In an order settling an enforcement action by the Commodity Futures Trading Commission, an undertaking not to apply for registration for period of three years operates as the functional equivalent of an order suspending registration. One who consents to such an undertaking is statutorily disqualified from registration under Article III, Section 4 of the NASD By-Laws.
September 28, 1999
Gerald L. Fishman, Esq.
Wolin & Rosen
Two North LaSalle Street
Chicago, Illinois 60602-3791
Dear Mr. Rosen:
Your letter of September 8, 1999 to Alden Adkins has been referred to me for reply. You requested interpretive advice as to whether your client, Terry Allan Dirksen, is subject to a statutory disqualification.
We understand that in September 1998, your client entered into a settlement with the Commodity Futures Trading Commission ("CFTC"). At the time of the CFTC's administrative action, your client had left the commodities business and was no longer registered. Your client undertook that, for a period of three years, he would not apply for registration in any capacity, nor would he engage in any activity requiring registration or act as an agent of any person registered or required to be registered. He also agreed to cease and desist from violations and pay a civil monetary penalty of $10,000. Your client was settling charges that he aided and abetted fraud violations under the Commodity Exchange Act, and he was also liable for the fraud violations of the entity as a controlling person.
Section 3(a)(39) of the Securities Exchange Act of 1934 and Article III, Section 4 of the NASD By-Laws state that person is subject to a disqualification if, among other things, the person is subject to an order of the CFTC "denying, suspending or revoking" such person's registration under the Commodity Exchange Act. Your client was not subject to an order of the CFTC denying, suspending or revoking his registration because he was not registered at the time of the administrative proceeding. However, he undertook not to apply for registration for a period of three years. It is our opinion that your client is subject to disqualification as a result of his undertaking.
The CFTC has published an interpretation of certain of its rules relating to statutory disqualification. Interpretative Statement with Respect to Section 8a(2)(C) and (E) and Section 8a(3)(J) and (M) of the Commodity Exchange Act, 17 C.F.R. Part 3 at App. A (hereinafter "Interpretative Statement"). Section 8a(3)(M) of the Commodity Exchange Act states that the CFTC is authorized to refuse to register or to register conditionally any person, if it is found after an opportunity for hearing that "there is other good cause" to do so.
The Commission interprets the phrase "other good cause" in the Interpretative Statement. It states that Section 8a(3)(M) authorizes the Commission to refuse to register, register conditionally or otherwise affect the registration of any person if that person, in connection with a settlement agreement, has consented to comply with an undertaking not to apply for registration with the National Futures Association or the CTFC in any capacity. The person’s effort to violate the undertaking would constitute "other good cause" under Section 8a(3)(M). The Interpretative Statement goes on to state:
The Commission believes that allowing such a person to be registered would be inappropriate and inconsistent with the intention of parties to the prior settlement agreement. The ... attempt to register in the face of such an undertaking would indicate the lack of fair and honest dealing which the Commission believes constitutes "other good cause" for denying, revoking or conditioning registration under the Act.
The Interpretative Statement also states:
The Commission also believes that allowing registration in such a situation would be inconsistent with both Section 8a(2)(A), which authorizes the Commission to refuse to register, to register conditionally, or to revoke, suspend or place restrictions upon the registration of any person if such person’s prior registration has been suspended (and the period of such suspension has not expired) or has been revoked, and Section 8a(3)(J), which authorizes the Commission to refuse to register or to register conditionally any person if he or she is subject to an outstanding order denying, suspending, or expelling such person from membership in contract market, a registered futures association, or any other self-regulatory organization. (Emphasis added.)
Thus, it appears from reading the CFTC’s interpretation of its own statute that the undertaking not to apply for registration operates, for purposes of statutory disqualification, as the functional equivalent of an order suspending or revoking registration. We have reviewed the requirements of Article III, Section 4 of the the NASD By-Laws in light of the CFTC’s interpretation, and it is our opinion that your client is statutorily disqualified from registration as a general securities representative.
I hope this letter is responsive to your inquiry. Please note that the opinions expressed in this letter are staff opinions only and have not been reviewed or endorsed by the Board of Directors of NASD Regulation. This letter responds only to the issues you have raised based on the facts as you have described them in your letter, and does not necessarily address any other rule or interpretation of the NASD or all the possible regulatory and legal issues involved.
Very truly yours,
Assistant General Counsel
NASD Regulation, Inc.