Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-98-01414/USCOURTS-caDC-98-01414-0/pdf.json

Parties Involved:
Ross S. Frankel
Petitioner
Securities and Exchange Commission
Respondent

Document Text:

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 30, 1999 Decided June 1, 1999

No. 98-1287

Victor Teicher, et al.,

Petitioners

v.

Securities and Exchange Commission,

Respondent

Consolidated with

98-1414

On Petitions for Review of an Order of the

Securities and Exchange Commission

Robert G. Morvillo argued the cause for petitioners Victor

Teicher and Victor Teicher & Co. With him on the briefs

were Catherine M. Foti and Neil M. Barofsky. Diana D.

Parker entered an appearance.

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Roger J. Bernstein argued the cause and filed the briefs for

petitioner Ross S. Frankel. Eugene A. Gaer entered an

appearance.

David M. Becker, Deputy General Counsel, Securities &

Exchange Commission, argued the cause for respondent.

With him on the brief were Jacob H. Stillman, Solicitor, and

Susan S. McDonald, Senior Litigation Counsel.

Before: Silberman, Williams and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Williams.

Williams, Circuit Judge: Petitioners Victor Teicher and

Ross Frankel were convicted of various charges of securities

fraud, conspiracy and mail fraud for their participation in an

insider trading scheme. In a later administrative proceeding,

the Securities and Exchange Commission issued an order

barring both petitioners from various branches of the securities industry, including association with registered and unregistered investment advisers. (Victor Teicher & Co. was also

convicted and barred along with the individual; we refer to

both simply as Teicher.) Both petitioners now challenge

portions of the order as beyond the Commission's statutory

authority. Teicher argues that the Commission's authority

under s 203(f) of the Investment Advisers Act of 1940 (the

"Advisers Act"), 15 U.S.C. s 80b-3(f), did not include the

power to exclude him from association with an unregistered

investment adviser; the language of the statute is emphatically against the claim, and Teicher presents nothing adequate

to overcome that language, assuming anything could be adequate. Frankel claims that s 15(b)(6) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C.

s 78o(b)(6), which is triggered by a person's past, present or

future association with a broker-dealer, does not supply the

Commission with authority to exclude persons from the investment adviser industry; indeed, the logic of the statutory

structure convinces us that Congress withheld that power.

* * *

Section 203(f) of the Advisers Act provides in part:

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The Commission, by order, shall censure or place limitations on the activities of any person associated, seeking

to become associated, or, at the time of the alleged

misconduct, associated or seeking to become associated

with an investment adviser, or suspend for a period not

exceeding twelve months or bar any such person from

being associated with an investment adviser, if the Commission finds ..., that such censure, placing of limitations, suspension, or bar is in the public interest and that

such person [has been convicted of specified offenses,

including those of which Teicher was convicted].

15 U.S.C. s 80b-3(f)(emphasis added).

Some but not all investment advisers are required by the

Act to register with the Commission. Among the exempt

advisers, for example, would be one with fewer than 15 clients

and not holding itself out to the public as an investment

adviser nor acting as adviser to an investment company under

the Investment Company Act of 1940. s 203(b), 15 U.S.C.

s 80b-3(b). The term "investment adviser" in s 203(f) is

unmodified, and the SEC read it to include any investment

adviser, whether registered or not. Teicher says the term

covers only a registered investment adviser. Since he was

not associated with a registered investment adviser at the

time of his wrongdoing or at the time of the Commission's

administrative proceeding, he says that s 203(f) afforded it no

authority to sanction him.

No language in the cited provision remotely suggests that

its application is limited to "registered" investment advisers.

And the Act explicitly defines an investment adviser as "any

person who, for compensation, engages in the business of

advising others ... as to the advisability of investing in,

purchasing, or selling securities." s 202(a)(11) of the Investment Advisers Act, 15 U.S.C. s 80b-2(a)(11). Again, no

mention of registration. As the Act in various places specifies "registered" advisers, see, e.g., ss 203(d) & 208, 15

U.S.C. ss 80b-3(d) & 80b-8, and in others those "exempt[ ]

from registration," see ss 204 & 205, 15 U.S.C. ss 80b-4 &

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80b-5, there seems every reason to believe that when it uses

the term unmodified, it means both.

Teicher claims that our decision in Wallach v. SEC, 202

F.2d 462 (D.C. Cir. 1953), construed the phrase "any broker

or dealer" in an analogous provision in the Exchange Act to

encompass only "registered" brokers or dealers; thus, he

argues, s 203(f) in the Advisers Act should be similarly

limited to "registered" investment advisers. In reality Wallach is a good deal narrower. There the SEC tried to force

the joinder of a broker-dealer's employee-salesman as a party

in disciplinary proceedings against the broker-dealer. We

rejected the Commission's argument that the statute, which

in terms focused on brokers and dealers, would reach their

employees. The Commission's theory was simply that such

an expanded proceeding would be much more practical--its

findings would be res judicata as to the salesman as well as

the firm, to be used against the salesman if he ever sought

registration. See 202 F.2d at 109-10. The Commission did

not argue that a salesman with a broker-dealer was an

"unregistered" broker or dealer. (Such a theory seems unlikely to have been helpful for the SEC's claim, as the statute

authorized only the denial or revocation of registration as a

broker or dealer, and was thus necessarily limited to a person

or firm seeking or already holding such a license.)1 Here, the

Act establishes some rules applying to unregistered investment advisers, some applying to registered ones, and some,

such as s 203(f), that give every appearance of applying to

both. The Commission's reading honors that structure.

Teicher calls our attention to the fact that when originally

enacted in 1940 s 203 applied only to registered investment

advisers--in the sense that it provided only for the denial,

revocation or suspension of a registration as an investment

adviser. See 15 U.S.C. s 80b-3(d) (1940). But since 1940

Congress has amended the Act and expanded the array of

__________

1 By means of a later amendment Congress explicitly granted

the SEC authority to discipline persons "associated" with a broker

or dealer. See s 15(b)(6) of the Exchange Act, 15 U.S.C.

s 78o(b)(6).

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sanctions far beyond the early focus on registration. Now

the SEC's sanction power--even looking only at that granted

by s 203(f)--explicitly covers persons merely associated with

or seeking association with investment advisers and ranges

from censure to an outright ban on association with an

investment adviser.

Teicher quotes an item from the legislative history of the

1970 amendment that added s 203(f): "[The proposed amendments] would strengthen existing disciplinary controls over

registered investment advisers by making them more comparable to the provisions of Section 15(b) of the Securities

Exchange Act relating to broker-dealers in securities."

S. Rep. No. 91-184, at 44 (1969) (emphasis added). But such

a use of the adjective "registered" in a Senate report is not of

much help, especially when the statute itself offers no apparent ambiguity that the reference might help resolve. See

Ratzlaf v. United States, 510 U.S. 135, 147-48 (1994). And

the SEC has pointed to references in the same Senate Report

that describe the addition with no mention of "registered."

See S. Rep. No. 91-184, at 46-47; see also H.R. Rep. No.

91-1382, at 41 (1970) (same). Teicher points to several other

items of legislative history, bits not even associated with the

enactment of s 203, but they are even less convincing. Reviewing the Commission's statutory interpretation under the

principles of Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 836 (1984), we find that Teicher has

not effectively challenged the Commission's reading of the

Act's unambiguous language.

* * *

Frankel's claim rests on the scope of a phrase that could be

very broad--out of context. It appears in the following

section, under which he was sanctioned:

With respect to any person who is associated, who is

seeking to become associated, or, at the time of the

alleged misconduct, who was associated or was seeking to

become associated with a broker or dealer ... the Commission, by order, shall censure, place limitations on the

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activities or functions of such person, or suspend for a

period not exceeding 12 months, or bar such person from

being associated with a broker or dealer, ... if the

Commission finds ... that such person [has been convicted of securities fraud or enjoined against conduct in

violation of the securities laws].

s 15(b)(6) of the Exchange Act, 15 U.S.C. s 78o(b)(6)(A)

(emphasis added). The SEC's implicit reading is that this

section authorizes it to "place," on any person guilty of the

specified substantive violations, any "limitation[]" it chooses

on his participation in any of the branches of the securities

industry for which it administers an occupational licensing

regime.

Frankel focuses primarily on two objections to the SEC's

reading. First, he points out that the word "limitation"

ordinarily has a meaning quite distinct from that of "bar."

Second, the passage shows a quite intentional progression of

penalty from mild to severe--censure, limitation, suspension,

and finally bar; the SEC's interpretation flouts this progression, elevating "place limitations" to a scope broader than the

climax penalty, "bar," which is explicitly limited to association

with a broker-dealer.

We need not decide whether these arguments alone would

carry the day for Frankel; the SEC's interpretation also

suffers fatal structural difficulties. Clearly the "place limitations" language requires some concept of the relevant domain. Even the Commission doesn't suggest that the phrase

allows it to bar one of the offending parties from being a

retail shoe salesman, or to exclude him from the Borough of

Manhattan.

In the opinion in which the Commission initiated its claim

to effect a "collateral bar" under s 15(b)(6), i.e., a bar outside

the broker-dealer branch of the securities industry, Meyer

Blinder, 65 CCH SEC Docket 1378, 1380-82 (1997), it relied

on a general principle favoring "flexibl[e]" construction of the

securities laws to effectuate their remedial purposes, id. at

1381 (citing Central Bank of Denver, N.A. v. First Interstate

Bank, 511 U.S. 164, 185-86 (1994)), and three specific points

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that we address below--(1) that the "collateral bar" concept

enables it to do in one proceeding what would otherwise

require two; (2) that it prevents the risk of a regulatory

"gap" through which a miscreant could for a time participate

in the securities market unbeknownst to the Commission;

and (3) that legislative history of a later-enacted provision

shows that the Commission's reading of the statute is in

accord with congressional intent. See Blinder, 65 CCH SEC

Docket at 1381-83. Neither in its brief nor in Blinder did the

agency articulate an explicit limiting principle other than the

idea of a bar of the offender from engaging in "activities in

other securities professions." See Blinder, 65 CCH SEC

Docket at 1383; Government Br. at 45-46. But such a

reading, if lawful, would allow the Commission to bar Frankel

from becoming a commercial banker or a mergers-andacquisitions attorney, activities linked to the securities industry but not under the Commission's jurisdiction. Because of

the Commission's regulatory "gap" claim, however, we infer

that it is only seriously claiming that the "place limitations"

power enables it to bar an offender from a branch of the

securities industry from which it might later have explicit

authority to exclude him. Even this claim, however, turns

out to contradict the way in which Congress has structured

the relevant occupational license regimes and related sanctions.

The SEC administers three systems of occupational licensing. The Advisers Act, as we saw when considering Teicher,

covers investment advisers and associated persons. ss 203(e)

& (f), 15 U.S.C. ss 80b-3(e) & (f). The Exchange Act, under

which it acted against Frankel, covers broker-dealers and

associated persons. ss 15(b)(4) & (6), 15 U.S.C. ss 78o(b)(4)

& (6). And another section of the Exchange Act covers

municipal securities dealers and associated persons.

ss 15B(c)(2) & (4), 15 U.S.C. ss 78o-4(c)(2) & (4). In each

regime, there is, as to associated persons, an almost identically worded threshold nexus requirement. Thus, recall that the

sentence governing Frankel began:

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With respect to any person who is associated, who is

seeking to become associated, or, at the time of the

alleged misconduct, who was associated or was seeking to

become associated with a broker or dealer ... the Commission, by order, shall....

s 15(b)(6) of the Exchange Act, 15 U.S.C. s 78o(b)(6)(A).

The one used against Teicher also demands a nexus, but the

required link is to investment advisers:

The Commission, by order shall censure or place limitations on the activities of any person associated, seeking

to become associated, or, at the time of the alleged

misconduct, associated or seeking to become associated

with an investment adviser....

s 203(f), Advisers Act, 15 U.S.C. s 80b-3(f). The provision

for municipal securities dealers follows precisely the structure

of the investment adviser provision, replacing "investment

adviser" with "municipal securities dealer." s 15B(c)(4), 15

U.S.C. s 78o-4(c)(4). And each provision has the "place

limitations" language in dispute here.

The SEC believes that once the threshold requirement of

any of the particular provisions has been satisfied, it should

be able to use the "place limitations" language to move

seamlessly from one licensing regime to another, imposing

unlimited sanctions throughout all the branches of the industry within its bailiwick. Thus, once it found Frankel met the

threshold requirement of being associated with a broker or

dealer under the Exchange Act, it could bar him from association with any investment adviser--a sanction that is only

specifically available under the Advisers Act.

In a letter submitted after oral argument, the SEC says, in

response to the suggestion that its reading of the provisions

virtually eliminates the nexus requirement, that such a view

begs the question--which is the meaning of the "place limitations" phrase. Of course in a way that is true. But Congress's thrice repeated use of a nexus requirement focused on

a single branch of the industry seems to us to underscore a

congressional determination to create separate sets of sancUSCA Case #98-1414 Document #439072 Filed: 06/01/1999 Page 8 of 11
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tions, each triggered by an individual's satisfying the industry-specific nexus.

The SEC objects that this forces it to do in two proceedings what it would be more convenient to do in one. First we

note that as we read the statutes, they simply do not permit

the Commission to impose sanctions in any specific branch

until it can show the nexus matching that branch. The

Commission's real objection is thus that it must wait--perhaps indefinitely. But this does not seem especially vexing.

Rather, it seems entirely consonant with Congress's having

set up three separate systems for denying the benefits of

"association" with licensed entities in the several systems.

The provisions lead in the aggregate to a tailoring of sanctions fitted either to a looming menace (the person's being in

or seeking to get into a branch of the industry), or to a

malfeasance committed while in a branch.

The Commission identifies one respect in which a branchby-branch reading of the statutes might create a risk to

investors. While the Commission would get notice automatically if Frankel sought to become associated with a registered

investment adviser, see Rule 204-1(b)(1), 17 CFR s 275.204-

1(b)(1), and thus could start a proceeding under s 203(f), it

would get no such alert for his association with an unregistered investment adviser. But assuming the Commission

cannot remedy this by an equivalent notice provision for such

advisers, that gap can only be because Congress withheld the

authority--presumably for good reason, perhaps relating to

their limited scale or regulation by other jurisdictions. A

congressional discount of a peril is hardly the strongest

argument why we should see it as urgent.

The SEC further points to the legislative history of the

1987 amendments, adding the "place limitations" language to

the sanction provision for municipal security dealers, and thus

making it fully parallel to that for investment advisers and

broker-dealers. The Senate Report accompanying the

change says:

The Commission regards this as a desirable change in

the law because the limitations authority is an important

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recognition by Congress of the need for flexibility to

fashion sanctions that fit the offense and situation presented. For example, the Commission may use its "limitations" authority in the broker-dealer area to suspend

the operation of a single branch office, rather than an

entire firm, where misconduct was localized; or to confine an offending employee to nonsupervisory positions

where an outright bar or suspension is unnecessary; or

to bar persons formerly associated with broker-dealers

from entering other securities professions where they

might continue to perpetrate frauds upon unsuspecting

investors.

S. Rep. No. 100-105, at 25 (1987) (emphasis added). The

passage offers several examples of options indisputably added

by insertion of the "place limitations" phrase, but, as the SEC

argues, it appears to presuppose the Commission's broad

understanding. And "post-enactment legislative history,"

purporting to describe an earlier enactment (or, as here,

language paralleling an earlier provision), may sometimes be

relevant in establishing ambiguity in the phrase commented

upon. See McCreary v. Offner, __ F.3d __, No. 98-5155, 1999

WL 202475 at *6-*7 (D.C. Cir. Apr. 13, 1999). But cf. United

States ex rel. Long v. SCS Business & Technical Institute,

Inc., Nos. 98-5133, 98-5149 and 98-5150, 1999 WL 178713 at

*6 (D.C. Cir. April 2, 1999) (declaring post-enactment legislative history as having "only marginal, if any, value."). At

most, then, all the legislative history can do is to buttress the

Commission's claim that the "place limitations" language is

ambiguous, and thus its interpretation is entitled to Chevron

deference if it is reasonable and consistent with the statutory

purpose. See Troy Corp. v. Browner, 120 F.3d 277, 285 (D.C.

Cir. 1997) (citing Chevron, 467 U.S. at 843). But even

assuming ambiguity, we do not see the criterion of reasonableness satisfied here. "The meaning of statutory language,

plain or not, depends on context." Bailey v. United States,

516 U.S. 137, 145 (1995) (citations omitted). The context--a

rather elaborate structure of separate provisions with distinct

threshold requirements--suggests that Congress meant the

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SEC would make those threshold findings before administering the corresponding sanction.

* * *

We affirm the SEC's order barring Teicher from associating with any investment adviser, registered or unregistered,

but find the order in excess of the Commission's powers

insofar as it purports to bar Frankel from becoming associated with an investment adviser.

So ordered.

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