Harry M. Richardson

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 51236 / February 22, 2005

Admin. Proc. File No. 3-11437

ORDER REMANDING APPEAL FROM REGISTERED SECURITIES ASSOCIATION

On the basis of the Commission's opinion issued this day, it is

ORDERED that the review proceeding of the application by Emmett A. Larkin Company, Inc. to employ Harry M. Richardson as a general securities representative is hereby remanded to NASD for further consideration.

By the Commission.

Endnotes

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¹ 15 U.S.C. § 77q(a); 15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5; 15 U.S.C. § 78o-4(c)(1).

² SEC v. First Cal. Capital Mkts. Group, Inc., C 97-02761 CRB (N.D. Cal., Apr. 5, 1999). The settlement also required Richardson and his employer to disgorge $600,000, and Richardson to pay a $40,000 civil penalty.

³ H. Michael Richardson, Securities Exchange Act Rel. No. 41448 (May 25, 1999), 69 SEC Docket 2622 (order instituting proceedings, making findings and imposing remedial sanctions).

⁴ Id. The Commission also alleged that sale of the municipal bonds violated MSRB Rules G-17 and G-19. Id.

⁵ Id.

⁶ 47 S.E.C. 668 (1981).

⁷ 15 U.S.C. § 78s(f).

⁸ Id. Richardson does not claim, and the record does not support a finding, that NASD's action has imposed an unnecessary burden on competition.

⁹ Richardson's argument that the events that were the basis for the bar order are "not a legally cognizable basis in fact to deny" his readmission, and therefore no grounds for the denial exist in fact, has no merit. The statutory disqualifications do exist in fact. Moreover, as discussed in more detail infra, Richardson's suggestion that the events underlying the injunction and bar order are "not legally cognizable" as a basis for denying his application overstates the breadth of our holding in Van Dusen.

¹⁰ Although Richardson has not raised the issue, we note that the record does not indicate whether the Hearing Panel or the Statutory Disqualification Committee ever submitted written recommendations as required by NASD Procedural Rule 9524(a)(10), or whether they were considered by the NAC, as required by Rule 9524(b)(1). See Reuben D. Peters, Exchange Act Rel. No. 49819 (June 7, 2004), 82 SEC Docket 3959, 3966 n.15.

Richardson argues that, because NASD "intentionally act[ed] in derogation of . . . controlling Commission precedent," i.e., Van Dusen, its denial of the Firm's application "cannot be deemed to be in accordance with NASD rules." Richardson does not specifically identify any NASD rule that has been violated, and this argument therefore appears to be an assertion that the denial was not consistent with the purposes of the Exchange Act. See infra.

¹¹ Arthur H. Ross, 50 S.E.C. 1082 (1992). NASD made no reference to Ross in its decision denying the Firm's application.

¹² Van Dusen, 47 S.E.C. at 671-72 (identifying several factors for consideration, but stating that list represented "only some of the matters that must be carefully weighed and considered." Id. at 671. NASD's argument that Commission precedent prevents it from considering all relevant factors is ironic, given that in this case it based its decision on a single factor -- the misconduct underlying the statutory disqualification.

¹³ Ross, 50 S.E.C. at 1085 n.10.

¹⁴ As we emphasized in Van Dusen, our objective in imposing sanctions pursuant to Exchange Act Section 15 is to "'afford investors protection without visiting upon the wrongdoers adverse consequences not required in achieving the statutory objectives.'" 47 S.E.C. at 671 (quoting Commonwealth Sec. Corp., 44 S.E.C. 100, 101-02 (1969)). In determining that Richardson should be subject to a bar with a right to apply for association in three years, we considered at that time how much protection the public interest requires, based on the nature and seriousness of the misconduct underlying the bar, and weighed the need for that protection against the importance of avoiding adverse consequences to Richardson that are not necessary to protect the public interest. See H. Michael Richardson, Exchange Act Rel. No. 41448 (May 25, 1999), 69 SEC Docket 2622, 2623-24 (noting Commission determination "that it is appropriate and in the public interest to accept Richardson's Offer of Settlement," which included the provision of a right to reapply in three years).

Where an initial public interest determination was made by an entity other than the Commission, different considerations may apply. See Ross, 50 S.E.C. at 1085 & n.13 (NYSE settlement not binding on NASD); see also Stephen R. Flaks, 46 S.E.C. 891, 894 n.6 (1977) (upholding NASD denial of application to associate, even though Commission had granted approval, because denial was based on independent ground of separate NASD bar, rather than on Commission bar).

¹⁵ In rare circumstances, the underlying conduct that led to the statutory disqualification may be sufficiently egregious, in light of the environment at the time of the application to associate, to warrant denial of the application. That is not the case here, however.

¹⁶ See M.J. Coen, 47 S.E.C. 558, 563-64 (1981) ("In cases of this sort, which are based on a prior statutory disqualification, Congress has granted the Association broad discretion."). See also Halpert & Co., 50 S.E.C. 420, 422 (1990) ("Particularly in matters involving a firm's employment of persons subject to a statutory disqualification, it is appropriate to recognize the NASD's evaluation of appropriate business standards for its members."). Moreover, we note that NASD has broad discretion in imposing conditions on the employment relationship of a statutorily disqualified person to the employing firm. See, e.g. Scott E. Wiard, Exchange Act Rel. No. 50393 (Sept. 16, 2004), 83 SEC Docket 2752, 2754.

¹⁷ NASD cites Robert B. Graham, Sr., 51 S.E.C. 449, 454 (1993) to support its argument that the Commission has no power to veto a decision by the NASD to disallow the association of a statutorily disqualified person. The Commission was evenly divided on the issues raised in Graham, so the language on which NASD relies does not represent the position of the Commission. 51 S.E.C. at 456. In any event, since Ross and Van Dusen do not dictate the outcome of NASD proceedings, they do not purport to create veto power in the Commission. We note, however, that, as discussed above, Section 19(f) contemplates that the Commission, under prescribed conditions, will set aside an NASD determination to deny access to a statutorily disqualified person.

¹⁸ Van Dusen, 47 S.E.C. at 669.

¹⁹ Id. at 670-71.

²⁰ Id. at 671-72.

²¹ Ross, 50 S.E.C. at 1083.

²² Id. at 1084-85.

²³ Id.

²⁴ 47 S.E.C. at 670-71.

²⁵ Applications for Relief from Disqualification, Exchange Act Rel. No. 11267 (Feb. 26, 1975), 6 SEC Docket 346, quoted in Van Dusen, 47 S.E.C. at 671.

²⁶ NASD contends that its by-laws, not the policy set forth in Van Dusen, provide the applicable standard for NASD review of applications that would allow the association of statutorily disqualified persons. Congress has made clear, however, that NASD's regulatory authority is subject to Commission oversight. See S. Rep. No. 94-75, 23 (cautioning against fallacious impression that industry and government fulfill same function in regulatory framework, enjoy same order of authority, or deserve same degree of deference and noting that SROs "exercise authority subject to SEC oversight" and "have no authority to regulate independently of the SEC's control"). To the extent that NASD by-laws might allow consideration of Richardson's underlying misconduct beyond that permitted under Commission precedent, Commission precedent controls. We note, however, that NASD has not specifically identified anything in its by-laws that is inconsistent with Van Dusen or Ross.

²⁷ In the alternative, NASD argues that any substantive fairness requirement was satisfied in Richardson's case because evidence of the misconduct that underlies the statutory disqualification is admissible under the Federal Rules of Evidence. See Fed. R. E. 403 (allowing exclusion of evidence if probative value is substantially outweighed by danger of unfair prejudice). NASD proceedings are not governed by the Federal Rules of Evidence. Moreover, Van Dusen and Ross do not preclude consideration of the underlying misconduct. They merely provide a context in which it may be considered.

²⁸ "In the new regulatory environment created by this bill, self-regulation would be continued, but the SEC would be expected to play a much larger role than it has in the past to ensure that there is no gap between self-regulatory performance and regulatory need." S. Rep. No. 94-75, 2.

²⁹ S. Rep. No. 94-75, 23.

³⁰ Id. at 132.

³¹ See United States v. O'Hagan, 521 U.S. 642, 658 (1997) (primary objective of Exchange Act was "to insure honest securities markets and thereby promote investor confidence."); Citadel Sec. Corp., Exchange Act Rel. No. 49666 (May 7, 2004), 82 SEC Docket 3249, 3255 ("[I]n order to ensure the protection of investors, NASD may demand a high level of integrity from securities professionals.").

³² Although the decision to settle an administrative proceeding is a complex function of multiple factors, the right to reapply for association is often an important aspect of a settlement. Settlement terms should be administered in accordance with the fair expectations of the settling parties.

³³ On July 12, 2004, an order was issued, pursuant to delegated authority, denying a motion filed by NASD requesting oral argument in connection with this matter. Pursuant to Rule of Practice 430(a), NASD has requested our review of that order.

Rule of Practice 451 provides that we will consider appeals (other than those from initial decisions by a Commission hearing officer) on the basis of the papers filed by the parties without oral argument unless we determine that the presentation of facts and legal arguments in the briefs and record and the decisional process would be significantly aided by oral argument. NASD contends that oral argument is necessary because the important policy issues at stake warrant careful consideration that necessarily will be aided by oral argument.

We do not believe that NASD has shown that oral argument will significantly aid our decision-making process. The parties have thoroughly briefed the factual and legal issues in this proceeding, and their contentions are presented before us in a manner that have permitted us to fully evaluate and determine the matters at issue. Accordingly, the request of NASD for oral argument is denied.

³⁴ We have considered all of the parties' contentions. We have rejected or sustained them to the extent that they are inconsistent or in accord with the views expressed in this opinion.