November 16, 2007

NOTE: On December 22, 2008, the Securities and Exchange Commission reversed the Initial Decision discussed in the article below.  The Commission determined that the statute and the authorities raised in the proceeding lead to the conclusion that Section 19(h)(4) authorizes the Commission to censure both current and former SRO officers and directors. As a result, the Commission reversed the Initial Decision dismissing the proceeding against Sodano. In accordance with this determination, the Commission remanded the proceeding to the administrative law judge for a hearing that will consider the underlying charges against Sodano, which were never reached because the Initial Decision dismissed the proceeding on Sodano's motion for summary disposition.  See In the Matter of Salvatore S. Sodano ('34 Act Rel. # 59141 / December 22, 2008)

October 2007

The Practice

Street Legal 

Hed: Don't Do As I Say

Dek: Why Are Regulators Held to a Lesser Standard?

Callout: Despite the existence of two-year tolling provisions pertaining to SRO registered persons, Sodano argued that officers and executives of those SROs are subject to far different sanctions for their alleged misconduct. 

From September 1999 until January 2005, Salvatore F. Sodano was the Chairman and CEO of the American Stock Exchange (AMEX), a quasi-governmental self-regulatory organization (SRO), which was a subsidiary of the NASD, Inc. from 1998 through December 2004. 

In September 2000, the SEC settled administrative proceedings against the AMEX (September 2000 Order) based upon findings that the SRO failed to support critical customer-protection rules relating to firm quotes and trading ahead. 

A June 2003 SEC investigation of AMEX determined that the SRO had failed to enhance and improve its regulatory enforcement programs as required by the September 2000 Order. Subsequently, the SEC investigated Sodano's alleged failure to fulfill his responsibilities as an SRO officer. 

In December 2004, following the sale of the AMEX, Sodano resigned as Chairman and CEO in January and April 2005, respectively. He subsequently became Dean of the Frank G. Zarb School of Business at Hofstra University in New York. 

The Sleeping Cop?

On March 22, 2007 the SEC charged Sodano with failing to enforce compliance with the Exchange Act during his term as the AMEX's Chairman and CEO. 

The SEC alleged that the AMEX's regulatory deficiencies resulted in large part from Sodano's failure to pay adequate attention to regulation, to put in place an oversight structure, to ensure the regulatory staff was properly trained, and to dedicate sufficient resources to ensure that the AMEX was meeting its regulatory obligations. The SEC alleged that Sodano's inattention to and apparent lack of interest in regulation filtered down the management chain creating an environment in which regulation was not a priority and, therefore, compliance with the securities laws and the AMEX's rules was not enforced. 

The only sanction sought by the SEC against Sodano was a Censure pursuant to Section 19(h)(4) of the Exchange Act (the Section), which provides the SEC with the authority "to remove from office or censure any officer or director of such self-regulatory organization [if] such officer or director has willfully violated any provision . . .willfully abused his authority, or without reasonable justification or excuse has failed to enforce compliance."

Sounds like a pretty air tight case-no?

Well, actually, no.

Motion to Dismiss

Sodano and his crackerjack legal team came up with a novel (if not brilliant) motion to dismiss by arguing that the SEC lacked authority to proceed against him because the Section only permits the SEC to censure or remove a current officer or director, and, Sodano had not been an AMEX officer or Director since April 2005 (some two years before the proceeding was instituted). Plainly stated, the defense was that "I quit before you filed and there's nothing you can do to me as a former officer or director."

Feeling Your Pain

Sodano noted that for stockbrokers and registered investment advisers, the respective Section 15 of the Exchange Act and Section 203 of the Investment Advisers Act allow for a permanent bar against "any person who is associated, who is seeking to become associated, or, at the time of the alleged misconduct, was associated or was seeking to become associated" with a broker or dealer or investment adviser. For example, under Article V, Section 4 of the NASD By-Laws, the SRO may take up to two years after a registered person's termination before filing a complaint.

Despite the existence of two-year tolling provisions pertaining to SRO registered persons, Sodano argued that officers and executives of those SROs are subject to far different sanctions for their alleged misconduct. He argued that when Congress drafted and passed the Section, it limited the SEC's remedies to the removal or censure of a sitting officer or director.

In attempting to refute Sodano's statutory interpretation, the SEC Staff urged a "common sense" reading of the Section. The Staff protested that Sodano's interpretation would allow an SRO officer to "evade a censure simply by resigning as an officer or director."

Strict Constructionist

On August 20, 2007, In the Matter of Salvatore F. Sodano, the SEC's Administrative Law Judge (ALJ) granted Sodano's Motion and dismissed the charges because he found that the Section does not provide for sanctioning a former officer or director. The ALJ noted that Congress has drafted many statutes that impose the ability to sanction individuals formerly associated with any number of entities. However, that was clearly not the case here and the language of the Section must be construed as written. The ALJ concluded the Section was intended to apply only to individuals presently in office. 

Parting Shot

I have long advocated that regulators be held to the same standards in their workplace as we the regulated are held to in ours. That would provide the industry's cops with a better feeling for the numbing, overwhelming impact of unfair and excessive regulation. 

Just imagine. All regulators have their employment and residential histories on a public database. All regulators would need to publicly disclose their criminal charges and convictions, their bankruptcies, and other assorted miscues. Moreover, anytime a regulator runs afoul of such obligations, they would have the unique and distinct privilege of hiring a fine young fellow such as me and the pleasure of mortgaging their home in order to pay my bill - even if it turns out that they subsequently prove their innocence. 

What's the lesson of the Sodano case? I think we need to consider two points. One, not a single registered person in our industry can avoid SRO prosecution by quitting before FINRA files its charges. Second, I am still waiting for some SRO officer or director to call for the amendment to the Section that will provide for the sanctioning of former SRO officers and directors within two years of their resignation or termination. You'll understand if I don't hold my breath.

Writer's BIO:

Bill Singer practices law at Stark & Stark, and is the publisher of