Wells Notices in NASD Proceedings
Broker-dealers and associated persons regulated by the NASD may receive Wells notices following the conclusion of an examination. In 1972, the SEC articulated its policy of issuing Wells notices, under which the staff advises persons and entities that it intends to recommend instituting enforcement proceedings against them. See Securities Act Release No. 5310 (1972) (“Wells Release”). [1] Among other things, an SEC Wells notice typically advises recipients of the legal and factual bases of the charges, and invites them to make a written submission (Wells submission) presenting any defenses and explanations that may apply. Responses to these notices, commonly known as “Wells submissions,” are a critical component of any defense strategy. Such submissions may argue that no enforcement action is warranted, or that the staff should pursue lesser charges and more lenient relief than that proposed in the notice. Importantly, Wells submissions accompany the staff’s enforcement recommendations that are presented to the five SEC Commissioners.
Less well known is the fact that the NASD also has a policy of issuing Wells notices. The policy appears to have been adopted fairly recently. In 2001, one commentator noted that “[g]enerally, the SROs provide for a Wells type procedure somewhat similar to the SEC’s procedure.” [1] Since at least the fall of 2005, the NASD’s Denver district office staff has been issuing Wells notices at the conclusion of examinations resulting in findings of deficiencies.
The NASD has offered no formal guidance about its Well policy. However, in a 2005 speech, Mary L. Schapiro, the president of NASD Regulatory Policy & Oversight, explicitly refuted the premise that the NASD’s Wells process was a “waste of time,” stating that:
it is my hope and expectation that we think long and hard about the cases we bring, because in this area we should never be nonchalant. If many cases fell by the wayside because of the Wells process that would indicate a failure on our part in doing our homework early and completely. But that doesn't mean we are married to a result before the submission of the Wells. Our reaction to finding a fact, circumstance or construction of law that we hadn't considered earlier is not to sweep it under the table. We have dropped big cases and small cases against firms of all sizes in the Wells process. For us that doesn't spell failure in a specific case, it means the check on the system has worked.
See Mary L. Schapiro, Remarks before the SIA Compliance & Legal Division Conference (April 4, 2005). [2] Ms. Schapiro’s statement implies that the NASD views its Wells process as being similar to the SEC’s Wells process, in that potential respondents are encouraged to bring exculpatory facts and circumstances, as well as legal defenses, to the attention of the NASD staff.
The lack of formal NASD guidance about its Wells policy leaves critical questions unanswered. Among these questions is whether the policy confer substantive rights on potential respondents. The SEC’s Wells Release emphasizes that its policies constitute a privilege rather than a right. Courts have agreed that the SEC’s policies create no enforceable procedural or substantive rights. [3] In contrast, the NASD has failed to articulate that its policy creates no enforceable rights, and I am aware of no authority to that effect. Accordingly, defense lawyers may be able to argue that the NASD staff’s failure to issue a Wells notice violated the substantive rights of their clients. Further, it is unclear whether the NASD’s policy allows potential respondents and their counsel to review evidence relied on by its staff in issuing its deficiency letter. It is probably worth making this request, since SEC regional offices now routinely grant access to their files during the Wells process. Until the NASD issues a formal release, practitioners will learn the nature and extent of its Wells process only through actual experience.
[1] See Paul Uhlenhop and Michael Wise, Regulatory Examinations for Cause, http://lksu.com/Articles/regulatory_examinations.htm (last visited March 13, 2006).
[2] Available at http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&ssDocName=NASDW_013752.
[3] See SEC v. National Student Marketing Corp., 538 F.2d 404, 407 (D.C. Cir. 1976), cert. denied, 429 U.S. 1073 (1977); Wellman v. Dickinson, 79 F.R.D. 341, 351-54 (S.D.N.Y. 1978).
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