December 29, 2005

Do the SEC’s Decisions Trump Sanctions Imposed by SROs?

Recently, I blogged about the battle between Delaware law and the federal securities law. Now, a development on when the NASD clashes with the SEC. [Perhaps next – what if the Mighty Thor met Conan the Barbarian!]

Here is an excerpt from a Registered Rep article regarding a December 13th opinion from the DC federal court of appeals:

“For the first time in its 68 years as a self-regulatory organization, the National Association of Securities Dealers sued the Securities and Exchange Commission over a right it was never granted. Guess what? It lost.

The right in question was to seek judicial review of an SEC decision reversing disciplinary action taken by the NASD and in barely concealed astonishment, the presiding Senior Circuit Judge Edwards said, “No court has ever suggested that such a review was possible.” Moreover, he continued, “we can find no case” where the NASD had ever asked for a review and “no reason to allow it do so now.”

‘Simply put,’ the judge said later on in his analysis, ‘the NASD appears before this court as a disgruntled first-level tribunal, complaining because it has been reversed by a higher tribunal.'”

By the way, contrary to the article, the NASD has previously appealed an SEC decision. That appeal related to Instinet – see NASD v SEC, 801 F.2d 1415 (DC Cir. 1986).

Nasdaq’s Public Reprimand Letters

The SEC recently approved a rule filing from Nasdaq – on an immediately effective basis – that allows Nasdaq to issue a public reprimand letter if it has determined that a listed company has violated a corporate governance or notification listing standard (other than one required by Rule 10A-3 of the ’34 Act). This is a much lower level sanction compared to delisting. A company that receives a public reprimand letter is required to publicly disclose it within 4 business days.

In determining whether to issue a public reprimand letter, Nasdaq will consider these factors:

– whether the violation was inadvertent,
– whether the violation materially adversely affected shareholders’ interests,
– whether the violation has been cured,
– whether the issuer reasonably relied on an independent advisor, and
– whether the issuer has demonstrated a pattern of violations.

Footnote 8 of the SEC’s release provides examples of circumstances under which Nasdaq might determine to issue a public reprimand letter, including:

– a company engaged in a pattern of failing to provide advance notice of press releases to the Nasdaq StockWatch department;

– a company with a December 31 fiscal year end has not held an annual meeting for the prior year as of early January, but the company has filed a proxy to hold the meeting in the next few weeks; or

– an independent director resigned from the company and was replaced with another independent director, but the company did not provide prior notice to Nasdaq.

More on Auditor Liability Caps

A number of members weighed in on my recent blog on auditor liability caps. For more commentary, check out Jack Ciesielski’s AAO Weblog (see the posts from Jack on December 5th and earlier) and this Bloomberg article. It will be interesting to see if this issue has “legs” and grabs the attention of the PCAOB and the SEC.