Schneider v. The Kansas Securities Comm'rs
397 P.3d 1227
Kan. Ct. App.2017Background
- Mark R. Schneider was a Kansas-registered investment adviser representative with discretionary control over long-time client Mary Lou Silverman’s account after her husband’s death and advised investing her $1.15M life-insurance proceeds.
- Schneider placed Silverman (a retail, unsophisticated investor) into leveraged and inverse nontraditional ETFs and held many positions well beyond one trading day (some >180 days); the accounts later lost roughly $90–95K and Schneider did not disclose the product risks or obtain written client consent.
- FINRA Regulatory Notice 09-31 (warning that nontraditional ETFs are highly complex and generally unsuitable for retail investors holding them more than one trading session) was in the record and relied on by the Commissioner’s expert as part of industry evidence.
- The Kansas Securities Commissioner’s ALJ found Schneider violated K.S.A. 17-12a412(d)(13) via K.A.R. 81-14-5(d)(1) (unsuitable recommendations) and K.A.R. 81-14-5(c) (breach of fiduciary duty); Commissioner affirmed and ordered restitution (~$94,720) and a $25,000 penalty.
- Schneider sought review in district court (affirmed) and appealed to the Court of Appeals arguing (1) the agency adopted FINRA Notice 09-31 as binding law in violation of the Rules & Regulations Filing Act and nondelegation doctrine, and (2) factual findings lacked substantial competent evidence.
Issues
| Issue | Plaintiff's Argument (Schneider) | Defendant's Argument (Commissioner) | Held |
|---|---|---|---|
| Whether the agency adopted FINRA Notice 09-31 as the controlling legal standard | Agency used FINRA Notice 09-31 as a binding, categorical 1-day prohibition and ignored Kansas suitability rule | FINRA Notice was only evidentiary industry guidance; Kansas regs governed legal standard and were applied | Court: FINRA Notice was evidence only; Commissioner applied Kansas regulations (no erroneous legal standard) |
| Whether reliance on FINRA Notice violated the Rules & Regulations Filing Act (rulemaking by adjudication) | Treating FINRA Notice as binding law required filing/publication and thus was invalid rulemaking | Notice was not an unpublished agency policy; it was evidence like a manufacturer’s manual and not a rule under the Filing Act | Court: No Filing Act violation—notice used as evidence, not a binding regulation |
| Whether reliance on FINRA Notice violated nondelegation (ceding rulemaking to FINRA) | Using FINRA guidance as controlling law unlawfully delegated state rulemaking to a private SRO | Commissioner retained decisionmaking authority; FINRA was not entrusted with making law for Kansas | Court: No nondelegation violation—no cession of governmental authority to FINRA |
| Whether factual findings (unsuitability and breach of fiduciary duty) are supported by substantial competent evidence | Schneider had reasonable grounds: created a financial plan, monitored positions, and client-specific factors could make strategy suitable | Record shows retail status, lack of disclosure/consent, misunderstanding of product mechanics, expert testimony tying misuse to losses | Court: Substantial competent evidence supports findings; scienter not required for fiduciary breach; sanction affirmed |
Key Cases Cited
- Golden Rule Ins. Co. v. Tomlinson, 300 Kan. 944 (2014) (burden and scope of judicial review under KJRA)
- Douglas v. Ad Astra Information Systems, 296 Kan. 552 (2013) (courts no longer defer to agency statutory interpretation)
- Ullery v. Othick, 304 Kan. 405 (2016) (give effect to unambiguous statutory text)
- Klein v. Oppenheimer & Co., 281 Kan. 330 (2006) (purpose of Kansas Uniform Securities Act—to protect investors)
- Bruns v. Kansas State Bd. of Technical Professions, 255 Kan. 728 (1994) (when an unpublished internal policy constitutes a rule under the Filing Act)
- American Trust Administrators, Inc. v. Kansas Insurance Dept., 273 Kan. 694 (2002) (agency bulletins treated as rules when applied without discretion)
- Hemphill v. Kansas Dept. of Revenue, 270 Kan. 83 (2000) (industry/manufacturer guidance may be used as evidence to show compliance without violating Filing Act)
- Redd v. Kansas Truck Center, 291 Kan. 176 (2010) (KJRA requires reviewing evidence both supporting and detracting from agency findings)