Ineligibility for Membership or Association

A person who is subject to statutory disqualification is ineligible to be a member of, or to associate with a member of, FINRA. Under FINRA's By-Laws, "ineligibility" and "statutory disqualification" describe the same bar: the By-Laws define a firm's disqualification standard by reference to the statutory disqualification set out in the Securities Exchange Act. Ineligibility is not a separate, broader standard.

Firm Obligations

FINRA By-Laws (Article III) require member firms to manage who they allow to associate with the firm. A firm must not admit or continue the association of a person who is subject to a statutory disqualification, which includes:

• A securities-related felony or disqualifying-misdemeanor conviction within the past 10 years
• An SEC or SRO suspension, bar, or expulsion
• An injunction from securities activities, a willful violation of the securities laws, or a false or misleading filing

A statutorily disqualified person may associate only if the firm applies for and receives relief through FINRA's eligibility process (by filing a Membership Continuance Application, Form MC-400).

Consequences of Failing to Register

If a firm allows an unregistered person to perform activities that require registration, the consequences can be severe:

• Fines against the firm for allowing unregistered activity
• Suspension of the firm's membership by FINRA
• Individual sanctions against supervisors who allowed the unregistered activity
• Individual sanctions against the unregistered person too. FINRA's definition of "associated person" reaches anyone performing securities-business functions for a member, whether or not they are registered, so the person who acted without registration can personally face a bar or other sanction.

The firm bears primary responsibility for ensuring every person who needs to be registered is registered, but that responsibility does not shield the unregistered individual from consequences of their own. Supervisors who knowingly (or negligently) allow unregistered activity face personal sanctions, creating a compliance obligation that flows from the top down.

Exam Tip: Gotchas

• The firm is responsible for ensuring proper registration, but that is not the whole story. If an unregistered person performs registered activities, the firm, its supervisors, and the unregistered individual can all face consequences.
• Supervisors face personal sanctions even if they were merely negligent (not just willful).

The Practical Impact

• Firms conduct pre-employment screening to identify statutory-disqualification events before hiring
• Ongoing monitoring catches new disqualifying events (a conviction, a regulatory bar or suspension, an injunction)
• If a currently registered person becomes statutorily disqualified, the firm must act promptly: restrict the person and, to keep them, file for relief through the eligibility process

Exam Tip: Gotchas

• A pending indictment is NOT a statutory disqualification. A charge or indictment is a reportable event that must be disclosed on Form U4, but disqualification is conviction-based (or based on a regulatory bar, suspension, or injunction). A person who is merely charged is not automatically barred from association.

Think of it this way: In FINRA's rules, "ineligibility" and "statutory disqualification" are the same bar. It is triggered by a completed event: a conviction within the past 10 years, a regulatory bar or suspension, or an injunction. A pending indictment is disclosed on Form U4 but does not by itself disqualify a person.

What Should You Check on Exam Day?

• Can you explain why ineligibility and statutory disqualification describe the same bar under FINRA's By-Laws?
• Do you know the process a firm must use to keep a statutorily disqualified person?
• Can you explain why a pending indictment does not by itself disqualify a person?
• Do you know who can face sanctions when a firm allows unregistered activity?
• Can you state whether supervisors can be sanctioned for negligent, not just willful, oversight failures?