Hearing Officers Must Participate in NASD Proceedings – Securities Cases from SECLaw.com

   

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Citing prior problems with NASD Disciplinary Proceedings, NAC finds that a decision rendered without a hearing officer is invalid.

NASD Regulation Dept. of Enforcement v. U.S. Rica Financial, Inc., No. C01000003 (NAC, 10/26/01): While SRO Rulings are not usually part of our coverage, we thought this particular one deserved reader attention; it deals with an issue of first impression before the National Adjudicatory Council and holds that the presence of a Hearing Officer on the Panel is essential to the fundamental fairness of the proceeding.

Before the Panel that decided to bar Respondent U.S. Rica Financial from further membership in the NASD was only the question of the appropriate penalty for its stipulated misdeeds. As a discount broker with approximately 2,500 customers, Respondent engaged in riskless principal trades, while representing to customers that the firm was doing low-commission or free-commission trades. Because USRF and its principal, Respondent Nguyen, did not dispute that they engaged in the activity alleged, Enforcement moved for partial summary disposition and asked for a hearing limited to the issue of sanctions.

That hearing posed a number of considerations relevant to the size and duration of any sanction, but, when it was over, the presiding Hearing Officer left the NASD. Thus, the two industry panelists were left to decide the matter on their own. A new Hearing Officer was designated, but the decision to expel the firm and bar, suspend and fine the chief principal was made without the Hearing Officer’s participation.

On appeal, while a number of issues were raised, the National Adjudicatory Council focused “on just one: that the Hearing Panel’s decision had been rendered without the participation of three panel members and without the participation of a Hearing Officer in the decision.” This, the NAC observed, is “an important procedural issue of first impression under the Code.” It reviews the history that led to NASD’s being sanctioned by the SEC, the Rudman Committee Report, and the undertakings that led to the promise of professional hearing officers.

After in-depth analysis, the NAC concludes that “[t]he Code of Procedure, approved by the Commission on August 7, 1997, requires Hearing Officer participation as an independent decisionmaker in all panel decisions…. Although a new Hearing Officer was designated, he declined to participate in the decision, thus depriving respondents of their right to a properly-constituted tribunal.”

On remand, a new Hearing Panel will be appointed to decide the appropriate sanctions. (SAC Ed: Just where does the virtue lie in admitting fault if the factfinder simply uses the admissions to impose the worst sanctions? In any case, this new development, we think, will be welcomed by the broker-dealer community. SAC thanks to David C. Franceski, Jr., Stradley Ronon, Philadelphia, PA, who represents Respondents in this proceeding.)


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