Statutory Disqualification and Eligibility Proceedings

A statutory disqualification is the registration system's most serious flag. The Series 24 has to know what triggers SD, what process the firm follows to keep the person, and who decides.

Statutory Disqualification Definition (Exchange Act)

A person is statutorily disqualified if any of the following apply:

• Suspended, expelled, or barred from membership or association by an SRO
• SEC order: Suspended (12 months or less), revoked, denied, expelled, or barred
• Court injunction: Enjoined from acting as a broker-dealer (B/D), investment adviser (IA), investment company officer (ICO), or in any securities-related capacity
• Convicted within the past 10 years of:
  • Any felony (regardless of subject matter)
  • Certain misdemeanors involving the purchase or sale of any security, false reports, theft, forgery, embezzlement, fraudulent conversion, misappropriation of funds or securities, or perjury
• Willful violation of the federal securities laws or the rules of an SRO
• Willfully made false or misleading statements in any registration application or report
• Subject to a final order of a state securities, banking, or insurance commission barring or suspending the right to engage in the business

The 10-year clock runs from the date of conviction, not the date of release.

Exam Tip: Gotchas

• A felony conviction triggers SD regardless of subject matter. A non-securities felony like a DUI homicide is a 10-year statutory disqualifier. Listed misdemeanors such as theft, forgery, false reports, and perjury also trigger SD even without a securities connection.
• The 10-year window is fixed. A securities-related felony from 12 years ago is no longer a statutory disqualifier under the Exchange Act's statutory-disqualification definition, though the firm may still consider the conviction as a hiring matter under its background-investigation duty.

FINRA By-Laws Article III - Qualifications

The Exchange Act Qualification Requirement

The federal qualification requirement is codified separately from FINRA's rules:

• Exchange Act qualification mandate: It is unlawful for any registered B/D to effect any transaction in securities, or induce or attempt to induce the purchase or sale of any security, unless the person doing so meets the qualification requirements of any SRO of which the firm is a member
• SEC compliance hook: A parallel SEC rule makes compliance with SRO qualification standards a federal-law requirement, not just a private SRO membership condition

Think of it this way: The Exchange Act qualification mandate means that even if a state allowed a person to operate, federal law makes it unlawful for the firm to use that person if they fail FINRA's qualification rules. SRO qualification status is the federal floor, not just a private association rule.

Form MC-400 and the SD Relief Application Process

When a firm wants to associate with (or continue associating with) a statutorily disqualified person, the firm cannot simply hire and hope:

• The SRO must notify the SEC of any proposed admission to or continuance of association of an SD person
• The firm files Form MC-400 with FINRA's Department of Member Regulation (or Form MC-400A when the member firm itself is the disqualified entity)
• FINRA's National Adjudicatory Council (NAC) decides whether the SD person may enter or remain in the industry
• The decision often imposes heightened supervision terms (see the next section)
• The SEC retains the right to set aside or modify FINRA's decision under the Exchange Act's SRO-disciplinary-review provision

An approved supervisory plan remains binding. The firm must submit proposed changes to FINRA for review and obtain prior approval before changing the disqualified person's responsible supervisor or other approved plan terms. A change does not automatically require a new Form MC-400 application.

Procedure is governed by FINRA's eligibility-proceeding framework and the broader other-proceeding rules.

Exam Tip: Gotchas

• Form MC-400 is filed by the member firm, not by the disqualified person. The SD person is the subject of the application; the firm is the applicant. The firm bears the responsibility for proposing supervisory arrangements that satisfy the NAC.
• The SEC review is separate from FINRA's decision. FINRA's NAC approves or denies through the eligibility-proceeding process, but the SEC must be notified under the SD relief application requirement and may set aside the result under the Exchange Act's SRO-disciplinary-review provision.

Exchange Act Authority: The Statutory-Disqualification Entry Bar

The Exchange Act's registered-securities-association provision authorizes FINRA to deny membership to a broker-dealer and to bar a person from becoming associated with a member subject to a statutory disqualification. It governs the entry gate: by itself it does not authorize FINRA to suspend a person who is already associated.

Exam Tip: Gotchas

• A statutory disqualification is automatic under the Exchange Act's statutory-disqualification definition; the entry bar under the registered-securities-association provision is the enforcement consequence. The definition sets the trigger; the provision lets FINRA deny membership or bar the person from becoming associated. Discipline against a person who is already associated runs through FINRA's separate eligibility and disciplinary proceedings, not this entry-gate provision.

What Should You Check on Exam Day?

• Do you know a felony conviction within the past 10 years triggers statutory disqualification regardless of subject matter, while a misdemeanor must involve a listed offense that may not be securities-related?
• Can you state that the 10-year statutory disqualification window runs from the date of conviction, not the date of release?
• Can you distinguish Form MC-400, filed by the member firm for an associated person, from Form MC-400A, filed by a disqualified member firm?
• Do you know FINRA's National Adjudicatory Council decides entry or continuance, and the SEC can set aside or modify that decision?