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For an executive who works in the financial services industry, a criminal or civil trial resulting from allegations of corporate wrongdoing can have uniquely damaging and far-reaching consequences. These include consequences that reach beyond spending time in jail and a large fine if found guilty. Even if the executive is acquitted, there is still public humiliation, and the executive’s reputation may be damaged in such a way that he or she may not be able to get hired by another financial services company. In addition, if an executive who is sanctioned by a financial services regulator ever wants to work for a broker-dealer, this could present additional problems. Any person that wants to associate with a broker-dealer that is a National Association of Securities Dealers (NASD) member firm, in either a registered or nonregistered capacity, is required to disclose to the broker-dealer whether he or she has “ever been found to have violated any provision of any securities law or regulation, any rule or standards of conduct of any governmental agency, self-regulatory organization, or financial business or professional organization, or engaged in conduct which is inconsistent with just and equitable principles of trade.” NASD Conduct Rule 3070(a)(l). As a result of these disclosures, many broker-dealers may not be able to, or may not want to, hire such an executive. Often, the person’s only option is to work in a field other than financial services. The direct consequences of a criminal trial are usually clear, and many defendants believe that settling out of court is a good way to avoid these consequences, put the matter behind them and move on with their lives. In addition, by settling these actions out of court, or settling to a regulatory sanction, these defendants believe they may avoid the possibility of the loss of a career and/or job. Until recently, sanctions usually did not cross over Most lawyers are aware of, and advise their clients on, the collateral consequences of the more common criminal or regulatory sanctions. For example, it is well known that a felony conviction, or a certain type of misdemeanor conviction, can act to bar a person from a career in the financial services industry for at least 10 years. Many defense attorneys advise their clients to settle a matter out of court, perhaps to a regulatory sanction that has less severe direct consequences. A regulatory sanction that bars a person from working in a bank, in the insurance industry or for a broker-dealer in one state, is quite severe. However, before July 31, 2002, these sanctions would not prevent a bank or insurance executive from putting his or her transferable skills to work at a broker-dealer. Then came the Sarbanes-Oxley Act. Sarbanes-Oxley � 604 amends federal securities laws to grant the U.S. Securities and Exchange Commission (SEC) more discretion in prohibiting individuals from going to work in one sector of the financial services industry when they have been kicked out of another sector. Section 604 amends Securities Exchange Act of 1934 � 15(b)(6), 15 U.S.C. 78o(b)(6), to provide the SEC with broader discretion to pursue administrative proceedings whereby it can sanction a person who is associated with, or seeks to associate with, a broker-dealer for regulatory misconduct that did not involve his participation with a broker-dealer. Exchange act � 15(b)(6) grants the SEC the ability to pursue an administrative proceeding against someone who has been sanctioned by a state securities commission; a state authority that supervises or examines banks, savings associations or credit unions; a state insurance commission; an appropriate federal banking agency; or the National Credit Union Administration. See 15 U.S.C. 78o(b)(4)(H). For example, prior to � 604, if executives were sanctioned by a state regulatory authority that barred them from association with a bank, insurance company or broker-dealer, they could still go to work for a broker-dealer in another state that was willing to hire them. As a result of � 604, the SEC is now able to pursue administrative proceedings against such people and sanction them further. The legislative history of � 604 states in relevant part: “The SEC staff has advised the Committee that there has been a growing perception that fraud artists are able to exploit gaps in the federal and state regulatory systems and to move from one sector of the financial services industry to another without sufficient impediment. The SEC lacks the enforcement authority to bar individuals from coming into the securities industry who have been found by other financial regulators to have engaged in fraudulent, deceptive, or dishonest conduct in other financial industries. This bill gives the SEC this power. In order to reduce the migration of fraud perpetrators into the securities industry, the bill authorizes the Commission to bar from the securities industry persons who have been suspended or barred by a state securities, banking, or insurance regulator because of fraudulent, manipulative, or deceptive conduct. The Commission requested this authority.” Senate Report 107-205-Public Company Accounting Reform and Investor Protection Act of 2002. As a result of the amendments, the SEC now has the authority to bar, suspend and otherwise sanction a person who is associated with, or seeks to associate with, a broker-dealer, if he or she is subject to one of these regulatory events. On Feb. 2, for the first time, the SEC barred a registered representative, Rodney Hinkle, from the brokerage industry pursuant to its newly granted authority under � 604. In re Hinkle, SEC Admin. Proc. File No. 3-11288 (Feb. 2, 2004). In its release, the SEC noted that its action was based on the entry of a final order by the commissioner of the securities division in the attorney general’s office of the state of Maryland that barred Hinkle from the securities and investment advisory business in Maryland. Id. While the Maryland sanction prohibits Hinkle from associating with a broker-dealer in Maryland, the SEC’s unqualified bar will likely keep him from ever associating with a broker-dealer again. This is because the SEC has stated that “[the] imposition of an unqualified bar evidences the Commission’s conclusion that the public interest is served by permanently excluding the barred person from the securities industry. Accordingly, absent extraordinary circumstances, a person subject to an unqualified bar will be unable to establish that it is in the public interest to permit reentry to the securities industry.” Letter of Sept. 13, 1994, from the SEC to Joseph R. Hardiman, president of NASD Inc. Based on one of these regulatory sanctions listed in � 604, the SEC has the authority to seek an unqualified bar, or one of several other sanctions, such as a qualified bar or a suspension. If the SEC pursues an administrative proceeding that sanctions an individual with a qualified bar, that person may have the benefit of a right of re-entry to the industry. Pursuant to current case law, these qualified bars provide the person with a right to reapply after a specified period of time. According to prior NASD decisions, NASD considers guidance provided by the SEC from In re Van Dusen, 47 S.E.C. 668 (1981). Under the Van Dusen precedent, when a self-regulatory organization (SRO) evaluates an application from an individual who was barred by the SEC with a right to reapply, the SRO is to considerany intervening misconduct in which the individual has engaged; the nature and disciplinary history of the prospective employer; and the supervision to be accorded the applicant. In Van Dusen, the SEC stated that when it specifies a date after which an application for re-entry may be made, “the [SEC] upon a proper showing will generally act favorably upon the application.” When a person is suspended from association with a broker-dealer in some capacity, the person is not entitled to associate with the broker dealer in that particular capacity, for the period of the suspension. When that suspension is over, the person may generally associate with the broker-dealer. A bar by the SEC, even a bar with the right to reapply, is not the same as a suspension. Statutory disqualification: when it comes into play In the event that the SEC does nothing, the person is still subject to a heightened level of review, and may still be barred from associating with a broker-dealer. This is because exchange act � 3(a)(39), 15 U.S.C. 78c(a)(39), was also amended to include these individuals in the Exchange Act definition of statutory disqualification. It is not yet clear how the SROs are going to process applications from individuals who are subject to this new category of statutory disqualification. It is also not yet clear what exactly constitutes a “final order” for the purposes of 15 U.S.C. 78o(b)(4)(H)(ii). When a person becomes subject to a statutory disqualification, it does not mean that the person will automatically lose his or her right to associate with a broker-dealer. The SROs have procedures to evaluate whether someone who is subject to a statutory disqualification should be permitted to associate with a broker-dealer. NASD’s Web site contains an overview of its process, and what it entails. See www.nasd.com. In the event that one of these sanctions does not prohibit a person from association with a broker-dealer, these events will nonetheless subject a person to an additional and potentially costly level of review. The SEC asked for and received broader discretion with which it could “bar individuals from coming into the securities industry [when they] have been found by other financial regulators to have engaged in fraudulent, deceptive, or dishonest conduct in other financial industries.” Senate Report 107-205, supra. Section 604 provides the SEC with the discretion it requested. It is not yet completely clear the extent of specific events that will cause a person to fit within these new sections, but it is clear that a litigator must be aware of 15 U.S.C. 78o(b)(6)(A)(i) and consider the potential career-limiting consequences it could have on his or her client. Patrick Leary is a partner at Washington’s Jorden Burt.

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