SEC Broker Registration Revoked.

Yes, the SEC has the authority to revoke a broker-dealer’s federal registration directly. Under Exchange Act Section 15(b)(4) (or “Section 15(b)(4)” / “15(b)(4)”), the SEC may suspend or revoke the federal registration of a broker-dealer if the SEC finds that the dealer has willfully violated the Exchange Act or the Securities Act (including the Act’s rules thereunder), has failed to supervise associated persons, or is subject to an SEC order barring or suspending the right to associate with a broker or dealer. However, Section 15(b)(4) also stipulates that the SEC cannot take this action without providing prior notice and the opportunity for a hearing. Exchange Act Section 15(b) broadly governs federal broker-dealer registration, including registration requirements, disciplinary proceedings, and statutory disqualification under the Act. The SEC’s authority to revoke a broker-dealer’s registration under Section 15(b)(4) is a separate and distinct legal issue from FINRA expulsion, the imposition of statutory disqualification, and the SEC’s authority to bar individuals from the securities industry under Section 15(b)(6). For example, expulsion from FINRA removes a firm from FINRA membership. While expulsion has substantial practical consequences, and it may lead to the loss of privileges such as executing trades on regulated exchanges, FINRA expulsion is not equivalent to revocation of federal registration by the SEC. Similarly, revocation of federal registration and the imposition of statutory disqualification are different legal concepts; although revocation of registration can lead to statutory disqualification under certain circumstances, and statutory disqualification can preclude broker-dealers from continuing their activities unless they obtain or maintain an SEC exemption, these remain distinct procedural mechanisms. Finally, while the SEC can revoke a broker-dealer’s registration under Section 15(b)(4), this is a separate and distinct enforcement proceeding from those aimed at individuals under Section 15(b)(6), and it is separate from the procedures for imposing sanctions or barring individuals in civil or criminal enforcement proceedings.

What Procedure Follows an SEC Broker-Registration Allegation?

Generally, an SEC broker registration investigation will be a lengthy and resource-intensive process involving the development of allegations from the SEC’s Enforcement Division, the pursuit of disciplinary action (e.g., civil litigation against individuals and/or firms), and potential penalties. While the SEC generally takes its time in building its cases, we can intervene early and attempt to steer an investigation away from SEC enforcement litigation. This means doing everything in our power to assist with the SEC’s investigation, while working alongside the SEC’s Enforcement Division to mitigate its findings. In cases where the SEC attempts to bring charges against unregistered broker-dealers, we defend our clients in court. This involves challenging the SEC’s authority, questioning the evidence it uncovered, and addressing the legal standards for registering as a broker-dealer. During the investigative process, federal regulators may require individuals and organizations to sit for sworn, on-the-record interviews. To prepare our clients, we meet with them in detail before interviews, providing them with sound advice and guidance, while helping them clearly communicate the facts and law to the best of their ability.

We help our clients respond promptly to investigations while also helping them carefully tailor their responses to avoid giving the SEC information that may lead to charges. Our securities defense lawyers are skilled in all aspects of SEC enforcement proceedings. We represent clients in securities enforcement cases, and we handle investigations, civil cases, and appeals. Our lawyers assist both corporate clients and individual clients through the stages of SEC enforcement. We understand the burden involved in facing an SEC enforcement action or SEC investigation. As a result, we work tirelessly to help our clients make informed decisions that may avoid charges. This involves negotiating with the SEC, assisting in the collection of records, providing a thorough defense based on a correct application of the law, and avoiding a trial by demonstrating the SEC’s case to be unfounded.

What Can FINRA Remove (And What Does NASD Rule 2350 No Longer Do)?

FINRA, like other securities self-regulatory organizations, is able to impose various sanctions in disciplinary proceedings. These sanctions include (among others) fines, suspensions, expulsions, and permanent bars. While a FINRA bar restricts an individual’s association with member firms, the bar is not intended to remove a broker-dealer’s federal registration. This is true because FINRA does not issue federal broker-dealer registrations, and FINRA also does not issue professional licenses.

Instead, the process of becoming a member firm generally requires both federal registration with the SEC and membership with FINRA. As a result, broker-dealers generally need both SEC registration and FINRA membership to execute most broker-dealer activities.

While some sources reference NASD Rule 2350 in the context of FINRA member removal, NASD Rule 2350 is no longer in effect. This former rule specifically addressed broker/dealer conduct on the premises of financial institutions. NASD Rule 2350 was superseded by FINRA Rule 3160, not renumbered as FINRA Rule 2350.

When Does Statutory Disqualification Block Association With a FINRA Member?

Along with SEC registration, state laws impose registration requirements for broker-dealers. These laws often contain their own version of statutory disqualification and apply to both the broker-dealer and its associated persons. In federal securities laws, Exchange Act Section 3(a)(39) (“Section 3(a)(39)”) contains the definition of statutory disqualification. Statutory disqualification is a broad term that refers to a wide variety of misconduct-related and regulatory or legal events that can preclude an individual or organization from associating with FINRA member firms unless FINRA grants eligibility or other relief.

In general, statutory disqualification is what blocks association. This is in addition to issues stemming from an individual’s or an organization’s ineligibility to join FINRA. While the same criteria that lead to statutory disqualification can also lead to membership ineligibility, these are different issues. FINRA Rule 9520 outlines the procedures for obtaining eligibility in cases involving statutory disqualification.

Finally, while BrokerCheck disclosures triggered by an individual’s or organization’s statutory disqualification events are a significant concern, the requirement to disclose on BrokerCheck is not the same as statutory disqualification itself. While FINRA member firms must disclose certain events on BrokerCheck (via Forms U4 and U5), these disclosures do not necessarily result in statutory disqualification. However, if a disclosure requirement also leads to statutory disqualification, then avoiding or resolving a statutory disqualification will be necessary for individuals to associate with (and firms to become) FINRA members.

What Do the 2023 Enforcement Figures Actually Prove?

To get a clearer understanding of the likelihood of facing FINRA enforcement, it is helpful to look at statistics provided by the self-regulatory organization itself. In its 2023 Annual Financial Report, FINRA reports:

• It conducted examinations of member firms as part of its statutory regulatory functions;
• It filed 610 new disciplinary actions;
• It imposed $88.4 million in monetary fines;
• It imposed 257 suspensions for associated persons; and,
• It issued 178 permanent bars for associated persons.

The 2023 report does not state what portion of these disciplinary actions is registration-related. FINRA resolves formal disciplinary actions through litigated proceedings or settlements such as Letters of Acceptance, Waiver and Consent; informal cautionary actions are not formal discipline. These action letters can range from non-punitive notifications to more serious disciplinary actions. While some of the letters only refer to registration violations, these issues can lead to restitution, fines, suspensions, and even permanent individual bars.

These statistics raise two important concerns for broker-dealers and associated persons:

• What do they mean for the likelihood of facing enforcement?
• What can they learn from FINRA’s reported enforcement outcomes?

In addition to learning more about the regulatory concerns that are most commonly targeted, it is also important for broker-dealers and associated persons to understand the full implications of FINRA’s disciplinary actions and how to protect themselves and their firms.

Because broker-dealers and their associated persons are under constant scrutiny by the SEC, FINRA, and other regulatory authorities, it is important to fully understand the risk of facing enforcement. It is also important to have a thorough understanding of what the regulators have targeted in the past. At Spodek Law Group, we provide tailored legal representation.

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