NASD REGULATION, INC.

OFFICE OF HEARING OFFICERS

SOURCE CITE

NASD Conduct Rules:

2210. Communications with the Public

2220. Options Communications with the Public

2110. Standards of Commercial Honor and Principles of Trade

RR remains liable for improper sales material even if submitted prior to dissemination to compliance officer.  $15,000 fine, 30 day suspension, GSP and GSR requalification.

The written materials were deemed deficient in accordance with NASD sales literature rules.  Most of the shortcomings were attributable to failure to properly disclose the risks inherent in Respondent’s trading program (utilized day trading and covered call strategies).  At the hearing, Respondent stipulated to the allegations concerning the violations in the written materials but argued that because she had submitted her written handiwork to her compliance officer (who made some changes) prior to dissemination and reasonably relied on the compliance officer’s approval, she had fulfilled her obligation to ensure that the materials were not misleading.  With respect to the letters drafted by the junior RR, Respondent argued that she did not have the authority to authorize the dissemination of the letters drafted by her co-worker, that she did not, in fact, authorize the letters, and that she did not know the letters were being issued.  She argued, therefore, that she did not have any responsibility for the dissemination of the letters.  

The Hearing Panel determined that as the primary drafter of the materials she initially drafted, Respondent retained responsibility for their misleading nature, even though her firm’s compliance officer approved them.  Accordingly, the Hearing Panel found that Respondent violated advertising and option disclosure Rules 2210, 2220, and 2110  by disseminating misleading communications to the public.  

As to her liability for the conduct of the junior RR, the Panel concluded that Respondent (i) participated in the drafting of the letters, (ii) knew that her own materials were enclosures in some of the letters, and (iii) approved all of the letters for dissemination.  Further, the Panel noted that she received a 5% override on the new RR’s customers and also received 50% of the brokerage commissions from day trading customers solicited by the rookie under joint representative number.  Pursuant to this arrangement, Respondent earned approximately $15,000.  Accordingly, the Panel found that Respondent shared the responsibility for dissemination of the misleading letters, in violation of advertising Rule 2210 and Rule 2110. 

An interesting issue would be to compare this decision to a somewhat similar ruling, In the Matter of Sharon M. Graham and Stephen C. Voss,Rel. No. 34- 40727, Admin. Proc. File No. 3-8511 (November 30, 1998).  In a rare expression of dissent, Commissioner Johnson wrote:

Today we decide Adrian C. Havill, Administrative Proceeding File No. 3-8510, and Sharon M. Graham and Stephen C. Voss, Administrative Proceeding File No. 3-8511. A key issue unites these companion cases: 

when is it appropriate to excuse conduct by a registered representative that would have otherwise been fraudulent because the representative relied on the advice of a compliance officer or supervisor? 

In my view, the answer will necessarily depend on the facts and circumstances of each case. For instance, if the compliance officer or supervisor advised the registered representative that it was permissible to lie to, cheat or steal from customers that advice would hardly be reasonable, and I would have no difficulty sustaining findings of violations by a registered representative purporting to rely on such advice. But when the advice appears reasonable on its face, I think that such a showing by a registered representative may negate scienter. [1] 

The Commission recognized this principle in James L. Owsley, Release No. 34-32491, 1993 SEC LEXIS 1525 (June 18, 1993). In Owsley, the Commission reviewed a finding by the NASD that a registered representative, Robert T. Nelson, had committed fraud when he failed to disclose to customers that he was selling his own personal stock in a company, Superior Resources, Inc., at the same time he was advising customers to purchase Superior stock. 1993 SEC LEXIS 1525, at *10. The Commission set aside these findings of fraud because the record does not show that Nelson acted with the requisite scienter * * * . On the contrary, prior to selling his stock, Nelson asked a firm official whether it was necessary for him to disclose his sales to customers being asked to purchase Superior, and received a negative response. Id. at *10 to *11. 

Applying Owsley to these two cases -- which present exceedingly close calls -- I reach divergent results. In Sharon M. Graham, after carefully reviewing the record, I find I must dissent. In my view, Graham reasonably relied on the advice of her direct supervisor James Pasztor and the firm's owner Stephen C. Voss, and her reliance negates scienter. [2] Because Voss was not charged with any direct violations, but only with failure to supervise Graham, my vote to reverse the findings of violations against Graham necessarily (if unfortunately) requires me to vote to reverse the findings of violations against Voss as well. 

I reach the opposite conclusion in Adrian C. Havill. In Havill, I concur with my colleagues' determination that Havill did not reasonably rely on the advice of his branch manager -- in other words, Havill knew or was reckless in not knowing that his branch manager's advice was wrong. Havill, supra at text accompanying nn.19 and 20 & n.18. I also agree with my colleagues' observation that Havill may not have made full disclosure: he seems not to have explained adequately the nature of the transactions at issue to his branch manager. Id. at n.18. For these reasons, Havill's situation seems distinguishable both from Graham's and from that presented in Owsley. Accordingly, I have voted to sustain the findings of violations in Havill.

FOOTNOTES:

[1]:I regard this showing as a form of affirmative defense, i.e., the registered representative would bear the burden of proof and persuasion in establishing that he or she, acting in good faith: (a) consulted a compliance officer or supervisor in advance of the action taken; (b) made full disclosure; and (c) reasonably relied on the advice received. 

[2]:Without prejudging the pending appeal filed by the Division of Enforcement, I note that ALJ Fox Foelak dismissed parallel charges against Pasztor because "[i]t had been Mr. Voss' decision to permit the trading [by John Broumas], and Mr. Pasztor was powerless to change it." Sharon M. Graham, 1997 SEC LEXIS 287, at *22 to *23 (Initial Decision Feb. 7,1997).

RETURN TO REGULATORY CASES OF NOTE INDEX