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Mayflower Securities Co. v. Bureau of Securities

Decided: December 4, 1973.


For reversal and remandment -- Justices Hall, Sullivan and Clifford and Judges Conford and Collester. For reversal -- Justice Pashman. The opinion of the Court was delivered by Hall, J. Pashman, J. (concurring in part and dissenting in part).


[64 NJ Page 87] This appeal derives from an order of the Bureau of Securities suspending for a period of 20 days the registration of appellant Mayflower Securities Co., Inc. (Mayflower) as a securities broker-dealer, and prohibiting its officers, agents and employees from effecting any securities transactions from or within New Jersey during that period. The order, which has been stayed pending appeal, was based on findings by the Chief of the Bureau, who sat as the hearing officer, that Mayflower had violated provisions of our securities law and rules by employing an unregistered agent, Alan Robert

Levine,*fn1 and by failing to possess certain customer transaction records required to be kept. The latter violation was discovered during the Bureau's investigation of the former. The order did not allocate the period of suspension as between the two violations. The Appellate Division affirmed in an unreported opinion, holding simply that there was ample credible evidence in the record to support the agency findings and conclusions. We granted certification on Mayflower's petition. 63 N.J. 558 (1973).

The interrelated questions before us are, in effect, whether the claimed violations meet the legal requisites permitting suspension of a registration under the statutory provisions authorizing this penalty and, even if they do, whether the penalty, under the circumstances, is so harsh as to be arbitrary and an abuse of discretion.

Since the pertinent statute and rule provisions have not previously been considered by this court, we should first outline our view of them.

The scheme of New Jersey's regulation of the securities business in the state is set forth in the Uniform Securities Law (1967), N.J.S.A. 49:3-47 et seq., and in rules adopted by the Bureau of Securities pursuant thereto (see N.J.S.A. 49:3-67(a)), now found in N.J.A.C. 13:13-1.1, et seq. The law is generally modeled upon the Uniform Securities Act approved in 1956 by the National Conference of Commissioners on Uniform State Laws, 7 Uniform Laws Annotated, Business and Financial Laws (Master ed. 1970) 691, but. as we have previously noted, with differences in a number of respects. See Data Access Systems, Inc. v. State of New Jersey, Bureau of Securities, 63 N.J. 158, 162 (1973).

Basic to the regulatory scheme, insofar as pertinent to the case, is the requirement of registration with the Bureau -- in effect, licensure after meeting certain qualifications -- of all broker-dealers and their agents (salesmen). An agent must be employed by a particular registered broker-dealer. N.J.S.A. 49:3-56(a) and (b). These subsections expressly declare it to be unlawful for any person to act as a broker-dealer or agent in this state unless he is so registered and for any broker-dealer to employ an agent unless the latter is registered. By statute, N.J.S.A. 49:3-56(d), and rule, N.J.A.C. 13:13-5.1, all registrations expire on December 31 of the year next ensuing the year in which the registration became effective and must be renewed prior to such date by the completion and submission of forms issued by the bureau and the payment of a fairly nominal fee. It is safe to say that renewal is pro forma unless the application therefor discloses or the Bureau otherwise knows of some change of circumstance which would demonstrate that the applicant no longer meets the required qualifications. See N.J.A.C. 13:13-5.1, 5.2, 5.3, 11.14 and 11.16.

A second pertinent requirement of the regulatory scheme is that all broker-dealers must keep, and preserve for three years, at their principal place of business, open to the inspection of the Bureau, all books and records required to be kept by the Securities and Exchange Commission. N.J.S.A. 49:3-59(b) and N.J.A.C. 13:13-1.9 The purpose is obviously to facilitate Bureau investigation and checking to make certain that all requirements of the law and rules relative to the operation of the business are complied with. See N.J.S.A. 49:3-68. It is not disputed here that customer transaction records are among those required to be maintained and available.

Three forms of sanctions are expressly prescribed by the law for violations of the statute or rules by a broker-dealer or agent, apparently to be selected from by the Bureau Chief in the reasonable exercise of his discretion depending on

the nature and circumstances of the violation and the offender. One, not involved here, is a regular criminal prosecution, for a misdemeanor, of one who "willfully" violates the law or rules. N.J.S.A. 49:3-70(a). This is derived from the Uniform Act, 7 Uniform Laws Annotated, supra, § 409(a), p. 768. Another is a monetary penalty, presumably administratively assessed by the Bureau, of not more than $200 for a first violation. not more than $500 for a second violation and $500 for subsequent violations. N.J.S.A. 49:3-70(b). It is to be noted that the availability of this sanction does not require a willful violation, although we would think it usable even if the violation were of such character. This sanction is not provided for in the Uniform Act and appears to be peculiar to New Jersey. The third form, that utilized here, is suspension or revocation of a registration. N.J.S.A. 49:3-58. This too is modeled after the provisions of the Uniform Act. 7 Uniform Laws Annotated, supra, § 204, pp. 710-713, and is substantially like section 15(b) of the federal Securities Exchange Act of 1934, 15 U.S.C.A. § 78 o (b)(5). This procedure involves a full-scale hearing, if requested by the offender, and must be bottomed, as far as this case is concerned, on two fundamental findings: (1) that the order "is in the public interest" (N.J.S.A. 49:3-58(a)(1)), and (2) that the broker-dealer or agent complained against "has willfully violated or willfully failed to comply with any provision of this law or a predecessor law or any rule or order authorized by this law or a predecessor law" (N.J.S.A. 49:3-58(a)(2)(ii)). (Emphasis supplied). The "public interest" requirement does not come into play unless a willful violation is first found. These severe sanctions seem obviously designed for use in serious situations.

The "public interest" requirement seems to imply a conclusion that revocation or suspension of registration is felt necessary to protect present and future customers of the registrant, i.e., the investing public -- for example, revocation,

if the registrant is shown to be unfit to continue to engage in the securities business, or suspension from business for a period, to impress upon him the necessity for drastically mending his ways lest he reach the level of unfitness. Cf. 69 Am. Jur. 2 d, Securities Regulation -- Federal, § 357. It is worthy of mention that the Commissioners' Note to the Uniform Act, in commenting upon this requirement, says: "But the requirement that such a finding be made in all cases emphasizes that not every minor or ...

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