Statutory Disqualification

What does it mean to say that a person is subject to statutory disqualification?

1. A.A status arising from defined events that bars association with a member unless approval is obtained through an eligibility proceeding.Correct. The status follows automatically from the event, and relief comes afterwards through a proceeding rather than beforehand.
2. B.A permanent bar from the securities industry imposed by a hearing panel after findings of fraud.Wrong. A bar of that kind is one triggering event, whereas disqualification is the status and it can be overcome.
3. C.A suspension of a person's registrations while a regulatory investigation into their conduct remains open.Wrong. An open investigation is not itself a disqualifying event; the status attaches to concluded matters on a defined list.
4. D.A designation a member firm applies to a representative it has placed under heightened supervision.Wrong. Heightened supervision is a firm's own remedial choice and carries no statutory consequence for association.

Why: Statutory disqualification is a status defined in the securities laws under which certain events, such as specified felony convictions, particular regulatory bars, expulsions, or findings of willful misstatements in a registration filing, disqualify a person from association with a member firm. The status is automatic in the sense that it follows from the event rather than from a discretionary judgment about the person's character. It is not permanent and not absolute: a firm that wishes to employ or continue employing a disqualified person may seek approval through an eligibility proceeding in which the regulator weighs the conduct, the passage of time, and the supervision proposed. Absent that approval, association is barred.

Applying to a new member firm, a representative answers "no" to a disclosure question about an unsatisfied judgment, knowing the answer is untrue. The judgment is later discovered. How is the false answer treated relative to the judgment itself?

1. A.The two merge into a single disclosure event, cured once an amendment reporting the judgment is filed.Wrong. Filing a late amendment corrects the record going forward but does not erase the false answer already given.
2. B.The judgment is the more serious matter, since the false answer caused no financial harm to any customer.Wrong. Customer harm is not the measure; the false answer undermines the disclosure system every firm relies on.
3. C.The false answer is an independent and typically graver violation, and a willful misstatement can itself be disqualifying.Correct. The system runs on self-reporting, so corrupting the record is treated more harshly than the fact concealed.
4. D.Neither is actionable, because a judgment that has never been enforced does not affect his ability to do business.Wrong. Enforceability is beside the point; the form asks about the existence of the judgment, and he denied it.

Why: An unsatisfied judgment is a disclosable financial event, but on its own it is rarely a bar to registration; regulators expect that people have financial difficulties and the form simply records them. Answering falsely is a different matter, because a willful misstatement or omission of a material fact in a registration application is itself a violation and is among the events that can render a person statutorily disqualified. The asymmetry is intentional: the system depends on self-reporting, so it treats corrupting the record as more serious than the underlying fact the record was meant to hold. Had he disclosed the judgment accurately, he would have had a disclosure on his record and, in all likelihood, a registration.

A long-serving operations manager becomes subject to statutory disqualification. His member firm believes he poses no risk in his current role and wants to keep him. What must the firm do?

1. A.Document its risk assessment in the firm's compliance file, which permits the association to continue.Wrong. A firm's own assessment is not a source of relief from a status imposed by statute.
2. B.Move him to a role that requires no registration, since the disqualification restricts only registered activity.Wrong. The bar runs to association with the member firm and is not confined to registered functions.
3. C.Terminate him immediately, because a disqualified person may never again be associated with any member firm.Wrong. The status is not permanent or absolute; relief through an eligibility proceeding is expressly available.
4. D.Apply to FINRA to permit the continued association, proposing a heightened supervisory plan for the proceeding.Correct. Relief comes only through that application, in which the firm carries the burden of justifying the association.

Why: Statutory disqualification bars association with a member unless relief is obtained, and the firm's private judgment about the person's risk carries no weight on its own. The firm must apply to FINRA to permit the continued association, and in that eligibility proceeding it bears the burden of showing why the association is consistent with the public interest, typically by proposing a specific and heightened supervisory plan naming a responsible principal. The regulator weighs the nature of the disqualifying conduct, how much time has passed, the person's intervening record, and the credibility of the proposed supervision. Continuing the employment while the application is pending, without permission to do so, is itself a violation.

A prehire background check reveals that a candidate has several disclosed customer complaints on his CRD record at a prior firm, though none resulted in statutory disqualification. What is the principal's obligation beyond confirming registration eligibility?

1. A.Rely solely on the prior firm's hiring decision, since it already vetted the candidateWrong. Each firm has its own independent prehire investigation obligation; it cannot be outsourced to a prior employer's judgment.
2. B.Take no action unless a customer complaint is currently pendingWrong. The obligation to investigate background and pattern exists regardless of whether a complaint is presently open.
3. C.Confirm the candidate is not statutorily disqualified and proceed with no further inquiryWrong. Confirming eligibility does not satisfy the separate obligation to investigate the substance of the disclosed history.
4. D.Investigate the substance and pattern of the disclosed complaints and assess whether heightened supervision is warrantedCorrect. Rule 3110(e) requires investigation of the candidate's background; a pattern of complaints can independently justify heightened supervision.

Why: The principal must investigate the substance and pattern of the disclosed complaint history and independently assess whether heightened supervision is warranted, rather than treating CRD eligibility alone as the end of the inquiry. Rule 3110(e) requires the firm to investigate the candidate's background as part of the hiring process.