There is a little corner of the FINRA world that most people never have the need or desire to visit, and that’s the not-so-quaint village of statutory disqualification. SD, for short. I have written about this sad place many times, mostly about those poor souls who manage to end up here through confusion, or, too often, reliance on bad legal advice, and who discover – too late – that it is impossible to leave. Like the Roach Motel, where “roaches check in, but they can’t check out.” Or Gilead, for you Handmaid’s Tale fans. Or, in the spirit of the Season, the Island of Misfit Toys. Safely navigating away from SD can be a procedural nightmare, as the rules are complex and hardly intuitive.
But all trips to SD start with the same event: a determination by FINRA staff that you are, in fact, statutorily disqualified. It comes in a letter addressed to your BD. It recites, basically, that because you are SD’d, the BD has a few weeks within which to choose one of three options, none of which is particularly attractive:
- Fire you
- File a Form BDW (because a BD is not permitted to associate with an individual who’s SD’d; to do so renders the firm SD’d, too, thus necessitating the withdrawl from FINRA membership)
- File an MC-400 (to seek permission to remain a FINRA member firm notwithstanding the fact that you are SD’d)
If your firm agrees to file the MC-400, there is long, complicated, expensive process that ensues. FINRA staff have the authority to approve, but not reject, an MC-400 application. So, in a best case scenario, some months after the MC-400 is filed you learn that it’s been accepted, and you can avoid being fired. If, on the other hand, FINRA staff is disinclined to approve the application, they will notify the BD, providing it the opportunity to withdraw the application. Most firms opt for this. If it is not withdrawn, then the process culminates in an evidentiary hearing before a two-person hearing panel representing the NAC’s SD Subcommittee.
Once that first letter is received, there is nothing to stop the SD train from rumbling down the tracks to its eventual (but yet undetermined) destination. This is true even in those circumstances where there is some question whether or not FINRA is correct that there has been an SD trigger. Indeed, sometimes it is not so clear. Take one case I had, as an example. The SD statute states that any felony conviction results in an SD. But, what happens if a convicted felon manages, under state law, to have the conviction expunged? The fact is, in some states, the result is that the conviction goes away completely, as if it never happened in the first place. In other states, however, it only goes away partially. This can result in a debate over whether or not someone who obtains an expungement of their criminal record is truly SD’d.
The problem is, as the rule is presently structured, apart from attempting to engage in a dialogue with the people that run the SD program at FINRA (who, by the way, are really nice and normal and seem truly to care about getting the right result), there is no formal, official mechanism to immediately challenge the determination that you are SD’d. Rather, the only way to go about doing that is to go through the full-blown MC-400 process and try to convince the hearing panel that FINRA staff erred. That is expensive and time-consuming, and incredibly inefficient.
Well, wonder of wonders, it seems that FINRA management has recognized this. I was excited to learn that at its December Board meeting, FINRA approved a “Proposal to Establish a Process to Appeal Staff Statutory Disqualification Determinations.” Specifically,
[t]he Board approved the filing with the SEC proposed amendments to the FINRA Rule 9000 Series to establish a process to appeal statutory disqualification determinations made by FINRA staff. The new process would provide individuals with the ability to challenge a FINRA decision that the person is subject to a statutory disqualification, without needing the support of a firm to do so.
There are two important things to observe here.
First, as noted, it is encouraging to see that FINRA has acknowledged that there is a hole in its current process, a hole that forces individuals who want to contest the threshold determination that they are SD’d to go through the entire MC-400 process. This is the very sort of hole in the Rule 8210 process I have been complaining about for years, i.e., that in order to challenge the validity of an 8210 request for documents and information, one must become a respondent in an Enforcement complaint, and take the matter to a hearing (with the knowledge that an adverse outcome results in a permanent bar). I am pleased anytime FINRA tries to make improvements to its administrative scheme that same time and money.
Second, note the last sentence: under the proposal, if you are SD’d, you can file the application yourself. That saves you from the always-awkward, mostly unsuccessful conversation with management of the BD in which you try to convince them to file the MC-400 on your behalf (because, under the current rule, if the BD declines to file the MC-400, you are out of luck). As I said earlier, a BD only has three options when you’re SD’d, and only one of them – firing you – is free and easy. By ceding some control over the situation to the SD’d (or apparently SD’d) individual, the proposal helps reduce the pressure on the BD to take that easy way out.
I like to think that I am evenhanded in my critiques of FINRA, that is, while I am quick to point out problems and errors, when FINRA manages to get something right, I am perfectly willing to give it the credit it deserves. That is the case here. I get that for most people, and I mean the overwhelming majority of people registered with FINRA firms, this proposal will have zero impact on their lives. But for the few unlucky people who, as I said, find themselves trapped in SD through mistake or inadvertence, the new mechanism could be a Godsend. I only hope that FINRA considers doing something similar with Rule 8210.