Can FINRA Bar Me From the Industry?
FINRA Bar: The SEC Has the Authority to Bar Brokers, Dealers, and Investment Advisers from the Securities Industry
The U.S. Securities and Exchange Commission (SEC) oversees regulation of the securities industry. The Financial Industry Regulatory Authority (FINRA) is a self-regulatory organization (SRO) that is responsible for oversight of securities brokers and dealers, investment advisers, and other securities industry professionals. Through their joint efforts, the SEC and FINRA play a central role in policing the securities industry, and they both have the authority to impose industry bars.
What is a FINRA Bar?
A FINRA bar is a legal prohibition on an individual’s ability to engage in regulated activities in the securities industry. More specifically, it is a legal prohibition on acting in any of the following capacities (among others):
- Broker or other person associated with a broker or dealer
- Investment adviser or other person associated with an investment adviser
- Transfer agent or other person associated with a transfer agent
- Municipal securities dealer or other person associated with a municipal securities dealer
- Credit rating agent or other person associated with a credit rating agent
In this context, the term “associated” has a specific legal definition. As defined in Section 3(a)(18) of the Securities Exchange Act of 1934:
“[T]he term “person associated with a broker or dealer” or “associated person of a broker or dealer” means any partner, officer, or director of such broker or dealer (or any person performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer or any employee of such broker or dealer, except that any person associated with a broker or dealer whose functions are solely clerical or ministerial shall not be included in the meaning of such term.”
As you can see, this definition of “associated” is extremely broad. As a practical matter, a FINRA bar prohibits all “controlling” and non-clerical services for securities firms of all types. It is also important to note that a FINRA bar prohibits individuals and firms from engaging in regulated activities. If you are barred from the securities industry and violate your bar, you can face steep fines and other penalties at the hands of the SEC and FINRA.
What is the FINRA Bar Process?
There are two primary scenarios in which FINRA can seek to impose a bar on an individual or firm in the securities industry. One is when the individual or firm is suspected of engaging in fraudulent or otherwise illegal activity, and one is when the individual or firm fails to pay fines or other financial obligations resulting from an enforcement action.
1. SEC Enforcement Actions Involving Allegations of Fraud or Other Illegal Activity in the Securities Industry
The SEC (or FINRA) can seek to impose a bar in connection with an enforcement action that involves allegations of fraud or other illegal activity in the securities industry. These actions can be incredibly complex, and it is critical that individuals and firms targeted need to engage experienced defense counsel immediately.
In FINRA enforcement actions, the process starts with the initiation of an investigation. The targets of FINRA investigations are required to cooperate fully, and they can face charges for failing to provide information or misrepresenting information in response to a FINRA request.
If a FINRA investigation uncovers evidence of fraud or another “statutory disqualification” (as discussed below), FINRA can issue a formal complaint. The complaint will be filed with FINRA’s Office of Hearing Officers (OHO), which will assign a Hearing Officer and appoint a Hearing Panel. The OHO will also schedule a hearing for a later date.
2. SEC Enforcement Actions Involving Failure to Pay Fines and Other Financial Obligations
The OHO can also seek to impose a FINRA bar in cases involving failure to pay fines or other financial obligations imposed in connection with an enforcement action. This includes not only SEC enforcement actions, but also criminal cases prosecuted by the U.S. Department of Justice (DOJ). In these cases, FINRA may grant an individual or firm’s request for a waiver in order to avoid imposing a permanent bar.
The process of seeking a waiver involves submitting a written request to the Office of General Counsel. The request should include all relevant information, and it should provide a compelling and well-supported justification for granting the requested waiver. The request also needs to include (or be accompanied by) a notarized affidavit attesting to the veracity of the information presented.
Once FINRA receives a waiver request, it will conduct an independent review and provide a decision within 30 days. If FINRA denies the waiver request, the individual or firm that sought the waiver has the option to seek review or apply again.
When Can FINRA Impose an Industry Bar?
As indicated above, there are two main scenarios in which FINRA (working in conjunction with the SEC) can impose an industry bar. This includes cases involving “statutory disqualifications”, and cases involving failure to pay required fines or other financial obligations. Some examples of “statutory disqualifications” (as defined in Section 3(a)(39) of the Exchange Act) include:
- Certain criminal convictions (including both felonies and certain misdemeanors)
- Injunctions involving false or misleading statements or the omission of material information
- Willful securities violations
- Temporary or permanent bars imposed by the Commodity Futures Trading Commission (CFTC)
- SEC cease-and-desist orders
- Foreign prohibitions
- SEC disciplinary actions
- Delinquencies in the payment of FINRA arbitration awards, settlements, and fines
The relevant statute states that FINRA bars should be temporary, “except that if the Commission finds that . . . the prohibitions of such suspension or bar should be permanent in light of the public interest and the protection of investors.” As a result, FINRA bar orders typically specify a period of time for which the bar will remain in effect. Once a FINRA bar order expires, the individual or firm that was the subject of the order may petition for review. The review process involves submitting and certifying relevant financial and other information, and FINRA will consider all of the circumstances involved in deciding whether to grant the individual or firm’s petition for review. If FINRA denies a petition for review, the individual or firm seeking review may reapply after a specified period of time.
Are FINRA Bars Public?
Yes, FINRA bars are public. If an individual or firm is barred from the securities industry, the SEC and FINRA publish this information online. FINRA also publishes regular reports regarding its enforcement activity, and these reports typically include information on both temporary and permanent bars.
There is also a FINRA SRD Disqualification List that includes information on both individuals and firms that are barred from the securities industry. If you are the subject of a FINRA bar, this is yet another place where your bar will be publicized.
What Should You Do if You Are Facing a FINRA Bar?
If you are facing a FINRA bar, there are several steps that you need to try to protect your ability to work in the securities industry. This includes (but is not limited to):
2. Work with Your Defense Counsel to Develop a Strategic Plan
Once you engage defense counsel to represent you, your defense counsel should work with you to develop a strategic plan. This strategic plan should be comprehensive, and it should take into account all of the facts and circumstances involved.
3. Communicate and Cooperate with FINRA
Regardless of the circumstances at hand, it is imperative that you communicate and cooperate with FINRA as required. You do not want to get yourself into further trouble by ignoring communications from FINRA, and you do not want to get yourself into further trouble by providing false or misleading information.
4. Work with Your Defense Counsel to Achieve a Favorable Resolution
As the FINRA bar process unfolds, you will want to work with your defense counsel to achieve a favorable resolution. This may include negotiating a settlement with FINRA, or it may involve taking your case to the SEC or to court.
5. Be Prepared for All Possible Outcomes
Regardless of the strategy you choose to pursue, it is important to be prepared for all possible outcomes. This is another area where experienced defense counsel can assist you. An experienced securities industry defense lawyer will be able to advise you of all of your options, and will be able to help you make informed decisions about how best to proceed.
