Respondent failed to file an annual report that had been audited by a PCAOB-registered auditor, in violation of SEC Rule 17a-5. Respondent is suspended until it files the requisite annual report. At the end of six months, the suspension will convert to an expulsion if by that date Respondent has not filed a properly audited annual report for 2009. Respondent is also ordered to pay costs.The OHO Decision explains that:
[T]he Respondent claimed an exemption from filing audited financial statements under Exchange Act Rule 17a- 5(e)(1)(i)(A) (the "Exemption") which provides in relevant part:[T]he financial statements . . . need not be audited if, since the date of the previous financial statements of the report filed pursuant to Rule 15b1-2 or this section:
Page 3 of the OHO DecisionA. The securities business of such broker or dealer has been limited to acting as broker (agent) for the issuer in soliciting subscriptions for securities of such issuer, said broker has promptly transmitted to such issuer all funds and promptly delivered to the subscriber all securities received in connection therewith, and said broker has not otherwise held funds or securities for or owed money or securities to customers . . .
[P]rovides that the firm may sell mutual funds on an application basis, and may sell variable life insurance or annuities. Feigenbaum admitted that Sharemaster had sold subscriptions on behalf of multiple issuers and in 2009, had selling agreements with multiple issuers. He also stated that in 2009, Sharemaster had received trail or "12b-1" commissions from multiple issuers and received monthly automatic deposits from customers into multiple mutual funds.Page 4 of the OHO DecisionNotwithstanding the firm's Membership Agreement's permits it to engage in a more expanded business, Feigenbaum argued that, in reality, Sharemaster's business is limited to soliciting subscriptions for mutual funds. He sought to distinguish between the fact that, on the one hand, Sharemaster "may" solicit subscriptions for and does receive commissions from multiple issuers; and, on the other hand, that the firm nonetheless limits its business to the solicitations of mutual funds subscriptions. In making such arguments, Feigenbaum appeared to be trying to shift the focus from the oneness of the term "issuer" to the oneness of the firm's allegedly limited mutual funds business.In disputing Feigenbaum's narrowing of the singularity issue, the Department argued that the Exemption is available only to members that[Ed: footnotes omitted]:
[S]olicit subscriptions for securities of a single issuer. Member Regulation's argument was supported by a letter from the SEC's Division of Trading and Markets providing the SEC's interpretation of the Exemption. The letter, addressed to Scott stated, "Under [the Exemption], broker-dealers that limit their securities business to acting solely as an agent for a single issuer in soliciting subscriptions for the issuer's securities, and that do not carry customer accounts must file an annual report, but it need not be audited."Page 5 of the OHO Decision
[S]haremaster is suspended until it files the requisite annual report. At the end of six months, the suspension will convert to an expulsion if Respondent has at that time not filed a properly audited annual report for 2009. Respondent is also ordered to pay costs of $1,785.00, which includes an administrative fee of $750.00 and the cost of the hearing transcript. The costs shall be due as of a date established by FINRA.Page 6 of the OHO Opinion
Sharemaster asks the Commission to set aside FINRA's decision and "deem filed" the 2009 Annual Report originally submitted. Sharemaster asserts that its subsequent compliance should have no impact on the Commission's authority to consider this appeal because "acquiescence through compliance was not an abandonment of a protected legal interest derived from statute but, rather, based solely on financial exigencies." FINRA contends that "Sharemaster did not show that it qualified for an exemption" and that FINRA's "findings are correct." FINRA acknowledges that it has lifted the suspension and that "the sanction is no longer in effect." FINRA nonetheless states that "a Commission decision that leaves unresolved the issue of whether Sharemaster must pay the costs ordered by the Hearing Panel would fail to address a key component of Sharemaster's appeal."Exchange Act Section 19 authorizes FINRA members or persons associated with such members to seek Commission review of action taken by FINRA. Under Exchange Act Section 19(d), certain FINRA action "shall be subject to review" by the Commission, namely action that: (i) imposes a final disciplinary sanction on a FINRA member; (ii) denies membership or participation to an applicant; (iii) prohibits or limits any person with respect to access to services offered by FINRA or a FINRA member; or (iv) bars any person from becoming associated with a FINRA member. Here, the question is whether the Commission has jurisdiction based on a "final disciplinary sanction;" neither party argues, and we do not find, that any of the other three bases for jurisdiction exists.
On October 29, 2010, when Sharemaster filed with the Commission an application for review of FINRA's decision, the suspension that FINRA imposed earlier that month was still in effect. At that point, Sharemaster had the option to not file a compliant annual report (in which case the suspension would convert to an expulsion at the end of six months) and to seek a stay of the suspension pursuant to Rule 401(d) of the Commission's Rules of Practice pending the Commission's consideration of the appeal. Instead, on January 24, 2011, after Sharemaster filed a properly audited annual report in compliance with the Hearing Panel's order, the suspension was lifted. Because the suspension is no longer in effect, there is no final disciplinary sanction within the meaning of Exchange Act Section 19(d) that is subject to review by the Commission.Nor does the imposition of costs create jurisdiction. FINRA's rules distinguish between disciplinary sanctions and costs. Our authority to review costs imposed by FINRA in a disciplinary action derives from, and is limited to, the jurisdiction granted to us by Exchange Act Section 19(d) to review a final disciplinary sanction. Here, we are not authorized to review the costs of $1,785 imposed by FINRA because there is no final disciplinary sanction that is subject to Commission review. Sharemaster's appeal therefore must be dismissed for lack of jurisdiction.Sharemaster also seeks to recover the late filing fee imposed by FINRA and costs other than those imposed by FINRA, such as $25.00 in commission checks cancelled by the customer, and PCAOB-registered accountant fees and mailing expenses. However, even if FINRA had not lifted the sanction and we had jurisdiction to review the FINRA-imposed costs, we would not have authority to order FINRA to pay these collateral costs. Under the circumstances, we have determined to dismiss Sharemaster's application for review.
SIDE BAR: Note that it took the SEC nearly a year to adjudicate this appeal. So much for the swift wheels of Justice. That delay underscores the idiocy of the SEC's suggestion that Sharemaster could have engaged in regulatory civil disobedience by opting to not file a compliant 2009 annual report, which would then have set in motion FINRA's machinery of suspension and expulsion. This wonderful so-called "option" proposed by the federal regulator would then enable Sharemaster to seek a stay of the FINRA suspension pursuant to an appeal to the SEC.
Did any of the esteemed SEC commissioners factor in the costs and risks of such proposed "civil disobedience?" Similarly, just from the perspective of commonsense and fairplay, should a FINRA member firm be deprived of the right to seek the SEC's review of a "final disciplinary sanction," simply because that firm opted to comply with a FINRA demand and submit a compliant annual report?
[R]eview the coercive sanction imposed by FINRA because there is currently no live sanction for us to act upon. Originally, Sharemaster and FINRA argued that we had jurisdiction to consider Sharemaster's application. On remand, Sharemaster contends that we have authority to review both its original suspension and the continuation of that suspension beyond November 1, 2010. Reversing its earlier position, FINRA now argues that we lack jurisdiction. We conclude that none of the arguments advanced by the parties identifies a supportable basis for jurisdiction.
[S]haremaster could have, but did not, seek a stay of the suspension pending our resolution of this matter. On November 1, 2010, Sharemaster opted to comply with the hearing panel order, and FINRA has since lifted the suspension. There is, therefore, no sanction currently in effect, and the question is whether that fact divests us of jurisdiction
[T]hose sections do not unambiguously answer the question before us. Section 19(d) provides that certain FINRA actions "shall be subject to review" by the Commission, and it lists reviewable actions as those that: (1) impose a final disciplinary sanction; (ii) deny membership or participation to an applicant; (iii) prohibit or limit any person with respect to access to services offered by FINRA or a FINRA member; or (iv) bar any person from becoming associated with a member. Section 19(e) governs review of any "final disciplinary sanction," but neither that section nor any other provision of the Exchange Act defines that term or expressly addresses whether a coercive sanction must be in force at the time of Commission review.Page 5 of the 2013 SEC Order
[I]f Sharemaster had either not complied with the coercive sanction or had sought a stay, the sanction it seeks to have reviewed would have remained in place and we could have undertaken the review contemplated by Section 19(e). Sharemaster, however, opted to comply, and at that point, the sanction lifted. There is, accordingly, nothing for the Commission, as Section 19(e) contemplates, to "affirm, modify, or set aside." Thus, we lack jurisdiction over this matter.Page 8 of the 2013 SEC Order
Footnote 31: The plain text of the FINRA hearing panel order provided that, "Sharemaster is suspended until it files the requisite annual report." FINRA Order 6 (emphasis added). Nevertheless, FINRA contends that Sharemaster's suspension did not lift when Sharemaster filed a compliant annual report. FINRA June 14, 2012 Br. at 4-6. Instead, FINRA maintains that Sharemaster's suspension did not lift until- nearly three months later-after FINRA completed a review designed to ensure that report was compliant. See id. FINRA, however, does not explain how the language quoted above could have reasonably notified Sharemaster that the suspension would not lift until FINRA conducted and completed such a review.
Side Bar: If you are a serious Wall Street participant (and particularly an industry lawyer or regulator), you must watch the February 3, 2016, video below of Sharemaster's and the SEC's appearances before Judges Callahan, Smith, and Rakoff for oral argument. It is going to take about 38 minutes to watch the entire film but you will come away with a tremendous respect for Feigenbaum and for the SEC lawyer, who, to his credit, refused to defend the indefensible and comported himself in an incredibly professional manner. Take particular note of Judge Callahan's comment to counsel for the SEC, starting around 16:45:But I'm not sure that the way you've determined a live controversy is reasonable . . . It's hard to not look at this case and wonder why the SEC is making a federal case out of this with all of this, and obviously there's something more at stake and I'm just, you know, that the Appellant isn't a person that's been a totally irresponsible person, I mean when this requirement came up he contacted someone and he's tried to comply . . .
The Live-Sanction RequirementIn recaping issues before the Court on appeal, the 2017 9Cir Opinion offered this brief analysis and conclusion:
Sharemaster challenges the Commission's decision dismissing its application for review on two grounds. First, Sharemaster argues that the Commission's "live-sanction" requirement is inconsistent with Section 19(d)(2), which directs the Commission to review any final disciplinary sanction imposed by FINRA. Second, Sharemaster contends that, even if a live-sanction requirement is read into the statute, the Commission unreasonably applied the requirement in dismissing Sharemaster's application for review. We disagree with Sharemaster's first argument, but agree with its second.
Judges are not experts in the field, and are not part of either political branch of the Government. Courts must, in some cases, reconcile competing political interests, but not on the basis of the judges' personal policy preferences. In contrast, an agency to which Congress has delegated policymaking responsibilities may, within the limits of that delegation, properly rely upon the incumbent administration's views of wise policy to inform its judgments. While agencies are not directly accountable to the people, the Chief Executive is, and it is entirely appropriate for this political branch of the Government to make such policy choices - resolving the competing interests which Congress itself either inadvertently did not resolve, or intentionally left to be resolved by the agency charged with the administration of the statute in light of everyday realities.When a challenge to an agency construction of a statutory provision, fairly conceptualized, really centers on the wisdom of the agency's policy, rather than whether it is a reasonable choice within a gap left open by Congress, the challenge must fail. In such a case, federal judges - who have no constituency - have a duty to respect legitimate policy choices made by those who do. The responsibilities for assessing the wisdom of such policy choices and resolving the struggle between competing views of the public interest are not judicial ones: "Our Constitution vests such responsibilities in the political branches." TVA v. Hill, 437 U. S. 153, 195 (1978).
When a court reviews an agency's construction of the statute which it administers, it is confronted with two questions. First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.
Looking to the Exchange Act, we conclude that Congress did not speak to the precise question presented: whether the Commission is authorized only to review final disciplinary sanctions that remain live. Section 19(d)(2) authorizes the Commission to review "any final disciplinary sanction" or denial of "access to services" imposed by registered SROs, but the Exchange Act does not define these terms. 15 U.S.C. § 78s(d)(1)-(2). While the Commission has by regulation defined "final disciplinary action," 17 C.F.R. § 240.19d-1(c)(1), the regulation also is silent on whether a sanction must remain in effect in order to be subject to review.Page 16 of the 20017 9Cir Opinion
Indeed, if an SRO such as FINRA imposed a disciplinary sanction but then fully retracted the sanction by, for example, setting aside a suspension and returning any fine levied, it would make little sense for the Commission to proceed with review. This common-sense observation highlights the reasonableness of the Commission's view that it need not review moot sanctions . . .
First, the Commission suggested that the entire $1,785 sum may have represented the "cost" of pursuing a hearing before FINRA, rather than a disciplinary fine. Sharemaster, 2013 WL 4647204, at *6 n.37. However, the Commission's own dismissal order and briefing before this court undermine this position. In its dismissal order, the Commission stated only that $1,000 of the $1,785 that FINRA ordered Sharemaster to pay "appears to be another example of costs assessed as part of the FINRA proceedings." Id. (emphasis added). In its answering brief on appeal, the Commission conceded that this $1,000 sum was "apparently [a] late fee."7 We agree. FINRA's decision plainly suggests that FINRA imposed a $1,000 penalty on Sharemaster, in addition to taxing a $750 "administrative fee" and a $35 transcript fee.Footnote 7: In response to our request for supplemental briefs, the Commission was unable to improve on its assertion that the amount "includes an administrative fee of $750.00 and the cost of the hearing transcript" and that a "[n]o further breakdown was provided." Sept. 29 2016 Letter Brief at 2.
[I]n addition to charging $785 in administrative fees associated with the hearing, FINRA imposed a $1,000 fine on Sharemaster possibly for failing to timely file a compliant annual report.. . .[C]alling the $1,000 a "late fee" is of no moment. 8 Regardless of its label, it appears to be a penalty imposed for not timely filing an annual report prepared by a PCAOB-registered accountant. It is not part of the separately ledgered "administrative fee" that FINRA taxed to Sharemaster for pursuing an administrative appeal. The fine became a "final" disciplinary sanction when Sharemaster exhausted remedies before FINRA. The sanction remained "live" even after the suspension lifted because the fine was not canceled and the money was not remitted to Sharemaster.Footnote 8: Such an argument reads "like the caption 'This is not a pipe' below Magritte's famous painting of a pipe." Cuero v. Cate, - F.3d -, 2016 WL 3563660, at *4 n.9 (9th Cir. June 30, 2016). Of course, Magritte's painting was not a pipe but only a painting of one, whereas a $1,000 penalty for not complying with applicable rules is nothing other than a fine.
[S]haremaster's challenge to FINRA's final disciplinary sanction is subject to review by the Commission pursuant to Section 19(d)(2). We leave it to the Commission to determine on remand whether, if Sharemaster prevails on the merits of its argument regarding the applicability of the PCAOB-registered accountant requirement, the Commission may direct FINRA to reinstate Sharemaster nunc pro tunc.
Determined to find a live sanction, the majority invents one. The majority notes that the FINRA order also required Sharemaster to pay hearing costs. The majority speculates that the $1,785 ordered by FINRA included "a $1,000 penalty." Maj. Op. 9. It then concludes that this "penalty" (which it also labels as a "fine") amounts to a live sanction that preserves the Commission's jurisdiction to review the FINRA order. Maj. Op. 19-22. Without persuasive argument by the parties on this second issue (thus, left only to speculation), the majority presses on to address and decide it, sua sponte adopting a position neither raised before us by the parties nor supported by the record.
Judges are not advocates. Thus, when an aggrieved party seeks review from our court, we require the party to "specifically and distinctly" explain what issues require our review. Miller v. Fairchild Indus., Inc., 797 F.2d 727, 738 (9th Cir. 1986). The majority's opinion ignores this fundamental policy and, instead, attempts to save Sharemaster's case by basing its decision on an issue Sharemaster did not raise. The record before this court cannot justify granting Sharemaster's petition, and this case should be closed.
[S]haremaster found that a PCAOB-registered accountant would charge significantly more to prepare the required annual report than the certified public accountant that Sharemaster regularly used -- $2,800 instead of the usual $585 charge. According to Sharemaster, this increased cost would inflict a significant financial hardship on its small business. After consulting with the Commission, Sharemaster learned that 17 C.F.R. § 240.17a-5(e)(1)(i)(A) provides for an exemption from the PCAOB requirement for certain securities brokers and dealers. Believing that it qualified for this exemption as an agent that does not hold customer funds or securities, Sharemaster filed an annual audit report using a certified accountant who was not registered with the PCAOB.Page 7 of the 2017 9Cir Opinion
Registered securities association found that member firm and registered broker-dealer violated Securities Exchange Act of 1934 by failing to file an annual report that had been audited by an accountant registered with the Public Company Accounting Oversight Board. Held, association's findings of violations are sustained but the sanction is ordered to be remitted.
Footnote 56 of the 2018 SEC OpinionAlthough we might otherwise have remanded the matter to FINRA in order to allow it to attempt to provide the explanation missing from the Hearing Panel's decision, we decline to do so here in light of the protracted nature and unique facts and circumstances of this particular proceeding. See, e.g., BethEnergy Mines, Inc. v. Director, Office of Workers Compensation Programs, 39 F.3d 458, 464 (3d Cir. 1994) ("While the Board could have remanded the matter, we hardly can fault it for bringing these protracted proceedings to a close").
Pursuant to Exchange Act Section 19(e)(2), if we find, "having due regard for the public interest and the protection of investors," that a sanction imposed by FINRA "is excessive or oppressive," or imposes an unnecessary or inappropriate burden on competition, we "may cancel, reduce, or require the remission of such sanction." Section 15A(h)(1)(C) also provides that FINRA's determination to impose a disciplinary sanction "shall be supported by a statement setting forth . . . the sanction imposed and the reason therefor." Here, FINRA did not provide the required statement setting forth the reasons for fining Sharemaster $1,000. The Hearing Panel did not explain why it was appropriate to fine Sharemaster for filing its 2009 annual report late under the circumstances. As discussed above, Sharemaster did not ignore the deadline for filing its 2009 annual report. It filed its 2009 annual report within the deadline and accompanied its filing with the explanation that it had not had its financial statements audited because it was relying on the exemption in Rule 17a-5(e)(1)(i)(A). Although Sharemaster's reliance on that exemption was erroneous, the Hearing Panel did not explain why the $1,000 late fee was justified. Indeed, the Hearing Panel did not mention the late fee at all despite Sharemaster's argument that the $1,000 late fee assessed in the Notice of Suspension should be withdrawn. The Hearing Panel said only that it had "considered and reject[ed] without discussion" all arguments not addressed specifically. This statement did not comply with Exchange Act Section 15A(h)(1)(C).55 Accordingly, we order FINRA to remit the $1,000 to Sharemaster.