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

Hearing Panels Must Include a Hearing Officer

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.)

Copyright 2000-2002 Securities Arbitration Commentator, Inc. P.O. Box 112, Maplewood, NJ 07040; t: 973-761-5880 f: 973-761-1504. Materials denoted with a SAC Reference No. (e.g. SAC Ref. No. 99-01-001) are on hand at SAC and may be obtained by calling the Securities Arbitration Commentator, or by email to help@sacarbitration.com. The Securities Arbitration Commentator is the leading publication for securities arbitration news and information, and maintains the most complete database of arbitration awards availalble anywhere. For more information regarding their services, visit their website at www.sacarbitration.com

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.


The attorneys at Sallah Astarita & Cox, LLC are former SEC Staff Attorneys and brokerage firm counsel, with over 100 years of collective experience. If you have received a subpoena from the SEC, a document request from FINRA, or have a dispute with a brokerage firm, call 212-509-6544 for a free consultation. The firm represents investors and financial professionals nationwide.

Securities Attorney at Sallah Astarita & Cox | 212-509-6544 | mja@sallahlaw.com | Website | + posts

Mark Astarita is a nationally recognized securities attorney, who represents investors, financial professionals and firms in securities litigation, arbitration and regulatory matters, including SEC and FINRA investigations and enforcement proceedings.

He is a partner in the national securities law firm Sallah Astarita & Cox, LLC, and the founder of The Securities Law Home Page - SECLaw.com, which was one of the first legal topic sites on the Internet. It went online in 1995 and is updated daily with news, commentary and securities law related links.