LITTLE ROCK — An official with the investment firm Stephens Inc., told a legislative panel Wednesday the state securities commissioner had a conflict of interest when he suggested that the company resolve proceedings against it by making a donation to a nonprofit organization he headed.
The Little Rock-based company also proposed statutory changes to the state Securities Department’s procedures. The securities commissioner denied any conflict of interest and criticized the proposed changes but said he would refrain from making similar settlement offers in the future.
Stephens has filed a complaint with the state Ethics Commission alleging that Securities Commissioner Heath Abshure violated state law by directing donations in lieu of fines in at least three cases, one of them involving a $150,000 donation and the others involving smaller amounts, to the North American Securities Administrators Association. Abshure was president of NASAA from September 2012 to October 2013 and continues to serve on its board of directors.
Stephens agreed in August to pay a $25,000 fine for failing to have written policies in place regarding the sale of certain exchange-traded funds. David Knight, executive vice president and general counsel for Stephens, told the legislative Joint Performance Review Committee on Wednesday that during negotiations between the Securities Department and the company, Abshure proposed that Stephens make a $20,000 charitable contribution to NASAA in lieu of a fine.
"That offended me because it was a conflict of interest," Knight said.
Knight also said that when a dispute arose over the amount of the fine Stephens was to pay, the company received an email from a Securities Department attorney stating that if Stephens did not accept the offer of a $25,000 fine, "then the staff shall make arrangements for a much larger exam of this issue" and that "after such an exam, I would anticipate the potential liability for Stephens will be much higher than $25,000."
"I know when I’m being retaliated against," Knight said.
Knight said the company could have requested a hearing, but when a securities case goes to a hearing, the commissioner typically serves as the finder of fact.
"The problem here is that your prosecutor is also the judge and jury," he said.
Knight said Stephens is proposing that the Legislature change state law to prohibit the securities commissioner from using his enforcement powers to obtain contributions to third parties; require that fines paid by companies go into the state treasury, not the Securities Department’s budget; require the commissioner to bring enforcement actions in circuit court rather than administrative hearings; and allow companies to seek court orders blocking investigations that are in bad faith.
As he did in a Jan. 8 hearing, Abshure testified Wednesday that regulators in several other states have negotiated settlements in which companies paid fines to NASAA. He said NASAA provides training to Arkansas securities regulators as well as other consumer-protection services.
He denied that any retaliation was directed at Stephens, saying the email the company cited was not a threat but a statement of the fact that taking the case to a hearing would have required further investigation.
"I think it’s extremely common in legal negotiations to say, ‘Look, this is our final offer, and if you don’t want to take it we’ll move to the next step.’" he said.
"To me, this is a threat," said Sen. Bill Sample, R-Hot Springs. "I hate to characterize it this way, but would you not feel like there was a little bit of extortion there?"
"Not at all," Abshure said. "Pointing out the alternatives to a settlement is not a threat."
Abshure also said that if the case had gone to a hearing, he would have recused himself and appointed a hearing officer to preside over it.
Talking to reporters later, Abshure said that because legislators are not comfortable with the practice, he would stop proposing to companies that they make contributions to third parties in lieu of fines.
"At this point, to be honest with you, the only thing I feel comfortable in doing is levying a fine or taking somebody’s license away," he said.
Discussing Stephens’ legislative proposals, Abshure said the amounts of fees collected by the Securities Department do not make a difference to its available operating funds. He also said that requiring cases to be prosecuted in circuit court would mean abandoning the greater efficiency of the state regulatory process and would not be what most companies would prefer.
"Most regulated entities would prefer to have an administrative consent order rather than a full-blown finding in a court of law," he said.