The Long Arm of NASD

In arbitration, the SRO warns you don't have Constitutional protection. But, there are limits

Alan Jay Ochanpaugh, a registered rep with Northwestern Mutual Investment Services, helped found the Wisdom Mission Church, of which he was president, in late 2003. The church came up with a clever plan: Wisdom Mission members contributed an amount equal to their monthly mortgage payment (or similar major indebtedness), plus a 10 percent tithe to the church. The church would pay the member's bills, keep the tithe as a contribution and issue a letter to the member to support a tax deduction for the contribution. When the church learned that federal tax law did not allow the deduction, it terminated the program.

Northwestern investigated Ochanpaugh's activities as possible undisclosed outside business activity in violation of NASD Conduct Rule 3030 and Northwestern's own policies. Ochanpaugh maintained that the activity was exempt from Northwestern's disclosure requirements because the church was a tax-exempt nonprofit and his activity was uncompensated and pastoral.

Northwestern asked Ochanpaugh to provide information about church members. But, Wisdom Mission's “Covenant of Silence” forbids the disclosure of information. So, he refused and Northwestern terminated him.

The NASD Investigates

During its investigation of Ochanpaugh's alleged outside business activities, NASD issued several “requests for information” under NASD Procedural Rule 8210. Ochanpaugh provided responses, including a complete description of Wisdom Mission and a copy of its articles. The NASD asked for copies of three Wisdom Mission checks to find out if Ochanpaugh was being compensated. Ochanpaugh refused. He argues: The checks were the property of Wisdom Mission, which is not an NASD member so it had no right to them. Church leadership cited the First Amendment and its obligations under the covenant and refused to violate its members' privacy by producing the checks; besides, Ochanpaugh did not have the checks in his possession and could not compel the church leaders to surrender them.

NASD ruled that the checks were within the scope of Rule 8210 because the church was Ochanpaugh's alter ego and he had possession and control of the checks. NASD barred Ochanpaugh and assessed $2,183.71 in hearing costs. Ochanpaugh appealed the action to the SEC.

SEC Review

The SEC ruled that NASD did not have subpoena power and noted that NASD's right to inspect and copy documents of a member or associated person under Rule 8210 extends only to “books, records and accounts of such member or person.” The SEC's ultimate question: Are the requested checks “books, records or accounts” of Ochanpaugh?

The SEC rejected NASD's alter ego analysis, since it had no proof. Similarly, the SEC also rejected NASD's “possession and control” analysis because it smacked of a because-we-say-so approach. The SEC concluded that NASD failed to prove its case and set aside the bar and hearing costs.

The Point

While this case is based upon odd facts, it presents a common scenario in which the NASD imposes sanctions when Rule 8210 document demands are refused. Yes, NASD is entitled to great leeway when it makes demands during an investigation. However, “great leeway” does not mean carte blanche. What the self-regulator too often forgets is that members and their associated persons are denied the protection granted to citizens in a state or federal court when it warns: There is no constitutional due process at the NASD…there is no Fifth Amendment protection. The SEC admonishes that such constitutional protections: “are not available when NASD makes a Rule 8210 request; in such a case, the only recourse against possible overreaching by NASD is for the person to whom the request is directed to refuse to comply, and to appeal any consequent disciplinary action to the Commission…”

Nonetheless, as with many a flawed Hollywood film, the ending leaves you wanting more. The SEC's suggestion to respond to unfair NASD document demands through a form of civil disobedience — refuse to comply and appeal — is not a solution but a cop out.

Writer's BIO: Bill Singer is a practicing regulatory lawyer and the publisher of RRBDLAW.com

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