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SEC Stands Up for Due Process for Registered Reps?

Well, sort of. 14 year old disciplinary hearing not barred, just unfair.

By Mark J. Astarita, Esq.  

As members of the nation's most regulated profession, registered representatives give up a number of rights that most of the country enjoy, save for convicted felons, some politicians, and a few select others. For example, to keep your license, you have given up your right to be free from unreasonable searches and seizures, you have given up your right not to incriminate yourself, and your right to due process, at least where your securities business is concerned.

Yes, for those of you who are not aware, the NASD has the right to come to your office, and ask your branch manager for just about any document they want, with no notice. Failure to provide the access can be deemed a violation of the "just and equitable principles of trade", and can ultimately cause the loss of your license. During an NASD investigation, if you refuse to answer any questions, your refusal is a "refusal to cooperate" and a violation of the "just and equitable principals of trade". Virtually every complaint that a customer makes regarding your business becomes a public document; regardless of the merit, and even if you win in the ultimate lawsuit.

Imagine if other professionals had to publicly disclose their customer complaints. I have written about this before, but there is yet another troublesome "right" that brokers give up - the "right" to a statute of limitations. I put the term in quotes because a statute of limitations really is not a "right", but rather is a protection that every citizen in the nation enjoys - except for murders. Every cause of action, every crime, everything that anyone in this country can be sued for (except for murder) has a statute of limitations.

The statute of limitations serves to protect the prospective defendant, and ultimately society at large, from old claims, claims from years past, where memories have faded, documents have been lost, and so much time has passed that the matter is better left alone.

Naturally, the statute of limitations for most causes of actions is quite long. For example, while the time varies in different states, and with different legal theories, in most states, the statute of limitations for fraud is six years. The statue of limitations for breach of contract is 4 to 6 years, depending on the state and the type of contract. The statute of limitations for most crimes is 5 years.

While the different statute of limitations for different states, and different legal theories, and the nuances of those theories, and determination of when the time starts to run, and when it stops, could take up a dozen columns, the point is, there is a limit. For every possible lawsuit and criminal prosecution in the country there is a time limit, a point where society says, "Enough! If you haven't sued for this by now, you never can." Everywhere except in the world of securities regulation, that is.

In the world of securities regulations and securities regulators, there is no statute of limitations, and a regulator can make inquiries, and even start disciplinary proceedings, for events that occurred years earlier, even decades earlier. Over recent years the courts have begun to address this anomaly, and have started to place some limits on the securities regulators, but there is still no rule preventing an investigator from investigating trades that are 10 years old, or from commencing disciplinary proceedings regarding events that occurred that long ago.

Now, the resources of the regulatory agencies, which simply do not have the time or money to investigate old claims, temper all of this, but such old cases do occur - cases where the customer could never sue because the statute of limitations has expired, but where the regulators commence a disciplinary proceeding. As you might imagine, this causes an extreme hardship on the broker who is the subject of such an old action, but the disciplinary process has not looked kindly on defenses based on the premise that the claim is too old, that the documents have been destroyed (legally), that witnesses cannot be found, and that those can can be found do not remember the events. They put on their case, and the respondent better well respond.

However, the SEC has taken a step in the right direction, and in a recent decision, reversed a NYSE disciplinary finding against a registered representative. The representative was charged with making unsuitable recommendations, misstatements regarding customer's financial status on their account forms, and failure to disclose risk to investors in limited partnership interests. The conduct allegedly occurred during an eight-year period from February 1982 to April 1990. According to the decision, the Exchange was informed of the misconduct in 1991, did not begin an investigation until May 1993, and brought its charges in November 1996, over 14 years after the first instance of misconduct.

Nevertheless, after a hearing, the Exchange concluded that the broker's actions were inconsistent with just and equitable principles of trade. The representative then appealed, based on the fact that over six years passed between the end of the actionable conduct and the institution of the Exchange's disciplinary action, that the claim should be time barred, and that he was prejudiced by the delay.

The Commission concluded that the delay in the underlying proceedings was inherently unfair and that fundamental fairness principles of the Exchange Act of 1934 required dismissal of the case, which it did.

While the Commission should be applauded for its reversal, and its protection of fundamental fairness principles, even for brokers, what was the Exchange thinking? Fourteen years from the first event, over six from the last, and then commence a proceeding?

And before we start celebrating the hint of fairness and due process, the Commission declined to rule that the action was time barred on a statute of limitations type defense, it simply ruled that the proceedings were not fair, leaving the possibility open for another SRO to bring another 14 year old action against another registered representative.

While I cannot imagine a 14 year old proceeding, based on a 10 year old investigation that could possibly be fair, apparently the Commission thinks that such a possibility exists, and declined to take the step to true fairness; to put a time limit on these actions, to protect registered representatives from these old claims, a protection that the rest of the country has always enjoyed.


Mark J. Astarita, Esq. is a partner in the law firm of Sallah Astarita & Cox, LLC, and represents firms, brokers and other financial professionals in their litigation and regulatory matters. He is also the sponsor of The Securities Law Home Page,, and can be reached at

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.  

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Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article. was created by and is sponsored by Mark J. Astarita, Esq., a securities attorney and partner in the law firm of Beam & Astarita, LLC, who represents financial professionals in a wide variety of matters. Mr. Astarita can be contacted by email at

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