Court Opinion

ID: 9787003
Source: CourtListenerOpinion
Date Created: 2023-08-31 00:08:02.337583+00
Date Added: 2024-06-11T07:36:51.111888
License: Public Domain

JONES, J.,
concurring in part and dissenting in part.
I concur in the Court’s opinion in all respects except for the conclusion that the Department did not have the authority under I.C. § 30-14-411(d) to request Karel’s client list. The Department determined that when the investigators requested the client list, Karel either had a client list or could have produced one through her computerized records. The client records were required to be maintained under I.C. § 30-14-411(c) and Karel was obligated to surrender them upon the Department’s request. While it is true the Department conceded these records were not required to be maintained, a review of the applicable provisions indicates the Department conceded too much.
The Court correctly holds that securities agents are obligated to make available to the Department upon its reasonable request those records within their possession which their broker-dealer is required by law to maintain. Broker-dealers are required to maintain a wide array of records, mostly dealing with client (customer) contracts, accounts, and trade transactions. I.C. § 30-14-411(c)(l) requires that broker-dealers (which does not include agents) make and maintain such records as are required pursuant to rules adopted by the Department. The Department’s Rule 88 (IDAPA 12.01.08.088.01) requires broker-dealers to make and maintain records compliant with SEC rules found at 17 C.F.R. §§ 240.17a-3, 17a-4, 15g-9 and 15c2-ll. Those SEC rules require maintenance of records primarily related to customers, including customer contracts, their personal information and their security transactions. For example, 17 C.F.R. § 240.17a-3(a)(17)(i)(A) requires maintenance of account records including the names of customers who are natural persons, together with each customer’s tax identification number, address, telephone number, date of birth, employment status, annual income, net worth and investment objectives. A current record of this and other information required by the SEC rules must be maintained and kept current for each office of the broker-dealer and is subject to exami*385nation by the SEC at any time during business hours. 17 C.F.R. 240.17a-3(b).
Based on the SEC rales, brokers-dealers have a strong incentive to carefully maintain customer records. Additionally, those records are the lifeblood of the broker-dealer’s business and contractual relationships with agents generally reflect that the customer records are the property of the broker-dealer, rather than the agent. The agreement between Summit and Karel specifies, “It is understood and agreed that all books and records pertaining to Summit customers are the property of Summit.” Karel further agreed that Summit had the sole discretion to conduct unannounced examinations and audits of these and other records related to her business.
One of the items that the Department sought to obtain from Karel when its agents made the unannounced visit to Karel’s office on June 7, 2005, was a list of clients to include their addresses and telephone numbers. Karel was required to surrender such information to the Department. The parties dispute what customer information was available and what should have been turned over. The Department contends Karel acknowledged she had a list of customers but refused to turn it over. Karel contends that she turned over information pertaining to her customers but that she was not obligated to furnish a list of the customers.
We need not try to reconcile the conflict in the evidence because the hearing officer addressed the matter in her findings, which the Department adopted in its order. The hearing officer found that Karel acknowledged she had the documents requested by the Department, including the client list, but declined to turn them over. The hearing officer went on to find:
With respect to production of the client list, Ms. Karel testified she understood the Department wanted a list of anyone currently doing investment business with Summit. She testified that, in June, 2005, she did not have a separate client list and indicated she did not know how to generate a client list from the ILX system. Her hearing testimony conflicts with her admissions to the Department investigators in which she admitted she had a client list, but refused to provide it. Further, Exhibits 10 and 11, produced by Ms. Karel on June 7, 2005, and June 15, 2005, indicate through her computerized records she had the capability of producing lists of clients. She testified that, in order to provide a current client list, she would need to update her records and eliminate old clients. However, Ms. Karel never explained that to the investigators. Instead, she refused to provide a list.
Thus, the hearing officer found that Karel either had a client list at the time it was requested or that she had the capability of producing one at that time. This finding, which was adopted by the Department, is supported by substantial, albeit conflicting, evidence and should be sustained. Karel’s refusal to provide the customer list was a violation of her obligations under I.C. § 30-14r411(d).
At oral argument, Karel’s counsel acknowledged that Karel had a list that she declined to provide the investigators but contended it was not information required to be maintained under I.C. § 30-14-411(c). According to counsel, the client list was not updated and not complete. The list included the names of clients from her former broker-dealer, Wachovia, and was being used by Karel as a “working list”. This contention provides no relief to Karel, however. Wachovia was a broker-dealer and the same record maintenance and production requirements pertained to Wachovia, as applied to Summit. The pertinent SEC rale requires customer information to be maintained for at least six years. 17 C.F.R. 240.17a-4. Whether the customer information requested by the Department pertained to Karel’s customers under either broker-dealer, she was obligated to furnish the information to the Department under I.C. § 30-14-411(d).
The same does not apply to the bank account records, as the Court holds. The requirement in I.C. § 30-14-411(c) to maintain records applies to broker-dealers, which does not include agents. While a broker-dealer is required to maintain its check books, bank statements, canceled checks and cash reconciliations in its records, pursuant to 17 C.F.R. *386§ 240.17a-4(b)(2), these are not the banking records that the Department sought. If the Department wished to obtain Karel’s personal checking account records or the records of a checking apparently owned by her father (and upon which she was able to draw checks), the Department should have sought those records pursuant to its subpoena power. I.C. § 30-14-602. Therefore, I concur in the Court’s determination regarding the banking records but dissent with regard to the determination pertaining to customer information.