Enforcement contends that Mission’s failure to provide notice that it
was recording calls
violated California law, and that Biddick was responsible for the
violation. Enforcement further argues that by failing to give notice as
required by California law, Respondents violated the Taping Rule, or,
alternatively, violated Rule 2110’s requirement that members and
associated persons “observe high standards of commercial honor and just
and equitable principles of trade.”
. . .
Enforcement also argues that Respondents’ failure to comply with
California law violates
Rule 2110 because it “prevents FINRA from enforcing its Taping Rule
requirement designed to protect a customer’s rights with respect to
their broker-dealer.” This is so, according to
Enforcement, because under California law “FINRA may not use any such
recorded but
unnoticed calls in the pursuit of its regulatory mission.” Specifically,
Enforcement points to the provision of Section 632 of the Penal Code
that provides, “no evidence obtained as a result of eavesdropping upon
or recording a confidential communication in violation of this section
shall be admissible in any judicial, administrative, legislative, or
other proceeding.”
There are several problems with this argument. First, it is by no means
clear that the provision of Section 632 on which Enforcement relies
would prevent FINRA from using the
recorded calls in the pursuit of its regulatory mission, and Enforcement
cites no cases applying
Section 632 in such circumstances.
18 Moreover, because FINRA’s
regulatory mission is
conducted pursuant to federal law, there is a strong argument that
FINRA’s use of calls recorded
by Respondents pursuant to the Taping Rule would be governed by federal,
not California law.
See Zhou v. Pittsburg State Univ., 252 F. Supp. 2d 1194, 1204 (D. Kan.
2003) (“evidence
obtained in contravention of [Section 632] is admissible in federal
court [in cases arising under
federal law], so long as no federal law is thereby violated”);
see also
Credit Suisse First Boston
fn.18 Certainly Respondents could not invoke Section 632 to preclude FINRA
from utilizing the recorded calls;
“allowing such offensive use of section 632 by the party who violated it
offends fundamental notions of fairness.”
Frio v. Superior Court, 203 Cal. App. 3d 1480, 1493 n. 5 (1988). It
would turn Section 632 on its head to find that a
firm that violated its customers’ privacy rights could use its
wrongdoing to frustrate the efforts of federal regulators
to determine whether the firm or its representatives had committed sales
practice violations during the calls.
Corp. v. Grunwald, 400 F. 3d 1119,
1132 (9th Cir. 2005) (“if a state law prevents [FINRA] from
complying with its rules or if it interferes with the Congressional
goals underlying the Exchange
Act, the state law is preempted by federal law”);
Jevne v. Superior
Court, 35 Cal. 4th 935 (2005)
(same). In any event, even assuming that California law would preclude
FINRA from using the
recorded calls, once again, Enforcement has cited no prior cases finding
a violation of Rule 2110
in analogous circumstances.
To resolve the alleged taping violations, therefore, the Panel would
have to address
several difficult legal issues of first impression, each of which could
have significant
ramifications beyond this case for FINRA members and associated persons.
If it were essential
to do so in order to protect the investing public, the Panel would, of
course, address the issues.
But in this case it is not necessary to resolve the alleged taping
violations. As explained above,
the evidence—generally undisputed—establishes that Respondents misused
and converted
customer securities, in clear violation of Rules 2330 and 2110, and,
under the Sanction
Guidelines and to protect the investing public, the sanctions for that
violation can only be to
expel Mission and to bar Biddick. Under these unusual circumstances, the
Panel declines to
determine whether Respondents violated California law, or whether, if
they did, they violated the
Taping Rule or Rule 2110, leaving those questions for another Panel to
resolve in some future
case in which they are material to the outcome.