A Second Circuit panel has declined to review an SEC decision sustaining the Financial Industry Regulatory Authority’s decision to bar a broker from associating with any member firm in connection with his failure to disclose a payment from an issuer whose securities he later recommended. The panel found that the Commission supported its finding that the sanction was remedial by substantial evidence, adequately considered the seriousness of the offense and potential mitigating factors, and correctly refused to review sanctions FINRA ultimately decided not to impose (Harris v. SEC, October 25, 2017, per curiam).
FINRA determination. FINRA found that a broker and his business partner violated Exchange Act Section 10(b) and FINRA Rules 2010 and 2020 by recommending shares of a company to customers without disclosing that they had received a $350,000 "advisory fee" from that firm two months earlier. Given the presence of several aggravating factors, FINRA permanently barred the individuals from associating with any member firm. The SEC reviewed and approved the decision and one of the brokers appealed to Second Circuit for review.
Substantial evidence of fraud. The broker claimed that he had a duty to disclose the payment to customers only if it was dependent on the actual sale of the securities and customers purchased them on his recommendation. However, the panel noted, the broker cites no precedent for a "transactional nexus" before a position of trust and confidence arises between broker and customer. Further, the panel found, the payment (used to set up the brokerage itself) was material, and a broker who recommends stock to clients must disclose all material information that could affect clients’ purchase decisions. In addition, the SEC’s scienter findings are supported by substantial evidence, according to the panel, because the broker is a seasoned professional who should have known he had a duty to disclose the information.
The panel also rejected the broker’s contentions that the permanent bar is excessive and oppressive and that the SEC did not appropriately consider mitigating factors and the remedial purpose of the sanction. FINRA decides what sanctions to impose on its members for violations, the panel noted, and the Commission must sustain them unless the agency finds them excessive. When reviewing FINRA sanctions, the SEC looks at the seriousness of the offense, the harm to investors, and the potential gains to the broker, according to the panel. The SEC noted that the broker sold nearly $1 million of the securities to at least 42 investors without disclosing the payment, profited from the misconduct, and provided inaccurate or misleading information to FINRA investigators, the panel explained. The Commission was within in its authority to find these aggravating factors outweighed any mitigating factors cited by the broker and provided a sufficient explanation for why the bar was necessary and remedial, the panel found.
Further noting that the SEC correctly declined to review sanctions deemed appropriate, but not imposed, by FINRA, the panel denied the broker’s petition for review of the Commission’s determination.
The case is No. 16-1739-cv.
Attorneys: Paula D. Shaffner (Stradley Ronon Stevens & Young, LLP) for Talman Harris. Michael Andrew Conley for the SEC.
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