Ineligibility for Membership or Association

Statutory disqualification is one barrier to working in the securities industry. Beyond that, FINRA's By-Laws establish broader eligibility standards that member firms must enforce.

Firm Obligations

FINRA By-Laws (Articles III and IV) require member firms to actively manage who they allow to associate with the firm. A firm must deny or terminate association with a person who is:

  • Subject to statutory disqualification (as covered in the previous section)
  • Under an SEC or SRO suspension or bar
  • Subject to a pending indictment for securities-related offenses

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

The firm bears primary responsibility for ensuring every person who needs to be registered is registered. 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, not just the individual. If an unregistered person performs registered activities, both the firm and its supervisors face consequences.
  • Supervisors face personal sanctions even if they were merely negligent (not just willful).

The Practical Impact

  • Firms conduct pre-employment screening specifically to identify disqualifying events before hiring
  • Ongoing monitoring ensures that new disqualifying events (arrests, indictments, regulatory actions) are caught quickly
  • If a currently registered person becomes subject to disqualification, the firm must immediately restrict their activities

Exam Tip: Gotchas

  • A pending indictment is enough to trigger ineligibility. The person does not need to be convicted. The exam may test whether an indictment alone is sufficient grounds to deny association.

Think of it this way: Ineligibility is broader than statutory disqualification. Statutory disqualification requires a completed event (conviction, bar, or expulsion), but ineligibility can be triggered by something still in progress, like a pending indictment. If someone is merely accused of a securities-related crime, the firm must act before a verdict.