-year clock starts ticking |
| June 6, 2001 through August 4, 2002 |
Unemployed |
|
| August 5, 2002 |
Guzzone hired by Parker Financial |
Equity Trader |
| August 14, 2002 |
Parker Financial files Guzzone's Form U4 with NASD |
Series 7 and Series 55 |
| November 7, 2002 |
Parker Financial terminates Guzzone per Form U5 |
Corporate restructuring closed Manhattan office where she
was employed |
| June 6, 2003 |
Rule 1031(c) 2-year clock expires |
From November 2002 through July 2003, Guzzone works at
temporary employment service in non-investment capacity |
| August 1, 2003 |
Gagnon Securities hires Guzzone |
|
| August 13,2003 |
Gagnon terminates Guzzone |
|
| August 25, 2003 |
Parker Financial re-hires Guzzone |
|
| August 26, 2003 |
Parker Financial requests waiver of Series 7 and Series 55 |
Rule 1070 waiver
application filed with NASD. |
| September 15, 2003 |
NASD Department of Testing and Continuing Education denies
waiver |
NASD says request not "warranted."
Guzzone appeals to NAC. |
| November 14, 2003 |
NASD National Adjudicatory Council affirms denial |
NAC sustains Dept. on appeal by Guzzone. She appeals
to SEC. |
Upon Guzzone's hiring by Gagnon
Securities in August 2003, that member firm apparently discovered that
her Series 7 and Series 55 registrations were inactive and had aged beyond
the Rule 1031(c) two-year limitation (and then terminated her for that reason).
Subsequently, in
a letter dated August 26, 2003, Parker Financial informed the NASD that it
had failed to complete the transfer of Guzzone's licenses before her 2002
termination and attributed the delay to a deficiency in the Firm's CRD
account. The NASD/SEC record of these proceedings also indicates that
Parker Financial filed Guzzone's fingerprint card late (more than 30 days
after the filing of her Form U4), although Guzzone had submitted the
fingerprint card to Parker Financial in a timely fashion. Further, the
firm's compliance officer, Patrick Walker, stated in the waiver
request to NASD that:
Apparently
as it turns out Ms. Guzzone's registration had never been completed at the
time a Form U-5 was submitted to CRD. It appears as though this oversight
resulted in her licenses becoming inactive. I interviewed Ms. Guzzone and
the former [c]ompliance [o]fficer to determine if [Guzzone] had effected
any business during the delay period in question and was informed by both
that she had not done any securities related business at that time.
Clearly, Guzzone's former (and again current) employer
admitted that an "oversight" had regrettably resulted in the failure
to register her licenses. She did everything she was supposed to do
and everything she had been asked to do. Her registrations expired
through no omission by her. Nonetheless, NASD denied her waiver request ---
presumably her situation wasn't exceptional and she had shown good cause.
Straining
the Quality of Mercy
| In
considering Guzzone's appeal, the SEC notes that NASD guidelines
provide relief from the re-examination
requirements to individuals where a member firm, acting in good faith,
has failed to file the appropriate application forms. In order to
qualify for this relief, a member firm must document the nature of the
filing error and confirm that the individual in question has in good
faith conducted investment banking or securities business during the
period that his or her registration was not reflected in CRD. Accordingly, the NASD might have granted a waiver to Guzzone if she had written at least one
ticket to demonstrate that she thought she had been approved to act in a registered
capacity. The problem with that good-faith test is that it also
requires the member firm to admit that it
failed to verify that an individual who was engaged in registered activity
wasn't actually registered. For an example of this type of quandary,
read In The Matter of Jon G. Symon (S.E.C., 34-41285, April 14, 1999)
http://www.rrbdlaw.com/1999/q299/examwv.html
Although Guzzone contended that during the
time that her registration was not reflected in CRD, she functioned in
good faith as a general securities representative and equity trader at
Parker Financial, the SEC noted that the waiver request contained a representation from
the current Director of Compliance that both Guzzone and the firm's former compliance officer assured him
that Guzzone had not conducted any securities-related business
during the relevant period. Moreover, in her application for review,
Guzzone states that, while working at Parker Financial, she had to
expend her retirement money to survive because "no commission
dollars were ever made." |
Was This
Really Necessary?
The NASD initially moved to dismiss Guzzone's
application to the SEC because the regulator claimed she had failed to
prosecute the proceeding. Adding insult to injury, Guzzone appeared before the SEC in a
pro se capacity ---
meaning she handled her legal representation by herself. No,
that doesn't entitle her to a free ride during an appeal, but it does
entitle her to some reasonable consideration. Thankfully, the
SEC determined that "Guzzone is acting pro se and her application
for review articulated her position in sufficient detail to enable
NASD to respond. Accordingly, we deny NASD's motion."
Sometimes it's downright difficult to tell the good guys from the bad
guys. |
Consequently, the SEC
determined that Guzzone
[H]as not functioned as a general securities representative or an
equity trader for over two years. It is reasonable to conclude that, in
that time, there have been changes to the securities laws and regulations
with which Guzzone should become familiar. We believe that requiring
Guzzone to retake the qualification examinations is fully consistent with
the statutory goal of ensuring the requisite levels of knowledge and
competency of associated persons.
Decision
The SEC sustained the NASD's
denial of Guzzone's waiver request.
Bill Singer's Comment
There is no public-policy justification for the "use it or lose it" approach to
securities-industry registrations. Professional licensing should not be
dependent upon employment with a particular firm.
Pointedly, registrations should only be invalidated in the absence of
meeting one's continuing education obligation or in response to a
disciplinary sanction. The present regulatory system by which industry analysts and
salespersons are registered with a member firm, rather than directly
with a
regulatory organization is anticompetitive and not in the consumer's
best interest.
Keeping registrations active only during
periods of employment discourages registered persons from resigning from a
firm whose policies and practices are fraudulent. The threat is
clear: Once you resign you only have twenty-four months to find
registered employment or you'll have to sit for the examinations all over
again. You don't think twenty-four months is unreasonably short?
Okay, go look at the massive numbers of Wall Street employees who lost their
jobs during this last round of business failures and corporate
downsizing. You think the brokerage industry rehired everyone within
two years? Get serious!
Industry regulators seem to
think that the mere act of being on the job encourages some osmosis by which
you become educated as to changes in securities laws and regulations.
If only that were ever true. Fact is, the reason Wall Street
implemented a continuing education program is because no one was learning
about law or compliance by merely sitting at a desk, answering a phone, and
writing an ticket. Additionally, the
Series 7 and Series 55 examinations aren't qualifying tests for compliance/legal
staff. To the
contrary, they are supposedly designed to ensure familiarity with the basic
obligations and skills of a general securities representative and trader.
Imagine that you have a driver's license but
your state requires that after you pass the road test you have to find
an employer, who then submits your application to become a licensed
driver to the state. Can you imagine the absurdity if your
employer went out of business or you quit, and then you were informed
that unless you could find employment within 2 years that your
driver's license would be invalidated and you would need to take a new
road test? Further, in my state, a driver's license is issued for a term
of 8 years. If I get the license on day one and never drive for
the next 7 years and 364 days --- but put the pedal to the metal on
the last day of the year, well I'm still legally entitled to drive.
Look at the absurdity of this comparison. Driving skills, which should
be used somewhat regularly to stay sharp, are allowed to languish for 8
years without a new license --- and even when you renew your license, the
only test is for your eyes (not your driving skills). However, poor
Ms. Guzzone supposedly lost all her Wall Street knowledge within two years
and has to be completely re-tested.
Similarly, I am a lawyer. I
passed a Bar examination more than 20 years ago. My
license to practice law was granted by the state. If I don't
practice law but still satisfy my bi-annual continuing education
credits, my license stays in force. If I go out and practice law
as a solo practitioner and do not join another law firm, my license
stays in force. The same holds generally true for doctors,
accountants, and virtually all so-called professionals. Why,
then, is a stockbroker's license so dependent upon employment at a member
firm?
The speciousness in the SEC's
decision is the fallacy of its basis for denying Guzzone's waiver
[T]here have been changes to the securities laws and regulations
with which Guzzone should become familiar. We believe that requiring
Guzzone to retake the qualification examinations is fully consistent with
the statutory goal of ensuring the requisite levels of knowledge and
competency of associated persons.
The SEC confuses licensing with
continuing education. If the goal the commissioners and NASD sought to
support was that Wall Street professionals should stay current with changes
in laws and regulations, then that could have been achieved by simply
requiring Guzzone to satisfy her continuing education requirements rather
than forcing her to re-take her registration examinations. Surely the
SEC and NASD are not going to suggest that the "statutory goal of
ensuring the requisite levels of knowledge and competency" is satisfied merely by putting in time on the job. How
absurd!
First, assume that Parker
Financial had timely submitted Guzzone's Series 7 and Series 55
registrations. Second, assume NASD confirmed she was
registered. Third, now assume that one second after Parker
Financial was notified that
Guzzone's registrations were effective, the member firm fired her because of
corporate downsizing. How do you think that changes the
result? Simple. For that one second during which she was
officially registered, the clock was stopped and re-set for an entire 24
months. No need for a waiver. How does that satisfy
the SEC's professed concern for ongoing competency? It doesn't.
Public investors need the
services of Wall Street Professionals. Stockbrokers, analysts, and the
whole host of men and women who populate the industry should be licensed in
a manner similar to most other professionals --- the license goes with you;
it's not held captive by your employer. Until we implement this much
needed reform, brokerage firms will control the hearts and minds of their
workers. And as long as that continues, the blemish of conflict of
interest will still be on the face of Wall Street. Lost in the shuffling of legal papers
and academic concerns is the simple fact that Guzzone didn't
violate any laws, isn't accused of defrauding a public customer, and isn't
accused of doing any single act that resulted in the failure to timely file
her registrations. She is a double victim --- first by her firm's
negligence and then by the regulatory community's lack of mercy.
Worse, the public continue to be short-changed by Wall Street's failure
to enact meaningful reforms.
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NASD Qualification Examination
Waiver Guidelines
Coordination With Other Regulatory Agencies
Be aware that NASD can grant qualification examination waivers
only for its requirements, and not for other regulatory agencies (most
notably, state licensing and qualification requirements).
Waiver Guidelines
NASD has identified certain typical waiver requests and provides a
summary of them.
Waiver Requests Based On Registration Filing
Errors
Individuals who have in good faith been functioning as
representatives or principals in member firms but whose
registrations, for reasons related to the filing of the appropriate
application forms, are not reflected in the Central Registration
Depository (CRD) system. For example, a member firm
files an incomplete application that is eventually purged from the
CRD system. NASD will waive the examination(s) in the cases provided
the firm(s) involved document the nature of the filing error and
confirm that the individual has in good faith engaged in the conduct
of the investment banking or securities business during the period
when the registration was not reflected in the CRD system.
Waiver Requests Based On Continuing
Registrations With Other Regulatory Authorities
The CRD system only contains active registrations for persons
associated with NASD members. If an individual becomes associated
with a broker/dealer that is not an NASD member, the CRD system is
incapable of recognizing the continuance. These situations normally
arise when a person transfers to a non-member broker/dealer that is
a member of a national securities exchange, a bank municipal
securities dealer, or intra-state securities firm. NASD staff will
verify the registration continuance with the appropriate regulatory
authority and then waive the applicable qualification examination(s).
Waiver Requests Based On Experience
Considers an applicant’s experience in the securities industry
and/or in related investment fields such as investment banking,
securities trading on behalf of a financial institution, securities
research, portfolio management, investment advisory services, or
securities activities in a foreign broker/dealer. Certain law,
accounting, and consulting practices related to the securities acts
and regulations also may provide an appropriate basis for waiving a
qualification examination. When reviewing such requests, NASD will
consider such factors as:
- the length and quality of the applicant’s
securities industry experience or professional experience in
investment related fields;
- the specific registration the applicant
requests and the type of business to be conducted in relation to
the applicant’s experience;
- the applicant’s previous registration
history, if any;
- the nature of any regulatory matters as
disclosed on the applicant’s application for registration;
- the applicant’s age or physical condition if
this is part of the basis for the waiver request, but only in
conjunction with experience and other factors above;
- other examinations taken by the applicant, such
as those for Certified Financial Planner or Chartered Financial
Analyst, that may be acceptable substitutes in conjunction with
experience and other factors above, for the normal securities
industry qualification examination.
Waiver Requests Based On Educational
Achievement
NASD will consider waiver requests for persons who terminate
their registrations and enroll in a master’s program with a
substantial emphasis on Finance and Investments. The applicant must
return to a member firm promptly after completing the course of
study and furnish a copy of the course transcript with the waiver
request.
Waiver Requests Based On Regulatory
Experience
An applicant for registration whose most recent employment has been
with a securities regulatory agency, and who was previously
registered with a member firm, may use the waiver process to have
the registration reinstated. An applicant with regulatory
experience, but no prior securities registration, must have at least
five years of regulatory experience for a waiver request to be
considered. In either case, NASD will consider the scope of the
regulatory experience in deciding the waiver request.
Disposition Of Waiver Requests
On average, approximately one-third of the waiver requests are denied
or withdrawn; one-third result in reinstatements of registration based
on filing errors or continuance with other regulatory agencies; and,
one-third result in waiver of the qualification examination.
Unconditional waivers represent only a small fraction of the waivers
granted. Most waivers of registered representatives’ examinations
are conditional on the applicant successfully completing a Regulatory
Element training session pursuant to NASD Continuing Education Rule
1120(a). In some cases involving principals, the prerequisite
registered representative examination is waived conditional on the
applicant taking and passing the appropriate principal examination.
Principal examinations are rarely waived.
Waiver Request Process
- The waiver request must be submitted by a member
firm on behalf of the applicant. Requests by individuals who
are not associated with a member firm cannot be considered.
Requests should be submitted to:
NASD
Qualification Examination Waiver Review
9509 Key West Avenue, 3rd Floor
Rockville, MD 20850
- The member firm must submit a Uniform Application
for Securities Industry Registration or Transfer (Form U-4)
electronically via the CRD system before NASD can consider the
waiver request.
- The member firm must respond to any NASD staff
requests for additional information before the request can be
considered.
- NASD will convey its decision on the request in
writing. The applicant must satisfy any conditions attached to a
waiver before the applicant’s registration will become
effective.
- A member firm may appeal a waiver decision on
behalf of the applicant within 15 calendar days after receipt of
the decision letter. Any such appeal should be submitted in the
form described in NASD Rule 9630 to:
Office of General Counsel
NASD
1735 K Street, NW
Washington, DC 20006
- Individuals who have questions regarding the
waiver process should be directed to the registration and
licensing group in their member firms. Questions member firms have
regarding the waiver process may be directed to the following NASD
staff members:
Marie Clapp (240) 386-4682
Sue Friedlander (240) 386-4683
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NASD ANNOUNCES
AMENDMENTS TO RULE 9600 WAIVERS EFFECTIVE SEPTEMBER 1, 2004
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NASD Notice to
Members 04-59
SEC Announces
Immediate Effectiveness of Amendments to the Rule 9600 Series
Establishing Waiver Subcommittee of the National Adjudicatory Council;
Effective
Date: September 1, 2004
Effective September 1, 2004, a newly created Waiver Subcommittee,
rather than the full National Adjudicatory Council (NAC), will have
the authority to affirm, modify, or reverse a decision of NASD's
Department of Member Regulation (Member Regulation) denying a
request
for a waiver from a required qualifications examination pursuant to
NASD Rule 1070.
NASD's Rule 9600 Series
sets forth the procedures under which NASD members and their
associated persons may seek exemptive relief from the NASD rules
enumerated in Rule 9610(a). Among those rules is Rule 1070, which
governs qualification examinations and waiver of requirements. Under
the new rules, the Waiver Subcommittee will consist of one industry
NAC member and one non-industry NAC member (annually appointed by the
NAC), will have the authority to affirm, modify, or reverse a Member
Regulation decision denying a request for a waiver from an applicable
qualification examination requirement and issue decisions in such
matters that will constitute final NASD action. The amended Rule
9600 Series will permit the Waiver
Subcommittee to review appeals of Department denials of
requests to waive an applicable qualification examination requirement
and issue decisions that affirm, modify, or reverse such Department
decisions. The Waiver Subcommittee will also have the authority, where
appropriate, to provide expedited review, order oral argument, and
consider new evidence. The Waiver Subcommittee will retain discretion
to refer an appeal to the full NAC when, for example, there is a split
vote or the subcommittee believes that the issues in the appeal
warrant consideration by the full NAC.
After reviewing the
qualifications examination waiver process, the NAC recognized that a
subcommittee would have the flexibility to review such decisions on a
timelier basis than the full NAC, which generally meets only five
times each year. The NAC considered that any
delay arising from the NAC's schedule may harm the associated person
on whose behalf the NASD member is appealing, as well as the member,
because the associated person is unable to function in the requested
registered capacity while his or her firm's appeal is pending. The NAC
also considered that its specialized expertise in reviewing
disciplinary matters and policy issues is not required in the
examination waiver process because appellate review of examination
waivers is based on application of the Guidelines to the
specific
facts of the case. |
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