MERRILL, Circuit Judge:
Petitioner Sirianni seeks review of a decision and order of the Securities and Exchange Commission (SEC) affirming disciplinary action taken against him by the National Association of Securities Dealers, Inc. (NASD).
NASD is a national securities association registered with SEC under Section 15A of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78o-3(a). It is composed of firms who sell securities in the over-the-counter market. The Exchange Act requires NASD to regulate the conduct of its members by promulgation of rules designed to protect investors and to promote just and equitable principles of trade. 15 U.S.C. § 78o-3(b)(6). NASD has adopted such rules and enforces them through imposition of disciplinary sanctions. Disciplinary actions by NASD are subject to review by SEC. 15 U.S.C. § 78s(e).
NASD after investigation charged that petitioner had violated Section 5 of the Securities Act of 1933, 15 U.S.C. § 77e, in that he had as an underwriter participated in the sale of securities without complying with the registration requirement of that act. Further, it charged that petitioner had violated Article III, Section 1 of the NASD Rules of Fair Practice, NASD Manual (CCH) ¶ 2151, by failing to notify his employer of this participation.
Following a hearing before a subcommittee of NASD's Business Conduct Committee for District No. 2, the Committee ruled on behalf of NASD that petitioner was guilty of the violations charged. He was fined $25,000 and barred from association with any NASD member in any capacity. The holding was upheld by the Board of Governors of NASD but the fine was increased to $50,000 and the association bar was reduced to suspension from association for one year. On review by SEC the Board's order was affirmed and this proceeding was initiated by petitioner to secure judicial review.
Petitioner is employed by Connecticut General Life Insurance Company (CG) where his activities have dealt largely with the estate and tax planning areas of the life insurance business. He is registered with NASD as a representative of CG Equity Sales Company (CGE), a wholly owned subsidiary of CG and member of NASD which engages in the sales of mutual funds. Petitioner has gained a reputation among his insurance clients as a knowledgeable and successful investor on his own behalf in properties providing tax shelters.
In 1976, petitioner was approached by Howard Gatliff who had a contract with an
Gatliff also arranged for petitioner to receive a fee of 15% of the amount of any investment for anyone referred by him to Gatliff who should become an investor in a limited partnership. Petitioner thereafter made several referrals to Gatliff and received a total of $253,000 in finder's fees.
The Commission found that petitioner had as an underwriter participated in the sale of unregistered securities in violation of Section 5 of the Securities Act. The question before us is whether this finding is supported by substantial evidence. 15 U.S.C. § 78y(a)(4); Sartain v. SEC, 601 F.2d 1366, 1372 (9th Cir. 1979).
The Securities Act defines "underwriter" as:
15 U.S.C. § 77b(11). Petitioner contends that his simple referrals to Gatliff did not bring him within the terms of this definition, and accordingly that he was not subject to the Section 5 registration requirement.
Petitioner first contends that the fact that he received a finder's fee standing alone cannot constitute him an underwriter. He relies on In re South Umpqua Mining Co., 3 S.E.C. 233, 241 (1938), where the Commission held that one who receives a fee cannot be found an underwriter without some showing that he participated in the distribution of an issue. Disregarding for the moment that more than the receipt of a fee has been shown here, we note that the cited case is distinguishable from the one before us. While there the fee was paid by the underwriter for referral of the issuer to it, here petitioner received fees for referral to the underwriter of securities purchasers. His fees thus related directly to the sale of the Cal-Am securities.
As to the nature of petitioner's involvement in the sale of Cal-Am securities we are confined primarily to the statements made by Togo Tanaka at the hearings held by the NASD District Business Conduct Committee and the NASD Board of Governors. Tanaka was a client of petitioner for whom petitioner had planned estate and tax programs for twenty years. Tanaka regarded himself as a typical example of the manner in which petitioner dealt with his clients and in his opinion other clients approached petitioner and were treated by him in the same fashion.
The thrust of Tanaka's testimony was that petitioner had never solicited him for anything. On the contrary, Tanaka explained that he had sought out petitioner in accordance with the practice he had followed for many years of finding out at regular intervals what tax shelter investments petitioner was making on his own behalf. Petitioner told him that he had invested through Gatliff in limited partnerships holding coal mining leases. Petitioner did not, however, recommend, advise or in any respect urge Tanaka to invest in the partnerships. Rather, he advised Tanaka to make his own investigation as to the value of the leases and their usefulness as a tax shelter. (This Tanaka subsequently did and in depth.) Petitioner also informed Tanaka that he would obtain a finder's fee if Tanaka made an investment, and Tanaka signed a written acknowledgment that he had been so informed. Petitioner did not participate in any discussions Tanaka had with Gatliff.
In petitioner's view, this evidence demonstrates no more than that he responded to an inquiry as to what investments he had made on his own behalf; that, if anything, he cautioned his clients against making the investment without securing independent investigation and advice. Petitioner's innocuous characterization of his conduct, however, overlooks the context in which the inquiry and response occurred. This was no friendly accommodation on petitioner's part. It was a professional contact. Petitioner must surely have been aware of the reputation he had gained as a successful investor in tax shelters. The practice of his clients to ascertain what investments he had made must have told him clearly that his judgment was valued and would be relied upon. By his response to his client's inquiry, then, petitioner disclosed acts of his that spoke louder than any oral expression could to the effect that in his judgment the coal mining leases were a sound investment. Disclosure of the fact and magnitude of his own investment overwhelmed any attempt on his part to disassociate himself from his client's subsequent purchases. The inference is inescapable that it was petitioner's reputation that Gatliff was bargaining for in offering a 15% referral fee. As a knowledgeable businessman, petitioner was surely not so naive as to be unaware of the basis for the high value placed upon his references.
Petitioner, then, was in the very profitable business, on a continuing basis, of putting his clients in touch with Cal-Am and its underwriters by means of entertaining and responding to his clients' inquiries. In our view, these activities were of sufficient significance to amount to participation in the sales that followed from his references. Accordingly, we hold that substantial evidence supports the Commission's determination that petitioner had as an underwriter participated in the sale of unregistered securities.
The Commission also affirmed the NASD determination that petitioner had violated the NASD Rules of Fair Practice by failing to notify his employer of his participation in
Pursuant to Section 15A(b)(6) of the Exchange Act, 15 U.S.C. § 70o-3(b)(6), NASD has promulgated rules "designed to prevent fradulent and manipulative acts and practices, to promote just and equitable principles of trade * * * and, in general, to protect investors and the public interest * * *." Among these is Article III, Section 1 of the NASD Rules of Fair Practice, NASD Manual (CCH) ¶ 2151, p. 2014, which provides: "A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade." To implement this rule, the Board of Governors has issued an interpretation concerning private securities transactions. In relevant part it provides:
NASD Manual (CCH) ¶ 2177, p. 2109-3.
Petitioner does not dispute that he failed to inform his employer of his involvement in the sale of Cal-Am securities. The only question, then, is whether his involvement fell within the proscription of the Board of Governors' interpretation. We concluded above that substantial evidence supports the Commission's determination that petitioner participated in the sale of unregistered securities. In our view, that same evidence of participation is sufficient to find that petitioner "engage[d]" in a private securities transaction without notification to his employer, and therefore violated the NASD rules.
Petitioner argues that he was unaware of the NASD requirement that employers be informed of such outside securities activities. However as the Board of Governors stated in its decision, "Sirianni had a duty to read the firm's compliance guidelines and the Association's Manual. Had he read either, he would surely have known of his responsibility to clear such private transactions with his employer."
The NASD ordered that petitioner be fined $50,000 and suspended for one year from association with any NASD member. SEC affirmed these sanctions finding that they were not "excessive or oppressive." Petitioner renews his challenge to the sanctions here.
"Because `the relation of remedy to policy is peculiarly a matter for administrative competence' ... we will not disturb SEC sanctions unless they are either unwarranted in law or without some justification in fact." Hinkle Northwest, Inc. v. SEC, 641 F.2d 1304, 1310 (9th Cir. 1981), quoting American Power & Light Co. v. SEC, 329 U.S. 90, 112, 67 S.Ct. 133, 145, 91 L.Ed. 103 (1946).
On this record we can hardly say that the Commission abused its discretion in finding that the sanctions imposed were justified by the circumstances. It stated:
We find this a sound analysis.
As to warrant in law, petitioner argues that the $50,000 fine is in excess of the maximum fine of $5,000 per violation authorized by the NASD rules.
The order of the Securities and Exchange Commission is AFFIRMED.