Under
the Securities Exchange Commission’s authority FINRA promulgates
rules of its own as a self regulatory organization (“SRO”).
Pursuant to FINRA’s By-Laws (and the By-Laws of the NASD and the
NYSE before it) a person may be disqualified from membership. A
person disqualified from membership would be prohibited from
participation in the securities industry. In July 2007 FINRA adopted
a revised version of the NASD’s definition of disqualification
contained in its By-Laws such that any person subject to a statutory
disqualification under the Securities Exchange Act Section 3(a)(39)
also is subject to disqualification under FINRA’s By-Laws.
Prior to the amendment, the NASD’s By-Laws listed some, but not all, of the grounds for statutory disqualification contained in Exchange Act Section 3(a)(39). However, after the amendment to the NASD’s then existing By-Laws, FINRA’s By-Laws provided that: “A person is subject to a ‘disqualification’ with respect to membership, or association with a member, if such person is subject to any ‘statutory disqualification’ as such term is defined in Section 3(a)(39) of the [Securities Exchange Act of 1934].”
The revised definition of disqualification incorporated three additional categories of statutory disqualification which previously did not exist. One of those additional categories of disqualification comes from the Sarbanes-Oxley Act. Section 604 of the Sarbanes-Oxley Act expanded the definition of statutory disqualification under the Securities Exchange Act of 1934 by creating Exchange Act Section 15(b)(4)(H) and then incorporating it into Exchange Act Section 3(a)(39). As a result of this change, statutory disqualification under Exchange Act Section 15(b)(4)(H) includes a person that:
Prior to the amendment, the NASD’s By-Laws listed some, but not all, of the grounds for statutory disqualification contained in Exchange Act Section 3(a)(39). However, after the amendment to the NASD’s then existing By-Laws, FINRA’s By-Laws provided that: “A person is subject to a ‘disqualification’ with respect to membership, or association with a member, if such person is subject to any ‘statutory disqualification’ as such term is defined in Section 3(a)(39) of the [Securities Exchange Act of 1934].”
The revised definition of disqualification incorporated three additional categories of statutory disqualification which previously did not exist. One of those additional categories of disqualification comes from the Sarbanes-Oxley Act. Section 604 of the Sarbanes-Oxley Act expanded the definition of statutory disqualification under the Securities Exchange Act of 1934 by creating Exchange Act Section 15(b)(4)(H) and then incorporating it into Exchange Act Section 3(a)(39). As a result of this change, statutory disqualification under Exchange Act Section 15(b)(4)(H) includes a person that:
is subject to any final order of a State securities commission (or any agency or officer performing like functions), State authority that supervises or examines banks, savings associations, or credit unions, State insurance commission (or any agency or office performing like functions), an appropriate Federal banking agency (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(q))), or the National Credit Union Administration, that --
1. bars such person from association with an entity regulated by such commission, authority, agency, or officer, or from engaging in the business of securities, insurance, banking, savings association activities, or credit union activities; or
2. constitutes a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct.
This
revised definition of statutory disqualification became effective as
of July 2007. The effect of the revised definition would have been
the immediate disqualification of a large number of individuals
subject to the new categories of disqualification. In order to remain
in the securities industry, these individuals would have had to
utilize the then existing NASD eligibility proceedings for persons
subject to disqualification; i.e. NASD Rule 9520.
In order to avoid this result, the NASD requested that the Securities Exchange Commission Staff not recommend enforcement action to the Commission under Exchange Act Section 15A(g)(2) or Rule 19h-1(a) for those persons subject to the new definition of disqualification until the NASD could update and improve its eligibility proceedings to address the changes to the definition of statutory disqualification. As a result, the SEC, by Chief Counsel Catherine McGuire, issued a No Action Letter on July 27, 2007, informing the NASD that it would not seek enforcement against the individuals subject to the new categories of statutory disqualification if NASD did not file notice with the Commission for enforcement between the time the amended By-Laws containing the revised definition of statutory disqualification became effective and the effective date of the revised eligibility procedures. This would mean that those persons subject to the revised definition could continue membership in FINRA without going through the application process for eligibility pending the adoption of the revised eligibility procedures.
In April 2009, FINRA released Regulatory Notice 09-19 which set forth the amendments to FINRA Rule 9520 Series to become effective June 15, 2009. The revised FINRA Rule 9520 Series established procedures applicable to firms and associated persons subject to the additional statutory disqualifications as a result of the adoption of the revised definition of disqualification. Under this new construct of the Rule 9520 Series, individuals subject to one of the additional categories of disqualification would need to seek FINRA’s approval to enter or remain in the securities industry by way of an application with FINRA’s Department of Registration and Disclosure (“RAD”) only under certain circumstances. The need to file an application depends on 1) the type of disqualification; 2) the date of the disqualification; and 3) whether the firm or individual was seeking admission, readmission or continuance in the securities industry.
There are likely four different ways that a member of FINRA would know that they are required to file an application with RAD as a result of the application of revised Rule 9520 Series to an order of a state securities commission. First, Regulatory Notice 09-19 states that as of June 15, 2009, FINRA began reviewing its records to identify persons that met any of the additional conditions that would require the filing of an application under the revised Rule 9520 Series. In what manner FINRA has undertaken this review is unknown. Second, an individual could identify on their own that they are subject to an existing order which would require an application with RAD.
Third, if someone is seeking to transfer their registration to a new broker-dealer, then any existing state orders which would require an application with RAD as a result of the revised Rule 9520 Series would be disclosed by the CRD (the central licensing and registration system for the U.S. securities industry and its regulators) when it is reviewed by FINRA. Fourth, if an individual is subject to a new order of a state regulator, then an alert is sent out to all other state regulators as well as FINRA through the CRD. Whether FINRA reviews each alert it receives in order to decide to take action against an individual subject to an order of a state securities commission is unknown.
For those subject to a statutory disqualification arising from orders specified in Exchange Act Section 15(b)(4)(H)(i) and Exchange Act Section 15(b)(4)(H)(ii), find below an outline of the circumstances under which the person must file an application with RAD under FINRA’s revised Rule 9520 Series:
A. If the person is seeking admission or re-admission to the industry; and
In order to avoid this result, the NASD requested that the Securities Exchange Commission Staff not recommend enforcement action to the Commission under Exchange Act Section 15A(g)(2) or Rule 19h-1(a) for those persons subject to the new definition of disqualification until the NASD could update and improve its eligibility proceedings to address the changes to the definition of statutory disqualification. As a result, the SEC, by Chief Counsel Catherine McGuire, issued a No Action Letter on July 27, 2007, informing the NASD that it would not seek enforcement against the individuals subject to the new categories of statutory disqualification if NASD did not file notice with the Commission for enforcement between the time the amended By-Laws containing the revised definition of statutory disqualification became effective and the effective date of the revised eligibility procedures. This would mean that those persons subject to the revised definition could continue membership in FINRA without going through the application process for eligibility pending the adoption of the revised eligibility procedures.
In April 2009, FINRA released Regulatory Notice 09-19 which set forth the amendments to FINRA Rule 9520 Series to become effective June 15, 2009. The revised FINRA Rule 9520 Series established procedures applicable to firms and associated persons subject to the additional statutory disqualifications as a result of the adoption of the revised definition of disqualification. Under this new construct of the Rule 9520 Series, individuals subject to one of the additional categories of disqualification would need to seek FINRA’s approval to enter or remain in the securities industry by way of an application with FINRA’s Department of Registration and Disclosure (“RAD”) only under certain circumstances. The need to file an application depends on 1) the type of disqualification; 2) the date of the disqualification; and 3) whether the firm or individual was seeking admission, readmission or continuance in the securities industry.
There are likely four different ways that a member of FINRA would know that they are required to file an application with RAD as a result of the application of revised Rule 9520 Series to an order of a state securities commission. First, Regulatory Notice 09-19 states that as of June 15, 2009, FINRA began reviewing its records to identify persons that met any of the additional conditions that would require the filing of an application under the revised Rule 9520 Series. In what manner FINRA has undertaken this review is unknown. Second, an individual could identify on their own that they are subject to an existing order which would require an application with RAD.
Third, if someone is seeking to transfer their registration to a new broker-dealer, then any existing state orders which would require an application with RAD as a result of the revised Rule 9520 Series would be disclosed by the CRD (the central licensing and registration system for the U.S. securities industry and its regulators) when it is reviewed by FINRA. Fourth, if an individual is subject to a new order of a state regulator, then an alert is sent out to all other state regulators as well as FINRA through the CRD. Whether FINRA reviews each alert it receives in order to decide to take action against an individual subject to an order of a state securities commission is unknown.
For those subject to a statutory disqualification arising from orders specified in Exchange Act Section 15(b)(4)(H)(i) and Exchange Act Section 15(b)(4)(H)(ii), find below an outline of the circumstances under which the person must file an application with RAD under FINRA’s revised Rule 9520 Series:
A. If the person is seeking admission or re-admission to the industry; and
1. the person is subject to an order under Exchange Act Section 15(b)(4)(H)(i), then the person must file an application unless the order imposing a bar on the person is time-limited and the time period is expired. However, if the bar is related to Fraudulent, Manipulative or Deceptive (“FMD”) conduct, then the person must submit an application under the circumstances described in section I.B.
2. the person is subject to an order under Exchange Act Section 15(b)(4)(H)(ii), then the person must submit an application unless:
i. the sanctions do not involve licensing or registration revocation or suspension (or analogous sanctions) and the sanctions are no longer in effect; or
ii. the sanctions do involve licensing or registration revocation or suspension (or analogous sanctions), the sanctions are no longer in effect, and the order was entered 10 or more years ago.
B. If the person was, as of March 17, 2009, a member of, or an associated person of a member of FINRA or another SRO, and was subject to a statutory disqualification as of that same date and is seeking to continue in the industry; and
1. the person is subject to an order under Exchange Act Section 15(b)(4)(H)(i); and
i. the bar is no longer in effect and is not related to FMD conduct, then no application is required.
ii. the bar is still in effect and is not related to FMD conduct then no application is required unless there is a “triggering event” - which occurs when the person subject to the statutory disqualification either changes employers or the member firm makes an application for the registration of such person as a principal pursuant to FINRA rules.
iii. the bar is still in effect and is related to FMD conduct, then an application is required.
2. the person is subject to an order under Exchange Act Section 15(b)(4)(H)(ii), then an application is required unless:
i. the sanctions do not involve licensing or registration revocation or suspension (or analogous sanctions), and the sanctions are no longer in effect; or
ii. the sanctions do not involve licensing or registration revocation or suspension (or analogous sanctions), and the sanctions are still in effect, in which event an application is required only if there is a triggering event; or
iii. the sanctions do involve licensing or registration revocation or suspension (or analogous sanctions), and the sanctions are no longer in effect, and the order was entered 10 or more years ago. However, if the order was issued less than 10 years ago, then an application is required if there is a triggering event.
C. If the person was, as of March 17, 2009, a member of, or an associated person of a member of FINRA or another SRO, and is subject to a statutory disqualification that arose after March 17, 2009, and is seeking to continue in the industry; and
1. the person is subject to an order under Exchange Act Section 15(b)(4)(H)(i), then the person must file an application unless the order imposing a bar on the person is time-limited and the time period is expired. However, if the bar is related to FMD conduct, then the person must submit an application under the circumstances described in section III.B.
2. the person is subject to an order under Exchange Act Section 15(b)(4)(H)(ii), then an application is required unless:
i. the sanctions do not involve licensing or registration revocation or suspension (or analogous sanctions) and the sanctions are no longer in effect; or
ii. the sanctions do involve licensing or registration revocation or suspension (or analogous sanctions), the sanctions are no longer in effect, and the order was entered 10 or more years ago.
Some
more recent articles touching upon this process include:
“Stockbroker's DUI Puts Career in the FINRA Ditch” by Bill
Singer, “Bankrupt Stockbroker Winds Up Statutorily Disqualified”
by Bill Singer, “U-4 Omissions and Statutory Disqualification:Much Ado About Nothing” by Alan Wolper. Do not hesitate to call
us if you or your broker-dealer need assistance with a potential
MC-400 application.
