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A Primer on NASD Disciplinary Hearing Procedures
o that customer complaint caught the eye of the NASD. But you answered the examiner's questions. And you provided all the documents requested. The NASD examiner really appeared to understand your position. So you had hoped the matter would "go away". But then you received the NASD's settlement offer. The settlement terms were not only unacceptable to you but also to your firm, which wanted to employ only brokers with "clean records". As a result, you declined the settlement offer.
Next step, the disciplinary hearing. What do brokers need to know about that process? Let's look at some of the key points. Preliminarily, you have a right to represent yourself, but don't do it. For this process (and the initial investigation process) hire your own lawyer. Even if the firm is involved and retains a lawyer to defend it, don't jump on that bandwagon, because your interests and the firm's interests usually are not aligned.
First, let's focus on your "judge" or "jury", and your "prosecutor". NASD Regulation, through attorneys in its Department of Enforcement, prepares and files the complaint against you. They are the prosecutor. Your judge or jury is known as the Hearing Panel, comprised of three members. The chair of that hearing panel is known as the Hearing Officer. That person strives to be independent, but that task is not easy because he or she also is employed as an attorney with NASD Regulation. In a 1999 publication describing the disciplinary hearing process, NASD Regulation claims independence:
The Hearing Officer and the panelists are independent from the Department of Enforcement; they are not responsible for investigating possible misconduct or instituting disciplinary actions. Furthermore, neither the Hearing Officer nor the panelists were or are involved in deciding whether an investigation should be conducted or whether disciplinary proceedings should be brought.
Suffice to say that the system is a far cry from criminal or civil litigation.
Regarding the composition of the panel, it is worth noting that if the complaint charges a violation relating to the quotations of securities, execution of transactions, reporting of transactions, and trading practices (including rules prohibiting manipulation and insider trading), you may "propose" that at least one panelist for the hearing panel be a current or former member of the Market Regulation Committee.
Second, you need to file an answer within 25 days from the date the complaint was served upon you. If you fail to do so, after notice, the allegations made in the complaint may be considered admitted and a default decision may be entered against you. When answering the complaint, you need to assert all of your defenses; any defenses omitted may not be considered at the hearing. Also note that you have a right to file a Motion for a More Definite Statement. That is used to obtain more information, either the facts or the law, to enable you to better defend yourself.
Third, you have a right to a hearing, but you must request it in your answer. At the same time you can propose a hearing location. If you do not request a hearing (and no one else does either), the hearing panel will decide the matter on the written submissions and any additional documentation provided and admitted into evidence. Notice of the hearing date, time and place will be served upon you no later than 28 days before the hearing unless the parties waive that notice requirement or the Hearing Officer determines that extraordinary circumstances require a shorter notice period.
Fourth, you have valuable rights with respect to "discovery" of documents and information. You generally are entitled to inspect and copy documents (broadly defined, to include things like computer data) prepared by or obtained by NASD Regulation in connection with the investigation that led to the proceeding. The exceptions to this disclosure are that the document: 1) is privileged or constitutes attorney work product; 2) was prepared by NASDR staff but will not be offered in evidence at the hearing; 3) may disclose a technique or guideline used in examinations, investigations or enforcement proceedings; or 4) will disclose the identity of a confidential source. As a related matter, you can also file a written motion to obtain pertinent written statements of witnesses whom NASDR has called, or is expected to call, to testify at the hearing.
You also can request that the NASD use its power to compel the production of documents or the testimony of a person at the hearing. The NASD will grant this request when you have satisfied several conditions. These conditions include your demonstrating that the NASD has jurisdiction over these persons (by virtue of their status as associated persons), that you have made good faith efforts to obtain the documents or testimony but have been unable to do so, and that the documents or testimony is material and is not oppressive or unduly burdensome.
Fifth, the hearing. You need to appear to present your case. Note that the hearing usually is conducted in person, but may be conducted (in whole or in part) by either videoconference or telephone. A court reporter will transcribe the hearing. You will be able to present all evidence that is deemed to be not irrelevant, immaterial, unduly repetitious, or unduly prejudicial. Formal rules of evidence do not apply but may be used as guidance. Typically, you present your case through questioning witnesses and presenting documents, but you also can offer affidavits of witnesses and other sworn testimony.
After the hearing, you should examine the transcript of your testimony (which you can purchase from the court reporter) and, if appropriate, seek to correct your recorded testimony. You do so by motion and affidavit, within a limited period of time after the hearing.
Sixth, the hearing panel will issue a written decision after the hearing is ended and after any post-hearing written submissions (of proposed findings of fact and conclusions of law) are filed. The decision is determined by a majority vote. The decision is served upon you, sent to the Central Registration Depository (CRD) and sent to each member of the NASD with which you are associated. The decision is final unless it timely is appealed or called for review.
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James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He is the immediate past co-chair of the Chicago Bar Association's Securities Law Committee, the immediate past chair of its Financial and Investment Services Committee, a registered investment advisor and a licensed securities principal of the National Association of Securities Dealers (NASD). He can be reached at 312-641-2929.
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Sponsored by James J. Eccleston, an attorney representing stockbrokers, financial planners and
investors nationwide in arbitration, litigation and regulatory matters, and a shareholder with the law firm
Shaheen, Novoselsky, Staat, Filipowski & Eccleston
P.C.(www.snsfe-law.com). This Web site contains material
of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment advisor when building and protecting your wealth.
All content Copyright © 2008 Advocate Capital Management, Inc. except where noted. All rights reserved.
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