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Regulatory Sanctions

Broker-Dealer Caught Associating with a Statutorily Disqualified Person

January 30, 2019

by Howard Haykin


A small New York, NY-based FINRA member firm agreed to pay a $50K fine to settle FINRA charges that it associated with a statutorily disqualified individual and permitted that individual to engage in its investment banking activities even though he was not registered.



FINRA FINDINGS.    In 2009, an individual (“JM”) pleaded guilty to felony conspiracy. In March 2014, JM began providing work for a broker-dealer (the “Firm”) in connection with various Firm private placements. The firm, which employs 10 registered individuals and maintains 4 offices including a main office in New York City, provides M&A advisory, restructuring and capital raising advisory services.


From March 2014 through August 2017 (the "Relevant Period"), JM participated in the Firm's investment banking business until August 2017, when the Firm terminated its relationship with JM. Over those 3-1/2 years, JM participated in the Firm’s investment banking business by advising on investment banking transactions, creating marketing materials, contacting potential investors, revising and distributing transaction documents, and conducting due diligence on target companies. JM's activities were under the FIrm's control, as the Firm and its registered persons: (i) provided JM with work facilities; (ii) assigned tasks to JM and instructed him regarding when and how to complete those tasks; and, (iii) edited his work product, some of which appeared on Firm-branded documents.



ASSOCIATION WITH A STATUTORILY DISQUALIFIED INDIVIDUAL.    According to FINRA, the Firm knew in March 2014 that JM was statutorily disqualified due to his felony conviction in 2009. And the firm knew of his disqualified status throughout the Relevant Period. Yet, the Firm never apparently sought out FINRA's approval to associate with this disqualified individual, which would have required entering into the MC-400 Application process. 


Article III, Section 3(b) of FINRA's By-Laws prohibits member firms from associating with an individual in any capacity if that individual has been statutorily disqualified. FINRA Rule 8311 (Effect of a Suspension, Revocation, Cancellation, Bar or Other Disqualification), effective August 2015, likewise provides that "a member shall not allow [a disqualified] person to be associated with it in any capacity that is inconsistent with the sanction imposed or disqualified status, including a clerical or ministerial capacity."


Under FINRA's By-Laws, a "person is subject to a 'disqualification' with respect to membership, or association with a member, if such person is subject to any ‘statutorily disqualifying events’ as defined in Section 3(a)(39) of the Exchange Act – including any felony conviction in the prior 10 years.


A FINRA member may not associate with a disqualified person in any capacity unless and until approved in an eligibility proceeding triggered by the member's submission of an MC-400 Application.



REGISTRATION VIOLATION.    As noted above, throughout the Relevant Period the Firm retained and compensated JM to advise on investment banking transactions, and in that capacity JM performed functions requiring registration - including creating and editing Firm marketing documents, contacting potential investors, and conducting due diligence. During the Relevant Period, JM was not registered as a Series 7, 79, or 82.


NASD Membership and Registration Rule 1031 requires that all persons engaged in the investment banking or securities business of a member who are to function as representatives be registered. NASD Rule 1032 further requires that persons who, among other things, advise on or facilitate debt or equity securities offerings through a private placement, or advise on or facilitate mergers and acquisition transactions, pass the Series 79 qualification examination and register as Investment Banking Representatives, or alternatively that persons whose activities in the investment banking and securities business involve effecting sales as part of a primary offering of securities not involving a public offering, pass the Series 82 qualification examination and register as Private Securities Offering Representatives.



FINANCIALISH TAKE AWAY.    Bill Singer, in an interesting 2012 BrokeAndBroker blog, analyzed the process by which one broker-dealer sought and obtained permission from FINRA and the SEC to associate with a statutorily disqualified individual – who would serve as a general securities representative. Among other things, the firm submitted an MC-400 Application which included an 18-Point Plan that would be implemented, including significant heightened supervision procedures for this individual.


While he acknowledged that there’s life after ‘death’ (i.e., being deemed an ‘SD’), Mr. Singer notes that ”the costs and perceived reputational risks associated with standing up on behalf of an SD are significant, and many broker-dealers are unwilling to incur that downside for anyone, no matter your explanations or the circumstances.”  



This case was reported in FINRA Disciplinary Actions for August 2018.

For details the case, go to ...  FINRA Disciplinary Actions Online, and refer to Case #2016047624603.