Among the myths circulating in the registered rep community, one stands out in its absurdity: If you avoid being served with a regulator's complaint, “they” can't do anything to you.
To many people, myself included, the act of hiding from (or ignoring) certified letters from an organization like the NASD is patently absurd — it's the sort of behavior that invites the very scrutiny that the dodger is trying to avoid. Yet it seems that more than a few financial advisors view evasive action as an acceptable legal tactic.
What follows is one example of the consequences of such actions.
On Nov. 15, 2001, the NASD served a complaint on a respondent (whose identity we will protect since the case is still pending). The complaint, claiming he had not properly disclosed his criminal history in regulatory paperwork, was sent by both first class and certified mail to three addresses the NASD had on file for him. The Postal Service returned all of the certified mailings marked “Unclaimed.” None of the first-class letters came back. On Dec. 19, 2001 and Feb. 15, 2002, the NASD sent second and third notices of the complaint with the same results.
On April 19, 2002, the NASD issued a default decision holding that the respondent had received effective constructive service of the complaint and failed to respond to it. As a result, he was barred from the industry.
If this were then end of the story, it would be lesson enough: To ignore the NASD is to invite a worst-case judgement. But there's more, because the barred rep appealed the NASD's decision. Not surprisingly, his failure to respond to the NASD's initial letters came back to haunt him.
In response to the challenge of its initial decision, the NASD essentially required the rep to prove that he didn't receive any of the 18 letters it sent him over the course of three months. If he were unable to show “good cause” for his failure to answer the complaint, the NASD's National Adjudicatory Council would decide his appeal solely on the basis of written papers — a near guarantee that the original decision would hold.
The respondent argued that because he had never become a full-fledged registered rep (he submitted an initial application as an associated person prior to passing his exams); he was therefore unaware of his duty to keep his Central Registration Depository (CRD) address current. As a result, mail sent to that address never reached him. The NAC was not persuaded, and it simply had to cite language from the rep's own Form U-4:
I consent that notice of any investigation or proceeding by any self-regulatory organization against applicant may be given by personal service or by regular, registered, or certified mail or confirmed telegram to applicant at his/her most recent business or home address as reflected in this Form U-4, or any amendment thereto, or by leaving notice of the investigation or proceeding at such address.
In a strict legal sense, there are holes in the NAC's case. For starters, it fails to take into account that amending a CRD address requires two signatures on Form U-4, one from the rep and one from his firm. Given that the respondent left the securities industry, it is reasonable to assume (I would argue) he did not have a means of amending his current address.
In addition, default decisions in the securities industry are supposed to contain independent evidence supporting the findings of violation. Although the NASD alleges a violation — that the respondent failed to disclose a felony charge — the hearing record does not contain evidence of that charge.
Though raising these issues might save the day for the respondent, a much more likely outcome is that the NASD simply refuses to hear anything more on this case, which would result in an upholding of the decision to bar him from the industry. Such a ruling could best be summed up by the following line: You had your chance.
If that's not a lesson, what is?
(To view examples of actions taken against reps who ignored the NASD, visit this page: http://rrbdlaw.com/regulatorylinks/privsectrans/nasd2003.htm)
Writer's BIO:
Bill Singer is a partner with the law firm of Gusrae, Kaplan & Bruno. rrbdlaw.com