90-003928RX Thomas James Associates, Inc.; Brian S. Thomas; James Alan Villa; Robert Joseph Setteducati; Karl Ronald Foust; Michael John Bergin; Lee Blackwell; Thomas Hinkel; George Salloum; John Mcauliffe; Kevin O`hare; David Rocco; And Cristanto Delgado vs. Department Of Banking And Finance, Division Of Securities And Investor Protection Status: Closed DOAH Final Order on Tuesday, August 21, 1990.

Summary: Rules requiring securities dealer to adhere to standards of conduct adopted by industry associations are valid.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

THOMAS JAMES ASSOCIATES, INC.; )

BRIAN S. THOMAS; JAMES ALAN VILLA; )

ROBERT JOSEPH SETTEDUCATI; KARL )

RONALD FOUST; MICHAEL JOHN BERGIN; )

LEE BLACKWELL; THOMAS HINKEL; )

GEORGE SALLOUM; JOHN MCAULIFFE; )

KEVIN O'HARE; DAVID ROCCO; and )

CRISTANTO DELGADO, )

)

Petitioners, )

)

vs. ) CASE NO. 90-3928RX

)

DEPARTMENT OF BANKING AND FINANCE, )

DIVISION OF SECURITIES AND )

INVESTOR PROTECTION, )

)

Respondent. )

____________________________________)

FINAL ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly

designated Hearing Officer, Claude B. Arrington, held a formal hearing in the

above-styled case on July 16, 1990, in Tallahassee, Florida.

APPEARANCES

For Petitioners: R. Michael Underwood, Esquire

Katz, Kutter, Haigler, Alderman,

Davis, Marks & Rutledge, P.A.

First Florida Bank Building

215 South Monroe Street, Suite 400

Post Office Box 1877

Tallahassee, Florida 32301

For Respondent: Margaret S. Karniewicz, Esquire

Anthony F. DiMarco, Esquire

Assistants General Counsel

Department of Banking and Finance

The Capitol, Suite 1302

Tallahassee, Florida 32399

STATEMENT OF THE ISSUES

Whether Rules 3E-600.013(1)(f), 3E-(300.013(1)(p) and 3E-600.013(2)(g),

Florida Administrative Code are invalid exercises of delegated legislative

authority.

PRELIMINARY STATEMENT

Petitioners contest the validity of certain rules adopted and administered

by the Department of Banking and Finance on the grounds that those rules are

invalid exercises of delegated legislative authority.

Prior to the beginning of the formal hearing, arguments were heard on

Respondent's Motion to Strike and/or Dismiss Petition. This motion was denied

and the case was heard on the merits. At the formal hearing, the parties'

Prehearing Stipulation and Joint Exhibits 1 through 4 were received into

evidence. Neither party called any witnesses or presented any other documentary

evidence. The record of the proceedings was held open until July 23, 1990, to

permit the original, signed and corrected deposition of Tamara Cain to be

substituted for the copy of the deposition admitted as Joint Exhibit 4.

No transcript of the proceedings has been filed. Rulings on proposed

findings of fact may be found in the Appendix to this Final Order.

FINDINGS OF FACT

1. Respondent is the state agency charged with the administration and

enforcement of Chapter 517 Florida Statutes, which is referred to as the Florida

Securities and Investor Protection Act. Rulemaking authority is conferred on

Respondent by the provisions of Section 517.03, Florida Statutes.

2. Pursuant to its rulemaking authority, Respondent filed documents on

November 15, 1979, with the Florida Secretary of State to adopt the challenged

paragraphs as part of Rule 3E- 600.13, Florida Administrative Code. This rule

became effective on December 5, 1979, and was subsequently renumbered as 3E-

600.013, Florida Administrative Code. The summary of the public hearing held by

the Respondent on November 7, 1979, as part of the rulemaking process makes no

mention of the specific provisions at issue here.

3. Section 517.l61(1)(h), Florida Statutes, provides, in pertinent part,

as follows:

(1) Registration under S. 517.12 may be

denied or any registration granted may

be revoked, restricted, or suspended by

the department if the department

determines that such applicant or

registrant:

* * *

(h) Has demonstrated his unworthiness

to transact the business of dealer,

investment adviser, or associated

person;

4. Rule 3E-600.013, Florida Administrative Code, provides, in pertinent

part, as follows:

(1) The following are deemed

demonstrations of unworthiness by a

dealer under Section 517.161(1)(h),

Florida Statutes, without limiting that

term to the practices specified herein:

* * *

(f) Extending, arranging for, or

participating in arranging for credit to

a customer in violation of the

Securities Exchange Act of 1934 or the

regulations of the Federal Reserve

Board;

* * *

(p) Violating any rule of a national

securities exchange or national

securities association of which it is a

member with respect to any customer,

transaction or business in this state:

* * *

(2) The following are deemed

demonstrations of unworthiness by an

agent under Section 517.161(1)(h),

Florida Statutes, without limiting that

term to the practices specified herein:

* * *

(q) Engaging in any of the practices

specified in subsections (1) ... (f)...

(p) ...

5. Thomas James Associates, Inc. is a securities dealer as defined in

Section 517.021(9)(a)1., Florida Statutes, and is registered with Respondent.

Section 517.12(16), Florida Statutes, requires securities dealers to be

registered as a broker or dealer with the Securities and Exchange Commission.

The other Petitioners are or were associated persons of Thomas James Associates,

Inc. within the meaning of Section 517.021(4), Florida Statutes. Each

Petitioner has been charged in a pending disciplinary proceeding with having

demonstrated his unworthiness to transact business in the State of Florida by

having committed one or more violations of the foregoing rules either as a

dealer or as an agent. More specifically, Respondent's charge of unworthiness

to transact business in the State of Florida is based on the allegations that

Petitioners have violated certain Rules of Fair Practice of the National

Association of Securities Dealers (NASD), the rules of the Securities and

Exchange Commission (SEC), the Securities and Exchange Act of 1934, and the

rules of the Federal Reserve Board. Section 517.161(6), Florida Statutes, gives

the Respondent the authority to deny an application for registration or to

suspend or restrict any registration granted pursuant to Section 517.12, Florida

Statutes, if the applicant or registrant is charged in a pending enforcement

action, including any proceeding brought by the SEC or NASD, with any conduct

that would authorize denial or revocation under Section 517.161(1), Florida

Statutes.

6. None of the challenged provisions of Rule 3E-600.013, Florida

Administrative Code, have been amended since originally adopted in 1979. None

of the statutes, regulations or rules referred to in Rules 3E-600.013(1)(f),(p),

Florida Administrative Code, have been filed with the Department of State, with

the following exception. On August 30, 1982, Respondent filed with the

Department of State certain rules of the Securities and Exchange Commission and

of the Municipal Securities Rulemaking Board. Respondent has not prepared or

filed with the Department of State any other certification describing this

referenced material and specifying other rules to which the referenced material

applies.

7. Some of the rules which are incorporated by reference by Rule 3E-

600.013(1)(p), Florida Administrative Code, have been changed since its adoption

in 1979 by Respondent. Respondent does not maintain a copy of all rules that

are incorporated by reference either in the form as they existed in 1979 or as

subsequently amended. Respondent has taken no action to amend its rules to

reflect changes that may be made from time to time in rules that have been

incorporated by reference.

8. Petitioners are members of NASD who have voluntarily agreed to comply

with the rules of NASD as they are or may from time to time be adopted, changed,

or amended by NASD. Petitioners are likewise required to comply with the rules

of the SEC, the Securities and Exchange Act of 1934, and the rules of the

Federal Reserve Board as those rules or laws are or may from time to time be

adopted, changed or amended.

9. Respondent makes its own factual determination as to whether an

applicant or registrant has demonstrated its unworthiness by violating rules

proscribed by Rules 3E-600.013(1)(f) and (p) and 3E600.0l3(2)(q), Florida

Administrative Code. Respondent does not wait to bring disciplinary action

against a registrant or applicant until there has been a formal and final

determination by a national securities exchange or by a national securities

association that a violation of its rules has occurred. For example, Respondent

does not wait for NASD to bring disciplinary action against an applicant or a

registrant if Respondent has determined on its own that the applicant or

registrant has violated NASD rules.

CONCLUSIONS OF LAW

10. The Division of Administrative Hearings has jurisdiction over the

subject matter of and the parties to this proceeding. Section 120.56, Florida

Statutes. Petitioners have the requisite standing to bring this rules

challenge.

11. Section 120.52(8), Florida Statutes, provides the following definition

that is pertinent to these proceedings:

(8) "Invalid exercise of delegated

legislative authority" means action

which goes beyond the powers, functions,

and duties delegated by the Legislature.

A proposed or existing rule is an

invalid exercise of delegated

legislative authority if any one or more

of the following apply:

(a) The agency has materially failed

to follow the applicable rulemaking

procedures set forth in S. 120.54;

(b) The agency has exceeded its grant

of rulemaking authority, citation to

which is required by S. 120.54(7);

(c) The rule enlarges, modifies, or

contravenes the specific provisions of

law implemented, citation to which is

required by S. 120.54(7);

(d) The rule is vague, fails to

establish adequate standards for agency

decisions, or vests unbridled discretion

in the agency,; or

(e) The rule is arbitrary or

capricious.

12. The burden is on the Petitioners to establish by a preponderance of

the evidence that the challenged rules are an invalid exercise of delegated

legislative authority. Agrico Chemical Co. v. State, Department of

Environmental Regulation, 365 So.2d 759 (Fla. 1st DCA 1978), cert. denied, 376

So.2d 74 (Fla. 1979). Great deference is given to an agency's interpretation of

its rules and governing statutes. Such an interpretation will not be overturned

even if such interpretation is not the sole possible interpretation, the most

logical interpretation, or the most desirable interpretation. An agency's

interpretation of its rules and governing statutes will not be overturned unless

the interpretation is clearly erroneous. General Telephone Company of Florida

v. Florida Public Service Commission, 446 So.2d 1063 (Fla. 1984); Department of

Professional Regulation, Board of Medical Examiners v. Durrani, 455 So.2d 515

(Fla. 1st DCA 1984).

13. Petitioners' contention that the challenged rules are arbitrary and

capricious is rejected. Petitioners' contention is based on its conclusion that

the rules attempt to expand the jurisdiction of Respondent indefinitely and are

therefore irrational, not supported by facts or logic, or are despotic. This

conclusion is likewise rejected as being contrary to the record in this

proceeding. The failure of an applicant or registrant to adhere to the rules of

a national securities exchange or association of which he is a member is

reasonably related to his lack of worthiness to transact business in Florida and

forms a reasonable basis for Respondent to exercise the disciplinary powers

conferred upon it by Chapter 517, Florida Statutes.

14. The challenged rules are clear and unambiguous. Petitioners' argument

that the rules are impermissibly vague is not supported by the record in this

proceeding and is, therefore, rejected.

15. Petitioners' final contention is that the rules are invalid because

Respondent has materially failed to follow the rulemaking procedures set forth

in Section 120.54, Florida Statutes.

16. Section 120.54(8), Florida Statutes, provides, in pertinent part, as

follows:

(8) Each rule adopted shall contain

only one subject and shall be preceded

by a concise statement of the purpose of

the rule and reference to the rules

repealed or amended, which statement

need not be printed in the Florida

Administrative Code. Pursuant to rule

of the Department of State, a rule may

incorporate material by reference but

only as such material exists on the date

the rule is adopted. For purposes of

such rule, changes in such material

shall have no effect with respect to the

rule unless the rule is amended to

incorporate such material as changed.

17. The rule adopted by the Department of State to implement Section

120.54(8), Florida Statutes, is Rule 1S-1.005, Florida Administrative Code,

which provides, in pertinent part, as follows:

(1) Any ordinance, standard,

specification or similar material may be

published by reference in a rule subject

to the following conditions:

(a) The material shall be generally

available to the affected persons.

(b) The material shall be published

by a governmental agency or a generally

recognized professional organization.

(2) The agency publishing material by

reference shall file with the Department

of State a correct and complete copy of

the referenced material with an attached

certification page which shall state a

description of the referenced material

and specify the rule to which the

referenced material relates.

(3) Any amendments to material

published by reference must be

promulgated under the rulemaking

provisions of Section 120.54, Florida

Statutes, in order for the amended

portions to be validly incorporated.

18. Respondent has complied with the provisions of Section 120.54(8),

Florida Statutes, and of Rule 1S-1.005, Florida Administrative Code, by its

filing on August 30, 1982, with the Department of State of the rules of the

Securities and Exchange Commission and the Municipal Securities Rulemaking

Board. The challenged rules are valid, at least to the extent that Respondent

has complied with the procedures of Section 120.54(8), Florida Statutes, and of

Rule 1S-1.005, Florida Administrative Code.

19. Petitioners' challenge to these rules is based on their contention

that Respondent failed to properly incorporate in these rules the provisions of

the Securities Exchange Act of 1934, the regulations of the Federal Reserve

Board, and the rules of any national securities exchange or national securities

association. This is a challenge to the scope of the challenged rules and to

the manner in which Respondent is attempting to apply these rules in the

administrative complaint that it has filed against the Petitioners. The scope

of these challenged rules and the extent to which they apply to Petitioners

should be determined in the formal proceedings brought pursuant to Section

120.57(1), Florida Statutes, to contest the administrative complaint that

Respondent has filed against Petitioners.

ORDER

Based on the foregoing findings of fact and conclusions of law, it is

ordered that Petitioners challenges to Rules 3E-600.013(1)(f), 3E-600.013(1)(p)

and 3E-600.013(2)(g), Florida Administrative Code be, and the same hereby are,

DENIED.

DONE AND ENTERED this 21st day of August, 1990, in Tallahassee, Leon

County, Florida.

___________________________

CLAUDE B. ARRINGTON

Hearing Officer

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

904/488-9675

Filed with the Clerk of the

Division of Administrative Hearings

this 21st day of August, 1990.

APPENDIX TO FINAL ORDER, CASE NO. 90-3928RX

The following rulings are made on the proposed findings

of fact submitted on behalf of Petitioners:

1. The proposed findings of fact in paragraphs 1-3 are adopted in material part

by the Recommended Order.

2. The proposed findings of fact in paragraph 4 are adopted in part by the

Recommended Order, and are rejected in part as being subordinate to the findings

made.

3. The proposed findings of fact in paragraph 5 are adopted in part by the

Recommended Order, but the last sentence is rejected as being a conclusion of

law.

4. The proposed findings of fact in paragraph 6 are rejected as being argument

or as being subordinate to the findings made.

5. The proposed findings of fact in paragraphs 7-8 are rejected as being

argument.

The following rulings are made on the proposed findings

of fact submitted on behalf of Respondent.

1. The proposed findings of fact in paragraphs 1-16 are adopted in material

part by the Recommended Order.

2. The proposed findings of fact in paragraph 17 are rejected as being

argument.

COPIES FURNISHED:

Gary R. Rutledge, Esquire

R. Michael Underwood, Esquire

KATZ, KUTTER, HAIGLER, ALDERMAN,

DAVIS, MARKS & RUTLEDGE, P.A.

215 South Monroe Street, Suite 400

Tallahassee, Florida 32301

Margaret S. Karniewicz, Esquire

Anthony F. DiMarco, Esquire

Assistants General Counsel

Department of Banking and

Finance

Legal Section, The Capitol

Tallahassee, Florida 32399-0350

Carroll Webb, Executive Director

Administrative Procedures Committee

120 Holland Building

Room 120

Tallahassee, Florida 32399-1300

Liz Cloud, Chief

Bureau of Administrative Code

Room 1802, The Capitol

Tallahassee, Florida 32399-0250

Honorable Gerald Lewis

Comptroller, State of Florida

The Capitol

Tallahassee, Florida 32399-0350

William G. Reeves

General Counsel

The Capitol

Plaza Level, Room 1302

Tallahassee, Florida 32399-0350

NOTICE OF RIGHT TO JUDICIAL REVIEW

A PARTY WHO IS ADVERSELY AFFECTED BY THIS FINAL ORDER IS ENTITLED TO JUDICIAL

REVIEW PURSUANT TO SECTION 120.68, FLORIDA STATUTES. REVIEW PROCEEDINGS ARE

GOVERNED BY THE FLORIDA RULES OF APPELLATE PROCEDURE. SUCH PROCEEDINGS ARE

COMMENCED BY FILING ONE COPY OF A NOTICE OF APPEAL WITH THE AGENCY CLERK OF THE

DIVISION OF ADMINISTRATIVE HEARINGS AND A SECOND COPY, ACCOMPANIED BY FILING

FEES PRESCRIBED BY LAW, WITH THE DISTRICT COURT OF APPEAL, FIRST DISTRICT, OR

WITH THE DISTRICT COURT OF APPEAL IN THE APPELLATE DISTRICT WHERE THE PARTY

RESIDES. THE NOTICE OF APPEAL MUST BE FILED WITHIN 30 DAYS OF RENDITION OF THE

ORDER TO BE REVIEWED.