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.To PCAOB or Not To PCAOB?What prompted FINRA to charge Sharemaster? On May 3, 2010, the FINRA Department of Member Regulation (the "Department") notified Sharemaster that its membership would be suspended because it had submitted its December 2009 annual audit without an attestation that said audit was conducted by a Public Company Accounting Oversight Board ("PCAOB") registered accounting firm. This PCAOB certification is allegedly required pursuant to '34 Act Rule 17a-5.The 17a-5 ExemptionIn response to the Department's notice, Sharemaster requested a hearing on May 17, 2010. On June 24, 2010, a telephonic hearing was conducted. For reasons not explained by FINRA, the OHO Decision was only first published on October 6, 2010, a date about five months after the Department's notice and about 3 1/2 months after the hearing. 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 broader provision permitting a more expanded business, Feigenbaum argued that Sharemaster's business is, in reality, limited to soliciting subscriptions for mutual funds. He sought to distinguish between the fact that Sharemaster "may"solicit subscriptions for and does receive commissions from multiple issuers, and, on the other hand, that the firm still 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
SIDE BAR: "For the foregoing reasons, Sharemaster is suspended until it files the requisite annual report. . ." at page 6 of the OHO Decision. Why didn't FINRA lift the suspension on November 1, 2010? Great question. Keep asking it as you continue to read.
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: I mean, seriously? The SEC suggests to Sharemaster that it engage in regulatory civil disobedience? The SEC suggests -- with a straight face, no less -- that Sharemaster could have chosen to not file a compliant 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.Also, did you happen to notice that it took the SEC nearly a year to adjudicate this appeal from the October 29, 2010, date on which Sharemaster filed with the SEC until October 14, 2011, when the SEC published its Order? So much for the swift wheels of Justice.As respectfully as I can muster my response: 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? What conduct speaks louder to the honored proposition of "under protest?"
[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.
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 . . .
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.
[W]e conclude that the disciplinary sanction imposed by FINRA remained live based on the $1,000 fine. Accordingly, Sharemaster'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
"Selling the Home Brand: A Look Inside an Elite JPMorgan Unit" (DealBook, New York Times, March 2, 2013):
The bank, Mr. Burris's bosses explained, examines the amount of JPMorgan-branded portfolios of mutual funds that brokers sell. "If you look at our firm, 50 percent of all our sales go" to those investments, Mr. Haigis said. Furthermore, he said, such products draw less scrutiny from the Financial Industry Regulatory Authority, which polices Wall Street.
"JPMorgan Wrote Complaints After Firing a Whistle-Blower" (DealBook, New York Times, December 3, 2015):
The more serious criticisms of Mr. Burris began to show up on his disciplinary record soon after he went public with his grievances against JPMorgan. In the course of two weeks, three client complaints showed up on his regulatory records.During his arbitration case, Mr. Burris's lawyer asked a JPMorgan supervisor at his old branch in Arizona whether the client complaints were "written by someone at JPMorgan" or if any JPMorgan employee had "helped" draft them."Absolutely not," the JPMorgan employee, Umbreen Kazmi, responded to both questions.It was only after the arbitration case was over that Mr. Burris tracked down the clients and learned that the letters had, in fact, been drafted by one of his old colleagues at JPMorgan, Ms. Gavin, a close associate of Ms. Kazmi.
"Finra Files Enforcement Action Against JPMorgan Securities Whistleblower" (Advisor Hub, September 19, 2016)"
Burris, who was fired in November 2012 over the incidents, filed a whistleblower complaint with Finra that same month. The New York Times wrote a story in March 2013 about his charges that JPMorgan pressured brokers to sell proprietary mutual funds, and followed with a story about his accusations that the bank manufactured client complaints to damage his personal and professional reputation."The firm has provided false documents, false statements under oath, pretext for termination and a myriad of other problems for [whistleblowers]," Burris' attorney, Robert D. Mitchell, wrote in a letter to Finra on August 1 in response to a Wells notice saying the regulator was likely to bring an enforcement action.Burris said Finra is being pressured by JP Morgan to discredit him now because the Occupational Safety and Health Administration is expected to rule imminently on his request for protection against retaliation. He also contended that as one of Finra's largest member firms, the bank has undue influence over the industry-financed self-regulator
"FINRA and JPMorgan go after whistleblower for $624 (not a typo) loss" (Financialplanning.com, September 22, 2016):
Now an independent RIA, Burris runs Burris Wealth Management in Surprise, Arizona, and serves mainly elderly clients. Two years after he initiated his OSHA whistleblower case, Burris says he got a got a call from Margery Shanoff, a FINRA enforcement attorney, in the spring of last year.Burris said she told him that FINRA had completed a thorough investigation into his activities at JPMorgan."You are in big trouble," he recalls Shanoff telling him.Burris said he asked how that could be, given that no one had called to get his side of the story. Shanoff did not respond to a request for her description of the conversation.
I have not and do not represent Mr. Burris but have recently referred him to veteran industry legal counsel. It is my expectation that, if necessary, Burris will take his case to the United States Supreme Court. I offer my role as an industry reform advocate to both Mr. Burris and FINRA in an effort to explore a sensible, fair resolution of this case.