Funding Portal Statutory Disqualification Process
The following is an overview of the rules and procedures applicable to funding portal members seeking to hire or retain a person who is or becomes subject to disqualification, and for funding portal members that themselves are or become subject to disqualification.
General Information on FINRA’s Eligibility Requirements
Under the FINRA By-Laws, no person shall be admitted to or continued in membership, and no person shall be associated with a member, continue to be associated with a member, or transfer association to another member, if such person is or becomes subject to a disqualification.
Article III, Section 4 of the FINRA By-Laws states 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 Exchange Act.
Disqualifying events under Section 3(a)(39) of the Exchange Act include:
- certain misdemeanor and all felony criminal convictions for a period of ten years from the date of conviction;
- temporary and permanent injunctions (regardless of their age) issued by a court of competent jurisdiction involving a broad range of unlawful investment activities;
- expulsions or bars (and current suspensions) from membership or participation in a self-regulatory organization (SRO);
- bars (and current suspensions) ordered by the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) or other appropriate regulatory agency or authority;
- denials or revocations of registration by the SEC, CFTC or other appropriate regulatory agency or authority;
- findings that a member or person has made certain false statements in applications or reports made to, or in proceedings before, SROs, the SEC or other appropriate regulatory agency or authority;
- any final order of a state securities commission (or any agency or office 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
- (i) 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
- (ii) constitutes a final order based on violations of any laws or regulations that prohibit fraudulent, manipulative, or deceptive conduct.
- findings by the SEC, CFTC or an SRO that a person: (1) "willfully" violated the federal securities or commodities laws, or the Municipal Securities Rulemaking Board (MSRB) rules; (2) "willfully" aided, abetted, counseled, commanded, induced or procured such violations; or (3) failed to supervise another who commits violations of such laws or rules; or
- certain associations with disqualified persons. In determining "association" for purposes of Exchange Act Section 3(a)(39)(E), FINRA uses the definition of "associated person" set forth in Exchange Act Section 3(a)(21).
Statutory Disqualification Reporting Obligation
Once a funding portal member becomes aware that it or one of its associated persons is subject to a disqualification, the funding portal member is obligated to report the event to FINRA. The funding portal member must submit information indicating whether the funding portal member or any associated person of the funding portal member is subject to a statutory disqualification within 10 days of learning of a disqualifying event (see Article V, Section 2(c) of the FINRA By-Laws).
Review the step-by-step process outlining how a funding portal member can report statutory disqualification events to FINRA via the Funding Portal Registration Depository (FPRD).
Special Permission to Continue in or Enter the Securities Industry Notwithstanding a Disqualification
Generally speaking, a person who is subject to disqualification may not associate with a funding portal member in any capacity unless and until approved in an Eligibility Proceeding as set forth in Article III, Section 3(d) of FINRA’s By-Laws and Funding Portal (FP) Rule 900(b).
However, a person who is currently associated with a funding portal member at the time the disqualifying event occurs may be permitted to continue to work in limited circumstances, provided that:
- the funding portal member and the person are in compliance with FINRA Rule 8311, as set forth in FP Rule 800(a); and
- the funding portal member promptly files a Form MC-400 application.
Likewise, a funding portal member subject to disqualification also may be allowed to remain a funding portal member, provided it promptly files a Form MC-400A application requesting approval of its continued membership, and the disqualifying event does not involve a licensing sanction, such as a bar, revocation or expulsion.
Filing an Application Under the Eligibility Rules
In the case of a disqualified person, the funding portal member must either indicate that the individual is “Inactive” and notify FINRA in writing if it wishes to terminate the individual's association or file a Form MC-400 Application if a funding portal member wishes to sponsor the association of a disqualified person. The funding portal member must file the Form MC-400 Application within 10 business days after service by FINRA staff of a notice of disqualification or ineligibility (see FP Rule 900(b)(3)(A)(iii)) or within 10 calendar days of learning of a disqualifying event (see Article V, Section 2(c) of the FINRA By-Laws). The Form MC-400 Application requests information about the terms and conditions of the proposed employment, with special emphasis on the proposed supervision to be accorded the disqualified person. Firms are reminded that the Eligibility Proceedings process extends to all associated persons.
Failure of the funding portal member to either terminate the individual or submit a Form MC-400 Application renders the funding portal member ineligible to continue in membership (see Article III, Section 3 of the FINRA By-Laws). Further, pursuant to FP Rule 900(b)(3)(A)(iii), if the funding portal member fails to file the Form MC-400 Application within the applicable 10 business day period, the funding portal member may not associate or continue to associate with the disqualified person, unless Member Regulation grants an extension for good cause shown.
Funding portal members subject to disqualification that wish to retain their membership are required to submit a Form MC-400A Application. A funding portal member subject to disqualification must immediately amend its Form Funding Portal, in accordance with the FINRA By-Laws, to report the disqualifying event and file a Form MC-400A Application with FINRA’s Registration and Disclosure Department (RAD) if it wishes to continue in membership. Further, pursuant to FP Rule 900(b)(3)(A)(ii), if the funding portal member fails to file the Form MC-400A Application or, where appropriate, the written request for relief, within the 10 business day period, the membership of the funding portal member shall be canceled, unless the Department of Member Regulation grants an extension for good cause shown.
As set forth in Section 12(a) of Schedule A to the FINRA By-Laws, the application fee for filing a Form MC-400 and for filing a Form MC-400A is $5,000. The funding portal member must authorize FINRA to deduct the application fee from its CRD account when submitting the Form MC-400 or MC-400A Application.
The following are exceptions to the requirement to file a Form MC-400 or MC-400A Application:
- Persons or funding portal members that are subject to an injunction, as described in Exchange Act Section 15(b)(4)(C), that is greater than 10 years old. In these situations, pursuant to FP Rule 900(b)(8)(A), the disqualified funding portal member or sponsoring funding portal member may provide to RAD a written request for relief. If the disqualified funding portal member or sponsoring funding portal member submits a written request for relief, RAD will send it to Member Regulation, which will review the written request for relief and may either approve it or require that the disqualified or sponsoring funding portal member file a Form MC-400 or MC-400A Application, as applicable.
- The disqualification arises solely from findings in Exchange Act Section 15(b)(4)(D) or (E) by the SEC, CFTC or a SRO, and the sanction is no longer in effect.
- The disqualification arises solely from a final order specified in Exchange Act Section 15(b)(4)(H)(i), and the bar is no longer in effect, provided that there is no final order specified in Exchange Act Section 15(b)(4)(H)(ii).
- The disqualification arises solely from a final order specified in Exchange Act Section 15(b)(4)(H)(ii), and:
- (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 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.
- The disqualification arises solely under Exchange Act Section 3(a)(39)(E), and the disqualified funding portal member or person is subject to the disqualification solely because the funding portal member or person has associated with it any person who is known, or in the exercise of reasonable care should be known, to the disqualified member or person to be a person described by subparagraph (A), (B), (C), or (D) of Exchange Act Section 3(a)(39), unless the associated person controls such disqualified member or person, or is a general partner or officer (or person occupying a similar status or performing similar functions) of such disqualified funding portal member.
Registration and Disclosure's Role
Once a funding portal member files a Form MC-400 or Form MC-400A Application, RAD will compile a package of relevant information including, but not limited to: (i) the Form MC-400/MC-400A Application; (ii) documentation regarding the disqualifying event; (iii) FPRD Records of the disqualified person, the sponsoring or disqualified funding portal member, and the proposed supervisor of the disqualified person; and (iv) documentation in the form of orders, decisions, and the like related to the disciplinary events concerning the disqualified person, the sponsoring or disqualified funding portal member and proposed supervisor of the disqualified person.
In addition to compiling the Form MC-400/MC-400A Application package, RAD will update the individual's/member’s statutory disqualification status "SD Status" in FPRD. The Associated Persons List of the FP’s Organization Information Page on FPRD contains a statutory disqualification (SD) status.
SD status codes for associated persons contain additional detail. See the Statutory Disqualification Codes for a full list of SD status codes.
Member Regulation's Role
Under FP Rule 900(b), Member Regulation is responsible for evaluating Form MC-400 and MC-400A Applications and deciding to either approve or deny the Applications. Funding portal members filing a Form MC-400 or MC-400A Application will not be required to undergo a hearing process. Member Regulation will approve or deny each application on the papers (see Decision Section below for additional details). Member Regulation conducts a thorough review of each file. Part of this function includes obtaining additional information, as required, from the applicant funding portal member, the disqualified person, or various other sources.
To ensure a uniform and consistent approach, Member Regulation staff conducts a prescribed analysis of each Application. This analysis takes into account:
- the nature and gravity of the disqualifying event;
- the length of time that has elapsed since the disqualifying event;
- whether any intervening misconduct has occurred;
- any other mitigating or aggravating circumstances that may exist;
- the precise nature of the securities-related activities proposed in the Application; and
- the disciplinary history and industry experience of both the funding portal member and the person proposed by the funding portal member to serve as the responsible supervisor of the disqualified person.
The Important Role of Supervision
Pursuant to FP Rule 300(a), each funding portal member must establish and maintain a system to supervise the activities of its associated persons that is reasonably designed to achieve compliance with applicable securities laws and regulations and with the FP rules. It is particularly important for a funding portal member to be prepared to implement appropriate supervisory controls when it sponsors the association of a person who is subject to disqualification or when it seeks to continue its membership after becoming subject to disqualification. In virtually every application that Member Regulation approves, it will do so subject to the funding portal member's agreement to implement a heightened supervisory plan.
In evaluating the proposed heightened supervisory plan Member Regulation will pay particular attention to the supervisory and disciplinary history of the sponsoring funding portal member and the proposed supervisor (if applicable). Depending on the nature of the disqualification, the funding portal member may need to propose additional controls and business restrictions.
For more information on the important role supervision plays in governing the employment of persons who are subject to disqualification as well as other persons with regulatory history, please see the Winter 1999 Regulatory & Compliance Alert article re: Special Supervisory Plans and Notice to Members 97-19 (Guidance on Heightened Supervision Recommendations).
Member Regulation will issue a final decision on a Form MC-400 or MC-400A Application on behalf of FINRA. The critical inquiry in every case is whether the admission of the disqualified person or funding portal member would be consistent with the public interest and the protection of investors. If Member Regulation does not approve a written request for relief pursuant to FP Rule 900(b)(8)(A), or the matter is not eligible for consideration under FP Rule 900(b)(8)(A), the disqualified funding portal member or sponsoring funding portal member may file a Form MC-400 or MC-400A Application, as applicable, under FP Rule 900(b)(8)(B). If Member Regulation does not approve an application pursuant to FP Rule 900(b)(8)(B), Member Regulation will inform the disqualified funding portal member or sponsoring funding portal member of its decision in writing. The disqualified funding portal member or sponsoring funding portal member shall have the right to appeal such a decision pursuant to FP Rule 900(b)(11) and may request a hearing subject to an additional $2,500 fee. An appeal will be decided by the National Adjudicatory Council, unless called for review by the FINRA Board.
If FINRA approves an application, it must then file a notice with the SEC pursuant to SEA Rule 19h-1 notifying the SEC of its decision. The SEC must review and approve that decision before it takes effect. The SEC will notify FINRA of its decision by written communication.
If FINRA denies an Application (pursuant to SEA Rule 19d-1), the funding portal member and the aggrieved individual have rights of appeal to the SEC.
FINRA examiners conduct periodic special statutory disqualification examinations to review for compliance with supervisory conditions and to monitor for other problems. FINRA classifies individuals and members subject to disqualification into three tiers with corresponding examination requirements.
Tier I generally consists of individuals and members subject to disqualification because of securities or commodities-related misconduct including crimes described in Section 15(b)(4) of the Exchange Act.
Tier II generally consists of individuals and members subject to disqualification whose disqualifying misconduct does not relate to activities enumerated in Tier I or Tier III (below). The disqualifying event for Tier II firms and individuals in most circumstances will be based on (1) felonies that are not securities- or commodities-related or (2) findings by certain foreign entities.
Disqualified members and persons in Tiers I and II are subject to periodic examination. District Office staff has discretion to conduct more frequent or additional statutory disqualification examinations if it believes that more frequent examinations are appropriate, for example because of past violations of the approved terms and conditions.
Tier III consists of those individuals and members subject to disqualification that were permitted to associate or remain as a member without any special supervision. There are no special examination requirements associated with this class of disqualified persons and members.
Pursuant to Section 12(b) of Schedule A to the FINRA By-Laws, members employing Tier I disqualified persons are required to pay an annual fee in the amount of $1,500. Members that employ Tier II disqualified persons are required to pay an annual assessment in the amount of $1,000.
Any questions related to RAD's functions should be directed to Patricia L. Delk-Mercer at (240) 386-5461 or Chris Dragos at (240) 386-5440. All other questions related to this process should be directed to Lorraine Lee-Stepney, Manager, Statutory Disqualification Program in Member Regulation at (202) 728-8442.