Statutory Disqualification and Eligibility Proceedings
Quick Answer
Statutory disqualification (SD) under the Securities Exchange Act (SEA) bars a person from association with a broker-dealer if they have been suspended, expelled, or barred by a self-regulatory organization (SRO); subject to certain SEC orders; enjoined from securities activity; convicted of a felony or specified misdemeanor within 10 years; or found to have willfully violated securities laws. A member firm seeking to associate (or continue associating) with an SD person files Form MC-400, the SEC is notified under the SD relief application requirement, and FINRA's National Adjudicatory Council (NAC) decides under the eligibility-proceeding framework whether the person can enter or remain in the industry, often subject to heightened supervision.
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, 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. Misdemeanors only trigger SD if they involve the listed securities-related conduct (theft, embezzlement, false reports, perjury).
- 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
| Topic | Provision |
|---|---|
| Eligibility | Persons eligible to become members and associated persons of members |
| Board authority | Authority of the FINRA Board to adopt qualification requirements |
| Ineligibility | No person subject to disqualification may associate with a member; no member subject to disqualification may continue in membership; an eligibility-proceeding mechanism is built into the article |
| Definition of disqualification | Tracks the Exchange Act's statutory-disqualification definition verbatim |
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
Procedure is governed by FINRA's eligibility-proceeding framework and the broader other-proceeding rules.
| Application | Filed By | Subject |
|---|---|---|
| Form MC-400 | Member firm | A specific associated person who is statutorily disqualified |
| Form MC-400A | Disqualified member firm | The firm itself seeking to remain a member despite SD |
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 for FINRA to Bar or Suspend
The Exchange Act's registered-securities-association disciplinary provision authorizes FINRA to bar or suspend any member or associated person from association if the person is subject to a statutory disqualification. This is the statutory hook that makes the FINRA disciplinary system enforceable as a matter of federal law.
Exam Tip: Gotchas
- A statutory disqualification is automatic under the Exchange Act's statutory-disqualification definition; the bar or suspension under the registered-securities-association disciplinary provision is the enforcement consequence. The two work together: the definition sets the trigger; the disciplinary provision gives FINRA the power to act on it.