Waymire as principal. The Department of Banking and Finance (hereinafter referred to as the "Department") ultimately denied the applications and the Petitioners requested an administrative hearing.
Prior to the commencement of the formal hearing the Department filed a Motion/Request for Official Recognition. In the Motion/Request the Department requested that Chapter 517, Florida Statutes (1985), and Chapter 3E, Florida Administrative Code, be officially recognized. This Motion/Request was granted at the formal hearing without objection.
At the formal hearing the Petitioners presented the testimony of Geraldine Ann Harrison, Don B. Saxon and Michael Albert Pearcy. The Petitioner also offered a number of exhibits into evidence. Petitioners' exhibits 1A, 1B, 8, 10-11, 13-14, 15B, 16B, 17-19 and 20A-20GG were accepted into evidence.
Petitioners' exhibits 2A-2C, 3A-3F, 4A, 4C, 5-7 and 9 were accepted into evidence pending a determination of the relevancy of those exhibits. Although it has been concluded, infra, that the alleged policy which those exhibits were offered to prove does not exist, the exhibits are relevant to that determination. They are, therefore, accepted into evidence.
The Department presented the testimony of Don B. Saxon and Tamara Cain.
The Department presented 3 exhibits which were marked as "Respondent's" exhibits. Exhibit 1 was accepted into evidence, exhibit 2 was rejected and exhibit 3 was withdrawn.
The parties have timely filed proposed recommended orders containing proposed findings of fact. A ruling on each proposed finding of fact has been made either directly or indirectly in this Recommended Order or the proposed finding of fact has been accepted or rejected in the Appendix which is attached hereto.
Whether the application of Lexington for registration as an investment adviser and the application for registration of John B. Waymire should be approved?
The Department's Division of Securities and Investor Protection is charged with the administration and enforcement of Chapter 517, Florida Statutes, the Florida Securities and Investor Protection Act.
Lexington filed an application for registration as an investment adviser in the State of Florida. The application was filed on May 30, 1985. At the time the application was filed Lexington was known as Amvest Capital Management, Inc. The application was accompanied by an application for registration of John B. Waymire, as principal.
By letter dated June 7, 1985, the Department notified Lexington that its application was deficient in 3 ways:
The application did not indicate that Lexington was a Foreign Corporation or include a legal opinion stating why such registration was not required under Florida law;
The application did not include financial reports as required by Rule 3E-300.02(2)(d), Florida Administrative Code; and
Lexington did not meet the net capital/net worth requirements of Rule 3E-600.16, Florida Administrative Code.
By letter dated June 17, 1985, Lexington corrected the first 2 deficiencies and requested that the Department waive the net capital requirements of Rule 3E-600.016(3)(b), Florida Administrative Code (hereinafter referred to as the "Net Capital Requirement").
By letter dated August 23, 1985, the Department denied Lexington's request for a waiver of the Net Capital Requirement.
By letter dated November 11, 1985, Lexington requested that the Department reconsider its request for a waiver of the Net Capital Requirement.
In the letter of November 11, 1985, Lexington also informed the Department that its name had been changed from Amvest Capital Management, Inc., to Lexington Capital Management, Inc.
By letter dated February 7, 1986, the Department informed Lexington that it would reconsider its request for a waiver of the Net Capital Requirement and requested audited financial statements of Lexington and Piedmont Management Company, Inc., and information concerning the acquisition of a surety bond by Lexington.
On May 7, 1986, Lexington provided the Department with documentation, including an audited financial statement for Lexington as of December 31, 1985, which indicated that Lexington had a negative net worth of $1,248,595.00, a general undertaking from Safeco Insurance Company to issue a surety bond for
$100,000.00, and a proposed "Continuing Guaranty" agreement from Piedmont Management Company, Inc., guaranteeing all debt of Lexington.
The Financial Administrator of the Department was requested to review the Continuing Guaranty agreement submitted by Lexington. She raised questions which led the Department to conclude that it had no authority to waive the Net Capital Requirement as requested by Lexington.
The Financial Administrator of the Department orally informed Lexington of its position and indicated that a Declaratory Statement on the issue could be requested. In September of 1986, Lexington filed a Petition for Declaratory Statement on the issue of whether the Department had the authority to waive the Net Capital Requirement. The request was withdrawn by Lexington by letter on March 13, 1987.
On April 29, 1987, the Department issued a letter denying Lexington's application for registration as an investment adviser in the State of Florida for failure to meet the Net Capital Requirement. The Department also denied the application of Mr. Waymire for registration as the principal of Lexington because Lexington's application had been denied. The Department's denial was based upon its determination that it did not have the authority to waive the Net Capital Requirement. The information that the Department had requested that Lexington provide was not considered or analyzed by the Department.
The following facts concerning the following investment advisers currently licensed in the State of Florida were proved:
FSC Advisory Corporation has filed financial statements with the Department for 1978, 1979, 1980 and 1981 which indicate that the Corporation had a negative net capital of $46,278.00, $79,127.00, $101,024.00 and $90,141.00, respectively, in each of those years. FSC Advisory Corporation has been licensed as an investment adviser in the State of Florida since at least 1977. [The Department has taken no action against FSC Advisory Corporation for failing to maintain the net capital required of licensed investment advisers.]
Richard W. Whitehead, Inc., was licensed as an investment adviser on February 5, 1981. Its application included a December, 1980, financial
statement which indicated that the company had a negative capital of $589.00. The evidence did not prove that the Department "waived" the Net Capital Requirement. Subsequently filed financial statements for 1981, 1983, 1984, 1985 and 1986 indicate that the company had a negative net capital of $1,071.00,
$3,838.00, $4,978.00, $46,582.00 and $33,989.00, respectively, in each of those years.
FCA Corporation filed financial statements with the Department for 1984 and 1985 indicating a negative net capital of $115,325.00 for 1984 and
$40,136.00 for 1985. The 1985 financial statement was filed in response to a letter of August 13, 1986 from the Department notifying FCA Corporation that it had failed to file a financial statement.
Coordinated Financial Services Advisors, Inc., filed a financial statement indicating that it had a negative net capital of $9,019.00 as of March 31, 1987. This statement was filed in response to a letter from the Department dated April 29, 1987, notifying the company that it had failed to file a financial statement.
Stratfield Investment Management, Inc., filed a financial statement with the Department indicating that it had a negative net capital of
$12,149.00 as of December 31, 1986.
Consortium Group, Inc., filed a financial with the Department indicating a negative net capital of $19,947.00 as of October 31, 1986.
TFG Consulting, Inc., was registered as an investment adviser by the Department on February 24, 1987. Its application included a July 31, 1986, financial statement indicating a negative net capital of $281.72. The Department informed TFG Consulting, Inc., of this deficiency by letter dated June 13, 1986.
Market Metrics, Inc., filed a financial statement with the Department indicating it had a negative net capital of $38,357.00 as of June 30, 1984.
Investment Management included a document with its application for registration which indicated that it had a negative net capital of $94,979.00. The Department, however, notified Investment Management of its failure to meet the Net Capital Requirement. By letter dated September 16, 1981, Investment Management notified the Department that it complied with the Net Capital Requirement; it had a net capital of $36,132.00.
Generally, the Department took no action against the companies discussed in paragraphs 13a through 13i for failing to maintain the net capital required of licensed investment advisers except to the extent specifically noted in those paragraphs. The evidence did not, however, prove that the Department had waived the Net Capital Requirement for any entity filing an initial application for registration as an investment adviser.
The Division of Securities and Investor Protection of the Department has a total staff of approximately 74 persons. The Division's Bureau which processes registrations consists of only 8 professional employees and several clerical positions.
The 8 professional employees of the Bureau processed approximately 500 new broker-dealer and investment adviser applications which were approved during
the past fiscal year. They also processed applications which were not approved and approximately 3,200 renewals.
There are approximately 3,200 broker-dealers and investment advisers, 1,500 branch offices and 120,000 associated persons registered with the Department.
Except for bank holding companies, which are discussed, infra, companies which received and/or retained registrations with the Department despite their failure to meet the Net Capital Requirement did so because of Department employee error.
From March 6, 1979 until March 20, 1986, the Department issued thirty- three letters in response to requests for waivers of the net capital requirements. In each case the Department indicated that it interpreted Rule
3E-300.02(7)(a), Florida Administrative Code, to allow the Department to waive the Net Capital Requirement if the waiver would not be contrary to the interest of the investing public.
Of the thirty-three cases where a waiver was granted, thirty of those cases involved bank holding companies. It is a common practice in bank mergers or reorganizations for a bank to form a bank holding company. Stock of the existing bank is then exchanged for stock of the bank holding company. The bank holding company is required to register as an issuer-dealer and must meet a
$5,000.00 net capital requirement. Often, the bank holding company does not meet this requirement until after the transaction has occurred. Therefore, bank holding companies request a conditional waiver from the net capital requirement. Each request is reviewed on a case-by-case basis to be sure the public is adequately protected. The waivers that have been granted were conditioned on the bank holding company complying with the Net Capital Requirement after the exchange of stock occurs.
Of the thirty-three waivers proved in this proceeding, thirty were bank holding companies. The evidence failed to prove what type of transaction was involved in the other three cases.
The Department's position with regard to waiving the Net Capital Requirement of bank holding companies applied to investment advisers as well as broker-dealers or issuer-dealers.
The Department's interpretation of Rule 3E-300.02(7)(a), Florida Administrative Code, with regard to its authority to waive the Net Capital Requirement for bank holding companies set out in the letter to the thirty-three companies referred to above was the same as set out in the Department's letter of February 7, 1986, indicating that the Department would reconsider Lexington's request for a waiver.
The Department has stopped granting waivers from the Net Capital Requirement to bank holding companies based upon its present interpretation of the law.
The $2,500.00 Net Capital Requirement for investment advisers does not guarantee that customers will not sustain losses or that the adviser will remain solvent.
Lexington is an investment adviser doing business in 46 states. The State of Arkansas has taken action to revoke the registration of Lexington in
that State. This action is based, in part, on the refusal of the State of Florida to approve Lexington's application.
As of the date of its application Lexington had a negative net capital of $1,248,955.00. The negative net capital is due in part to $1,650,000.00 in long-term debt owed to Piedmont Management Company, Inc., and Lexington Management Corporation of New Jersey. Piedmont Management Company, Inc., owns
100 percent of the stock of Lexington Management Corporation of New Jersey, which in turn owns 50 percent of the stock of Lexington. The other 50 percent of the stock of Lexington is owned by "senior management" in Lexington.
Lexington's $1,650,000.00 of long-term debt to Piedmont Management Company, Inc., and Lexington Management Corporation of New Jersey is subordinated; all other debts of Lexington would have priority over the long- term dept.
Piedmont Management Company, Inc., had net capital of $78,394,000.00 as of December 31, 1985.
Lexington does not take physical possession of its clients' assets. Clients' assets are kept with a broker-dealer. Lexington only has the authority to trade a client's account; it does not authority to transfer assets in or out of a client's account.
The Continuing Guaranty agreement submitted to the Department by Lexington is not effective indefinitely. The agreement does place the asset and net worth of Piedmont Management Company, Inc., behind the liabilities of Lexington, except subordinated debt.
The surety bond commitment was to be in a form specified by the Department.
The parties stipulated that Lexington has never met the Net Capital Requirement.
If the Net Capital Requirement were waived the investing public would be adequately protected if the actions which the Department and Lexington have discussed are taken. This protection will only be for the effective period of the Continuing Guaranty agreement, however.
CONCLUSIONS OF LAW
The Division of Administrative Hearings has jurisdiction of the parties to, and the subject matter of, this proceeding. Section 120.57(1), Florida Statutes (1987).
In support of its position that its application should be approved, Lexington first argues that the Department is required to issue the permit pursuant to Section 120.60(2), Florida Statutes. In pertinent part, Section 120.60(2), Florida Statutes, provides:
Within 30 days after receipt of an application for a license, the agency shall examine the application, notify the applicant of any apparent errors or omissions, and request any additional information the agency is permitted by
law to require. ... Every application for license shall be approved or denied within 90 days after receipt of the original application or receipt of the timely requested additional information or correction of errors or omissions unless a shorter period of time for agency action as provided by law. .
Any application for a license which is not approved or denied within the 90-day or shorter time period ... shall be deemed approved ...
Lexington has argued that it supplied all information requested by the Department as of May 7, 1986, when Lexington provided information concerning the Net Capital Requirement. In support of its position, Lexington has cited World Bank v. Lewis, 425 So.2d 77 (Fla. 1st DCA 1982), and other cases and Attorney General Opinions dealing with this issue.
The evidence fails to support Lexington's argument. Lexington filed its application May 30, 1985. By letter dated June 7, 1985, the Department informed Lexington that its application had three deficiencies. Two of those deficiencies were corrected by Lexington on June 17, 1985. In effect, the third deficiency raised by the Department was that Lexington had failed to provide information sufficient for the Department to conclude that Lexington met the Net Capital Requirement.
In response to the Department's deficiency letter, Lexington requested the Department to waive the Net Capital Requirement and to grant its application based upon other information which would satisfy the Department that the investing public would be protected. Because of Lexington's waiver request, the Department and Lexington could not determine what information would have to be supplied by Lexington until the request for waiver issue was resolved. Lexington's application could not, therefore, be complete until the waiver issue was resolved.
On May 7, 1986, Lexington provided the Department with financial statements which indicated that Lexington had a negative net capital. At the same time Lexington provided the Department with information in support of its request for waiver of the Net Capital Requirement. Both the Department and Lexington were still attempting to resolve their dispute concerning the Net Capital Requirement. Therefore, the information submitted by Lexington, including the financial statement that indicated that it had a negative net capital, was submitted in support of its request for a waiver of the Net Capital Requirement. Until the question of whether a waiver should be granted, as requested by Lexington, was resolved one way or another neither the Department nor Lexington knew what information was still necessary for Lexington's application to be deemed complete.
When the Department determined that it could not waive the Net Capital Requirement, that was the point when Lexington's application became complete even though all the necessary information had been provided as of May 7, 1986. It was not until the Department sent its notice of denial of the application to Lexington, however, that the Department could have known that Lexington's application was complete.
The facts in this case are distinguishable from the facts in the World Bank case. In that case it was clear that the application had been deemed complete by the agency long before the agency was required to approve or disapprove the application. Therefore, the application in the World Bank case was deemed approved by operation of law. In this case the application could not be deemed complete until the Department acted on a request by Lexington to approve its application based upon other information. Until the Department acted on Lexington's request, the information necessary to approve or disapprove Lexington's application could not be considered to have been provided.
Based upon the foregoing it is concluded that the Department acted within the time requirements of Section 120.60(2), Florida Statutes, in denying the Petitioners' applications. The Department should not, therefore, be required to grant the Petitioners' applications.
Secondly, Lexington has argued that the Department has established a policy of waiving the Net Capital Requirement and that it must adhere to that policy in this proceeding. In support of this argument, Lexington has argued first that "where, as here, an agency has a long-standing policy of general applicability, even though that policy has not formally been promulgated as a rule in accordance with the requirement of Fla. Stat. s. 120.54, such long- standing policy is nevertheless a rule under the APA."
Next, Lexington has argued that the Department may not change its policy of waiving the Net Capital Requirement "by any means other than through formal rule making ... or detailed evidentiary explication and justification within the context of a s. 120.57(1) proceeding such as this ..." It is Lexington's position then that the Department has failed to change its waiver policy in either acceptable manner in this case.
Lexington's argument concerning the Department's alleged waiver requirement is based upon Lexington's assumption that the evidence in this proceeding proved that the Department has adopted a policy of permanently waiving the Net Capital Requirement for initial applicants for registration as an investment adviser in the State of Florida as long as the waiver is not contrary to public policy. The evidence, however, failed to prove that such a policy has been adopted by the Department.
Most, if not all, cases dealing with incipient agency policy involve agencies which are advocating their policies. Where an agency advances a policy in support of its action it must "skillfully expound such policy by conventional proof methods." City of Delray Beach v. Department of Transportation, 456 So.2d 944, at 946 (Fla. 1st DCA 1984). In this case it is the non-agency party, Lexington, that is advocating an alleged agency policy. Lexington, therefore, must prove this alleged policy as skillfully as the agency would be required to do. Lexington has failed to do so.
The evidence presented in this case concerning investment advisers in the State of Florida merely proved that the Department had failed to insure that all registered investment advisers continue to meet the Net Capital Requirement. Even in the few instances where the Department failed to take action to insure that investment advisers maintained the required net capital, the evidence indicated that the Department had failed to do so because of error. The evidence did not prove that the Department had, as a matter of policy, approved any initial application for registration as an investment adviser.
The evidence presented in this case did prove that the Department has waived the Net Capital Requirement for bank holding companies. In those cases where the Department has done so, however, the Department agreed to waive the Net Capital Requirement conditioned upon the bank holding company meeting the Net Capital Requirement shortly after its formation. Lexington is not requesting the same treatment in this case. In this case, Lexington is seeking a total and permanent waiver of the Net Capital Requirement. It has not offered sufficient evidence to support a conclusion that the Department has adopted such a policy. See, generally, McDonald v. Department of Banking and Finance, 346 So.2d 569 (Fla. 1st DCA 1977).
In light of the conclusion that the Department has not established a policy of waiving the Net Capital Requirement which is applicable in this case, the Net Capital Requirement can be waived only if required or authorized by Chapter 517, Florida Statutes, or the Department's rules. No such authority exists, however.
Section 517.12(9), Florida Statutes, provides, in pertinent part:
The department may be rule require the maintenance of a minimum net capital for registered dealers and investment advisers, or prescribe a ratio between net capital and aggregate indebtedness to assure adequate protection for the investing public.
Pursuant to this authority, the Department has adopted Rule 3E- 600.016, Florida Administrative Code, requiring that applicants for registration as an investment adviser meet the Net Capital Requirement:
(1) The net capital of an applicant or registrant under Section 517.12, Florida Statutes, shall be maintained at a level required by this rule.
....
Issuer/dealer or investment adviser applicants shall meet the net capital requirement of this section:
An investment adviser shall maintain net capital of at least $2,500.
Based upon the foregoing, the Department has no authority to waive the Net Capital Requirement. The Net Capital Requirement is mandatory. Without specific authority to waive the requirement, the Department may not do so. It is true that the Department has relied upon Rule 3E-300.002, Florida Administrative Code, to support its waiver of the Net Capital Requirement for bank holding companies in the past. It is also true that the Department tentatively cited this Rule as authority for a possible waiver of the Net Capital Requirement in this case. The Department's reliance on Rule 3E-300.002, Florida Administrative Code, however, was misplaced. That Rule, which sets out certain requirements concerning financial statements and reports which must be filed with the Department, merely provides that the Department may "permit the omission of one or more of the financial statements or related requirements of this Rule ..." Allowing the omission of the requirement that certain financial statements must be filed or other requirements of the Rule concerning the filing
of statements and reports is not sufficient authority to waive the Net Capital Requirement of Rule 3E-600.016, Florida Administrative Code.
Having established the Net Capital Requirement by rule as the Department was authorized to do by Section 517.12(9), Florida Statutes, there is no statutory or rule provision which authorizes the Department to deviate from the Net Capital Requirement and allows guaranty agreements, surety bonds or the like in substitution for meeting the Net Capital Requirement.
Based upon the foregoing, it is concluded that the Net Capital Requirement cannot be waived in this case. Even if it were concluded that the Net Capital Requirement could be waived, the evidence only proved that the investing public would be protected for the temporary period of time that the Continuing Guaranty agreement was in force even though Lexington is requesting a permanent waiver. Therefore, the waiver should not be granted even if the Department had the authority to do so.
