SECURITIES AND EXCHANGE COMMISSION Washington, D.C. SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40690 / November 19, 1998 Admin. Proc. File No. 3-9510 __________________________________________________ : In the Matter of the Application of : : RUSSELL A. SIMPSON : 49 Elizabeth Road : Belmont, MA 02178-3819 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : __________________________________________________: OPINION OF THE COMMISSION REGISTERED SECURITIES ASSOCIATION -- REVIEW OF ASSOCIATION ACTION Jurisdiction to Review Action of Association Customer's disciplinary complaint against member firm of registered securities association and associated person, contending that firm and associated person had violated association rules, was dismissed by association after conclusion of proceedings in which no violation was found. Held, the matter is not reviewable by the Commission because the dismissal of such a complaint is not among the actions enumerated in Section 19(d) of the Securities Exchange Act of 1934, 15 U.S.C. 78s(d), and application for review is dismissed. APPEARANCES: Russell A. Simpson, pro se. Alden S. Adkins, Norman Sue, Jr., and Susan L. Beesley, for NASD Regulation, Inc. Peter W. Schneider and Kevin E. Broyles, of Rogers & Hardin, for Pierre M. Koutani and Bear, Stearns & Co. Inc. Appeal lodged: December 11, 1997 Last brief received: March 30, 1998 I. Russell A. Simpson, a former customer of Bear, Stearns & Co. Inc. ("Bear Stearns"), a member firm of the National Association of Securities Dealers, Inc. ("NASD"), seeks review of NASD action. The NASD dismissed a complaint filed by Simpson against Bear Stearns and Pierre Koutani, formerly a registered representative with Bear Stearns who handled Simpson's account. Simpson contends both that Bear Stearns and Koutani violated NASD rules, and that the NASD and its subsidiary NASD Regulation, Inc. ("NASDR") failed to enforce those rules. [1] As discussed below, we conclude that we do not have jurisdiction under Section 19(d)(2) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. 78s(d)(2), to review this matter. [2] II. At the time of the events at issue, Article IV, Section 2 of the NASD Rules of Fair Practice provided that any person feeling aggrieved by an act of an NASD member or associated person that he or she believed to be in violation of those rules could file a complaint, using a form to be supplied by the Board of Governors, and that any such complaint would be handled in accordance with the NASD Code of Procedure. Article IV, Section 2 subsequently became NASD Rule 8120. Rule 8120 was eliminated in 1997 when the Commission approved new rules governing the NASD disciplinary process. [3] On April 10, 1994, Simpson wrote to the NASD's District Business Committee for District Number 7 (the "District Committee"), identifying his letter as "a formal complaint under Article IV, Section 2 of the NASD Rules of Fair Practice" against Bear Stearns and Koutani. Simpson asserted that Bear Stearns and Koutani had violated the NASD Rules of Fair Practice in connection with securities transactions in October and November 1993. He contended that Koutani had misrepresented the price/earnings ratio of a stock that Koutani had recommended; that Bear Stearns and Koutani had recommended the purchase and subsequent sale of that stock to him without any reasonable grounds for believing that those recommendations were suitable; and that Bear Stearns and Koutani had not given proper notice that, as a market maker in that stock, it was the seller of the shares Simpson purchased and the repurchaser of the shares he later sold. Although Simpson indicated that he intended his letter as a formal complaint, he did not, as the rule required, use the form provided for such complaints. The District Committee therefore did not treat the letter as a formal complaint. Rather, the District Committee considered it in accordance with former Article I, Section 4 of the NASD Code of Procedure, which provided that communications received from any person regarding any grievance against an NASD member or associated person "may be dealt with by the [NASD] as it considers to be fair and proper under the circumstances." [4] After an investigation, the NASD staff determined that no disciplinary action was warranted. Simpson expressed dissatisfaction with this outcome, and an examination subcommittee of the District Committee then reviewed the staff's report of investigation and determined to take no further action. Still dissatisfied, Simpson filed a formal complaint against Bear Stearns and Koutani. Simpson conducted the prosecution of the complaint. After a hearing at which four witnesses testified and more than 60 exhibits were introduced into evidence, the District Committee found that Simpson failed to sustain his burden of proof as to any of the violations. It therefore dismissed the complaint. Simpson appealed the District Committee's dismissal to the National Business Conduct Committee ("National Committee"). Following a hearing, the National Committee instructed the District Committee to clarify its findings as to one of the three causes alleged in the complaint, and retained jurisdiction over the entire matter pending receipt of that clarification. The National Committee found that the first District Committee response was inadequate and ordered further clarification. After receiving this additional clarification from the District Committee and reviewing the record and the arguments made on appeal, the National Committee affirmed the dismissal of Simpson's complaint in its entirety. Simpson then sought our review. III. Section 19(d)(1) of the Exchange Act, 15 U.S.C. 78s(d)(1), requires, among other things, that the NASD file notice with the Commission of any action by which it: (1) imposes any final disciplinary sanction on any member or person associated with a member; (2) denies membership or participation to an applicant; (3) prohibits or limits any person in respect to access to services offered by the NASD or an NASD member; or (4) bars any person from becoming associated with a member. Exchange Act Section 19(d)(2) authorizes our review of any action as to which notice is required to be filed with us under Section 19(d)(1) on our own motion or upon application of any person aggrieved thereby. [5] Although we have not previously considered whether we can review actions in which a formal complaint brought by a customer was dismissed by the NASD with no finding of violation, [6] we have considered the extent of Commission jurisdiction to hear appeals from other types of actions by self- regulatory organizations ("SROs") such as the NASD. Based on those earlier rulings, we conclude that we do not have jurisdiction here under Section 19(d). A. This is not an action in which the NASD imposed a "final disciplinary sanction." We have previously defined a disciplinary action as an action that responds to an alleged violation of an SRO rule or Commission statute or rule, or an action in which a punishment or sanction is sought or intended. [7] Under this definition, the proceeding initiated by Simpson's complaint was unquestionably disciplinary in nature: it was held in response to Simpson's allegations that NASD rules had been violated, and Simpson asked that Koutani and Bear Stearns be sanctioned. Section 19(d) does not, however, grant us jurisdiction to review disciplinary actions generally, but only over those in which a final disciplinary sanction is imposed. Here, the NASD imposed no sanction; indeed, it found no violation on which a sanction could be based. Simpson relies on Rule 19d-1(c)(1), 17 C.F.R. 240.19d-1(c)(1), which requires SROs to report to us "any final disciplinary action" that "after notice and opportunity for hearing, results in any final disposition of charges of: (1) one or more violations of (A) the rules of [an SRO]." Because this proceeding resulted in final disposition of charges of violations of rules of an SRO, he contends that we have jurisdiction to review it. Simpson's reliance on this rule, however, is misplaced. Rule 19d-1(c)(1) requires that dismissals of disciplinary actions be reported to us so that we may more effectively carry out our responsibilities for oversight of the SROs. [8] The rule does not expand our review jurisdiction under Section 19(d), which allows appeals only where disciplinary actions result in imposition of final disciplinary sanctions. [9] B. We also conclude that the NASD's action did not prohibit or limit Simpson in respect to access to services offered by the NASD. [10] Simpson's interaction with the NASD was through his involvement in seeking disciplinary action against Koutani and Bear Stearns. We do not view permitting any person to file a complaint against an NASD member or associated person and conducting any resulting proceeding as offering a "service" for purposes of Section 19(d). [11] Even if the NASD were deemed to be offering a service under Section 19(d), however, it did not limit or prohibit Simpson's access to that service. Simpson's informal complaint was investigated and considered by NASD staff, and the staff's recommendation was then reviewed by the District Committee. His formal complaint was given full consideration: a hearing before the District Committee, an appeal to the National Committee, and two remands to the District Committee for clarification before the issuance of the National Committee decision. C. The remaining two prongs of Section 19(d) are easily dealt with. Simpson did not apply for membership in the NASD, nor did he seek to become associated with a member. Questions of denial of membership or bar from association are therefore not raised. IV. A. As an alternative to Section 19(d), Simpson asks us to review the NASD's decision on our own initiative under Rule 400, 421, or 430 of our Rules of Practice, 17 C.F.R. 201.400, 201.421, or 201.430. None of these rules is applicable. Rule 400 pertains to the interlocutory review of rulings of hearing officers, and Rule 430 provides for our review of actions taken pursuant to authority delegated to Commission staff in 17 C.F.R. 200.30-1 through 200.30-18. Neither of these applies to our review of SRO proceedings. Rule 421 allows us to review on our own initiative any determination by an SRO that could be subject to an application for review under Rule 420. But the SRO determinations to which Rule 420 applies are those enumerated in Section 19(d)(1), and as discussed above, the NASD's action here does not fall within that section. B. Simpson contends that there were numerous "abuses" in the way the NASD and NASDR handled his complaints. Because 19(d) gives us no jurisdiction over this review proceeding, however, we cannot consider Simpson's procedural issues in this context. [12] **FOOTNOTES** [1]: Simpson states that "[i]t is not the purpose of this application for review to seek disciplinary sanctions" against Bear Stearns and Koutani. Rather, he claims that he wishes us to find that Bear Stearns and Koutani violated the NASD's rules. [2]:As an initial matter, Bear Stearns and Koutani have filed a motion for leave to file a Brief in Opposition to Simpson's Application for Review. Bear Stearns and Koutani contend that they have a high degree of interest in this proceeding, since they would be affected by its outcome. They contend that it would be unfair to deny them the opportunity to defend themselves. Simpson does not oppose the motion. As discussed below, after an evidentiary hearing and an appeal, the NASD found that Simpson failed to establish that Koutani and Bear Stearns had violated NASD rules as alleged in his complaint. It therefore dismissed the complaint, and Simpson sought our review. The parties to this review proceeding are thus Simpson, as applicant, and the NASD. Under Rule 210(f) of our Rules of Practice, 17 C.F.R. 201.210(f), however, we may allow a non-party to participate on a limited basis in a proceeding to review a determination by a self-regulatory organization if we deem it necessary or appropriate in the public interest. We deem it appropriate to allow Bear Stearns and Koutani to participate by filing their brief. [3]:In light of the rule amendments, which included implementing staff-initiated disciplinary proceedings, enhancing the arbitration process, and instituting an expanded and independent NASD internal review function, this Commission agreed with the NASD that it was no longer necessary to accord aggrieved persons the right to invoke NASD processes to initiate formal disciplinary actions. See Exchange Act Rel. No. 38908 (August 7, 1997), 62 Fed. Reg. 43,385, 43,401 (1997). [4]:Article I, Section 4 subsequently became NASD Rule 9111, and was later eliminated. [5]:Because we conclude that we lack jurisdiction, we do not reach the question whether Simpson was "aggrieved" within the meaning of Section 19(d)(2). See Daniel M. Pecoraro, 48 S.E.C. 875, 875 n.1 (1987) (dismissing appeal of entity against whom no findings were made and on whom no sanctions were imposed, on grounds that it was not "aggrieved"). [6]:We have exercised review jurisdiction over appeals from NASD disciplinary actions initiated by customer complaints where those actions resulted in findings of violation and the imposition of final disciplinary sanctions. In each of those instances, the appeal was filed by the person disciplined. See Stephen Investment Securities, Inc., 51 S.E.C. 604 (1993), aff'd, Stephen Investment Secs., Inc. v. SEC, 27 F.3d 339 (8th Cir. 1994); E.F. Hutton & Co. Inc., 49 S.E.C. 829 (1988). [7]:Pacific Stock Exchange's Options Floor Post X-17, 51 S.E.C. 261, 266 (1992). [8]:See Exchange Act Rel. No. 13726 (July 8, 1977), 12 SEC Docket 1107, 1111 (noting that reports of dismissals "have been demonstrably valuable to the Commission in overseeing NASD regulatory performance"). Reports of dismissals are required pursuant to the Commission's power under Section 17(a) of the Exchange Act, 15 U.S.C. 78q(a). Id., 12 SEC Docket at 1111 n.5. [9]:We noted the distinction between the scope of Section 19(d)(1) and the scope of Rule 19d-1 when we adopted Rule 19d-1: "While Section 19(d)(1) of the [Exchange] Act appears to require the SRO to report only proceedings in which sanctions were imposed, Rule 19d-1 requires SRO's to file notices of both the imposition of sanctions as well as the dismissal of charges." Id., 12 SEC Docket at 1111. We further noted that, because Section 19(d)(1) did not mandate all the reports that our oversight responsibilities required, it was necessary to include the concept of "disciplinary actions" in Rule 19d-1 to ensure that we would obtain information about dismissals, among other things. Id., 12 SEC Docket at 1111 n.5. [10]:Although Section 19(d) also gives us jurisdiction over NASD actions involving limitations on access to services offered by NASD members, access to services offered by Bear Stearns is not an issue here. [11]:See William J. Higgins and Michael D. Robbins, 48 S.E.C. 713, 718 (1987) (finding that denial of request to install telephone link-ups on trading floor to permit communication between floor and non-members was denial of access to services); see also Morgan Stanley, Exchange Act Rel. No. 39459 (December 17, 1997), 66 SEC Docket 351, 356- 57 (reviewing cases in which denial of access to services was found). [12]:Simpson also urges us to institute proceedings against the NASD and/or NASDR based on what he terms their failure to enforce the NASD's rules. Our decision whether to institute such proceedings is a separate matter from our disposition of this review proceeding. V. For the reasons discussed above, we have concluded that the NASD's decision to dismiss Simpson's complaint is not reviewable by this Commission under the Exchange Act. We accordingly dismiss Simpson's application. An appropriate order will issue. [13] By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY and UNGER). Jonathan G. Katz Secretary **FOOTNOTES** [13]:Because we lack review jurisdiction, we do not consider the merits of Simpson's allegations of rule violations. We have considered all the arguments for and against jurisdiction advanced in the briefs. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein. UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION SECURITIES EXCHANGE ACT OF 1934 Rel. No. 40690/ November 19, 1998 Admin. Proc. File No. 3-9510 __________________________________________________ : In the Matter of the Application of : : RUSSELL A. SIMPSON : 49 Elizabeth Road : Belmont, MA 02178-3819 : : For Review of Action Taken by the : : NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. : __________________________________________________: ORDER DISMISSING APPLICATION FOR REVIEW On the basis of the Commission's opinion issued this day it is ORDERED, pursuant to Rule 210(f) of the Rules of Practice, that the Brief of Interested Parties Bear, Stearns & Co. Inc. and Pierre M. Koutani in Opposition to Application for Review of Action taken by the National Association of Securities Dealers, Inc. be accepted for filing, and it is further ORDERED that the application of Russell A. Simpson for review of action taken by the National Association of Securities Dealers be, and it hereby is, dismissed. By the Commission. Jonathan G. Katz Secretary