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resentative, fine and censure. An individual may also be found to have been the cause of a violation and of the penalty imposed on another party for such violation. Such a cause finding can have farreaching effects, particularly in the case of expulsion or suspension of a member from membership or suspension or revocation of registration as a registered representative. A person found to be a cause of suspension or expulsion from membership cannot be employed by any NASD member while such suspension expulsion is in effect, except with the approval of the Commission. Where an individual should have been, but was not, registered as a representative, a finding that the unregistered person was a cause of an effective expulsion, suspension or revocation acts as a disqualification from membership, or control of or by a member, just as if such a penalty had been imposed directly on the person found a cause. In many cases more than a single penalty may be imposed; thus, expulsion, suspension or revocation might be accompanied by a fine and/or censure. In cases where the penalty is a fine, censure is customarily added.
All decisions by district business conduct committees of the NASD are reviewable by the NASD board of governors on its own motion, or on the timely application of an aggrieved party. On review the board may affirm, modify, or reverse such decisions or remand them for further consideration.
During the year the Association reported to the Commission its final disposition of 411 disciplinary complaint actions against 368 different member firms and 196 registered representatives.58 With respect to 49 members and 26 representatives, complaints were dismissed on the basis of findings that the allegations had not been sustained. Violations were found, and some penalty was imposed, with respect to 362 members and 170 representatives.
The maximum penalty of expulsion from membership was imposed in 47 decisions (one member being expelled in each of two decisions), and 9 members were suspended from membership for periods ranging from 15 days to 2 years. Fines ranging from $50 to $5,000 were imposed on members in 236 cases, including 6 in which members were suspended and 2 in which members were expelled. In 78 cases the only penalty was censure, although members subjected to fines were usually also censured.
Registered representatives found in violation of Association rules were also subjected to a wide variety of sanctions. The registrations of 74 representatives were revoked and 19 were suspended for periods ranging from 15 days to 2 years. Nine representatives were found to
* A total of 34 members was involved in 2 reported cases each ; 3 were involved in 8; and I was involved in 4.
have been causes of penalties imposed on their firms. Fines ranging from $50 to $5,000 were imposed on 33 representatives, including 5 whose registrations were suspended and 9 whose registrations were revoked. Censure was the only penalty imposed on 49 representatives found in violation.
The NASD decisions during the year included 168 solely involving the NASD's so-called "free-riding” interpretation which states, in essence, that a member who fails to make a bona fide public offering of securities acquired for distribution is in violation of the NASD Rules of Fair Practice.59 In 15 of these "free-riding” cases, the complaints were dismissed. With respect to the remainder, fines ranging from $50 to $4,000 were imposed on members in 110 cases, while censure was the only penalty in the other 43 cases. Registered representatives were named as respondents in only 9 “free-riding" cases. In 1 such case, 13 representatives were named, but the allegations as to them were dismissed, although the firm was fined. Eight representatives were fined amounts ranging from $500 to $5,000, and 6 of these were also suspended for periods ranging from 30 days to 6 months. Commission Review of NASD Action on Membership
Section 15A (b) of the Act and the bylaws of the NASD provide that, except where the Commission finds it appropriate in the public interest to approve or direct to the contrary, no broker or dealer may be admitted to or continued in membership if he, or any controlling or controlled person, is under any of the several disabilities specified in the statute or the bylaws. By these provisions Commission approval is a condition to admission to or continuance in Association membership of any broker-dealer who, among other things, controls or is controlled by a person whose registration as a broker-dealer has been revoked or who has been and is suspended or expelled from Association membership or from a national securities exchange, or whose registration as a registered representative has been revoked by the NASD or who was found to have been a cause of such an effective order.
A Commission order approving or directing admission to or continuance in Association membership, notwithstanding a disqualification under Section 15A (b) (4) of the Act, or under an effective Association rule adopted under that Section or Section 15A (b) (3), is generally entered only after the matter has been submitted initially to the Association by the member or applicant for membership. Where, after consideration, the Association is favorably inclined, it ordinarily files with the Commission an application on behalf of the petitioner. A
5° See First California Company, infra, p. 78.
broker-dealer, however, may file an application directly with the Commission either with or without Association sponsorship. The Commission reviews the record and documents filed in support of the application and, where appropriate, obtains additional relevant and pertinent evidence. At the beginning of the fiscal year 3 such petitions were pending before the Commission. During the year 6 petitions were filed; decisions were issued in 8 cases; and 1 petition was pending at the year end.
The Commission found it appropriate in the public interest to approve 6 petitions for continuance in Association membership notwithstanding employment of a disqualified person. In 2 other decisions the Commission by order remanded the applications to the Association for reconsideration.
In remanding to the NASD, for further consideration, an application by the Association for approval of the continuance of a firm in membership while employing N. Sims Organ, the Commission stated, in an opinion written by Chairman Cary, that such an application “must be weighed in the light of our basic objective of raising standards in the securities industry.”
In March 1961, the Commission had revoked the broker-dealer registration of a firm of which Organ was president, because of Organ's "fraudulent conduct" in the sale of Continental Mining Exploration stock in 1958, while he was employed by J. H. Lederer Co., Inc., whose registration had been revoked in December 1958. Organ had represented, among other things, that the Continental stock would be a “tremendous money-maker” without disclosing that the company had suffered some $584,000 of losses. In addition to this prior violation of the Federal securities laws, the Commission took official notice of the fact that in March 1952, the Ontario Securities Commission had cancelled Organ's registration as a securities salesman in Canada. In that proceeding, Organ, in direct contradiction of the other evidence developed, had testified under oath that he did not make sales across the border to U.S. investors, and the Chairman of the Ontario Commission had stated, “. . . his attempt to mislead the Commission when under oath, fairly indicates the type of representations he would resort to over the telephone, when there is little risk, if any, of his being held accountable for his actions."
In applying for approval of Organ's employment by the member firm in question, the NASD took into consideration the fact (among others) that he would be subject to effective supervisory controls by
60 Securities Exchange Act Releases Nos. 6604 (July 26, 1961) ; 6610 (August 2, 1961); 6707 (January 11, 1962) ; 6766 (March 27, 1962) ; 6783 (April 18, 1962); and 6805 (May 15, 1962).
the new employer. In view of the basic objective of improving standards, the Commission asked: “Would approval now give proper recognition to the nature of his violations? If standards are to be raised, can fraud once painfully established through extended proceedings be so swiftly ignored?” In remanding this case, the Commission stated that there should be a “penetrating review” of the employee's history by the prospective employer, the NASD and the Commission, and that the nature and activities of the firms with which he was associated could properly be taken into account in evaluating his training, experience and character.61
The other remanded case concerned an application filed by the Association seeking approval of the continuance of a member firm in NASD membership while employing Edgar R. D’Abre as a controlled person.
D’Abre's registration with the NASD as a registered representative of another firm was revoked by the NASD in March 1961, because of certain irregularities, including "free-riding” and the "manufacture” of fictitious accounts and records in an effort to deceive his former employer and to conceal violations of NASD rules. "If we accept, as the NASD apparently did," the Commission stated, “the correctness of the original findings of the District Business Conduct Committee, it would follow that, insofar as the records reveal, D’Abre has never been candid with his former employer, his prospective employer, or the NASD. A securities firm must rely to a considerable extent on the willingness of responsible employees to disclose their activities accurately and forthrightly, if it is to properly discharge its important responsibilities of supervision. If D’Abre is unwilling to make such disclosures, even now, then it would appear doubtful that he fully appreciates the professional obligations to his employer and to the public that further participation in the securities field entails. If so, the necessary finding that it is in the 'public interest' to approve the continuance of a firm in membership with D’Abre as a controlled person can hardly be made. A much different record than the one now before us will be needed to warrant approval of the application.” 62 Commission Review of NASD Disciplinary Action
Section 15A (g) of the Act provides that disciplinary actions by the NASD are subject to review by the Commission on its own motion or on the timely application of any aggrieved person. This section also provides that the effectiveness of any penalty imposed by the NASD is automatically stayed pending determination in any matter which
Securities Exchange Act Release No. 6798 (May 4, 1962). * Securities Exchange Act Release No. 6817 (June 8, 1962).
comes before the Commission for review. Section 15A (h) of the Act defines the scope of the Commission's review in proceedings to review disciplinary action of the NASD. If the Commission finds that the disciplined person engaged in such acts or practices, or has omitted such acts, as found by the NASD and that such acts, practices, or omission to act are in violation of such rules of the Association as have been designated in the determination, and that such conduct was inconsistent with just and equitable principles of trade, the Commission must dismiss such proceedings unless it finds that the penalties imposed are excessive or oppressive, having due regard to the public interest, in which case the Commission must, by order, cancel or reduce the penalties. At the beginning of the fiscal year 15 such review cases were pending before the Commission. During the year 9 additional such petitions were filed, and decisions were issued in 9 cases, certain of which are discussed below, leaving 15 petitions pending at the year end.
The Commission sustained disciplinary action by the NASD against First California Company. The NASD had found that First California had violated the Rules of Fair Practice, in that it had failed to make a bona fide public offering of shares of stock which it had acquired as a member of a selling group participating in a distribution of such stock. The NASD had fined the company $500 and assessed costs of $41.89 against it.
The basic facts, which were not in dispute, showed that First California, as a selling group member participating in a public offering of Permanent Filter Corporation stock at $15 per share, was allotted 1,500 shares on May 7, 1959, and on that day sold 400 shares at the $15 offering price to its Employees Profit-Sharing Retirement Plan, an account in which its officers and employees had a beneficial interest. The stock was quoted on May 7 at 19 to 1912 and on the following day the high bid was 2012. Thus, on the basis of the low bid on May 7, there was a potential profit on the 400 shares of $1,600 exclusive of the price concession to members of the selling group. The shares were held in the account until August 10, when they were sold at prices of 151/2 and 1534, representing a profit to the Plan of $22.50.
The NASD rested its determination that its rules were violated solely on its finding that the amount of stock sold to the Plan, representing 26.6 percent of the 1,500-share allotment, was disproportionate to that sold to public investors. Thus, the sale was held to be in violation of the NASD's published interpretation with respect to “free-riding and withholding” in connection with public distributions of securities. This announced interpretation was to the effect that a member is obligated to make a bona fide public offering of securities