United States: NAC Reverses Panel Decision, Vacates Bar And Substitutes Minimal Fine

Keywords: National Adjudicatory Council, NAC, Financial Industry Regulatory Authority , FINRA, CDSC, intentional misconduct, contingent deferred sales charges, Citigroup

Originally published June 9th 2008

In a rare, if not unprecedented decision, the National Adjudicatory Council (NAC), the appellate body of the Financial Industry Regulatory Authority (FINRA), has vacated a permanent bar that had been imposed against a former Citigroup registered representative and eliminated any period of suspension.¹ The NAC set aside a FINRA hearing panel's finding of intentional misconduct, and concluded that the broker's admittedly negligent entry of inaccurate disability waivers of contingent deferred sales charges (CDSC) for a handful of his clients over a nine-month period supported only the imposition of a $5,000 fine. Because the FINRA Board of Governors did not call the case for further review, the NAC opinion represents FINRA's final decision.

Factual Background

The case involved a registered representative with a previously unblemished 26-year career. Between September 2001 and June 2002, this broker obtained CDSC waivers in connection with 31 mutual-fund redemptions by incorrectly representing in Citigroup's electronic order-entry system that the customers were disabled. These 31 waivers did not form any pattern that suggested intentional misconduct, nor did they bestow more than a nominal financial benefit on the broker. Nonetheless, FINRA's Department of Enforcement charged the broker with violations of NASD Rule 2110 (obligation to observe high standards of commercial honor) and 3110 (obligation to preserve books and records in accordance with law), and sought a permanent bar.

The Hearing Panel's Decision

At the hearing before a three-member FINRA hearing panel, the broker testified that he entered the CDSC waivers by mistake. The panel found this explanation "not credible," and determined that not only had he acted deliberately—thus violating Rules 2110 and 3110—he had "not been straightforward in his testimony." Two other brokers who were charged in the same proceeding admitted at the hearing that they had entered CDSC waivers intentionally. The panel suspended these other brokers for two years and imposed substantial fines while imposing a complete bar on the broker who denied intentional wrongdoing. The panel concluded that this broker's "intentional" conduct was "aggravated by his proffered explanation of the cause," thus warranting the most severe penalty available.

The NAC Opinion

Mayer Brown was retained to handle the barred broker's appeal. After briefing and oral argument, the NAC set aside the hearing panel's credibility determination and found that the evidence supported only a finding of negligence.

The NAC first concluded that the hearing panel's determination that the broker had lied in his testimony was not entitled to deference. The NAC noted that the hearing panel had made only a "general credibility finding" and had not discussed the substantial amount of evidence that contradicted that finding. Under binding caselaw of the NAC and the SEC, a hearing panel's "general credibility finding " which does not take into account substantial record evidence contradicting that finding is entitled to particularly little weight on appeal.

The NAC then conducted its own de novo review of the record. The NAC panel first took official notice of the physical layout of a computer keyboard and agreed that a busy broker entering numerous trades might accidentally press "2" (which waives the CDSC based on disability) instead of "tab" (which skips the CDSC field). The panel noted that the broker had conceded that he had been "sloppy," although it also reasoned that even under conservative assumptions about trading volume, it represented at most a 1 percent error rate. The panel then discussed circumstantial evidence tending to support the broker's explanation that his conduct was merely accidental: for several of his customers, he applied the CDSC on certain transactions but waived it on others; and he sometimes waived CDSCs when there was no sales charge to begin with.

Accordingly, the NAC concluded that the broker had testified truthfully and that his conduct was negligent, not intentional. The NAC accordingly removed the bar, and imposed only a $5,000 fine.

Footnote

^{1. The decision is reported as Dep't of Enforcement v. Trevisan, Complaint No. E9B2003026301, 2008 FINRA Discip. LEXIS 12 (NAC Apr. 30, 2008), and is available at http://www.finra.org/web/groups/enforcement/documents/nac_disciplinary_decisions/p038420.pdf.}

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