Maybe FINRA Can’t Bar You
Nearly every person in the securities business has to be registered with the Financial Industry Regulatory Authority. And as a result, they are subject to FINRA’s disciplinary authority for violating the rules of FINRA and the SEC. If they are disciplined, sanctions can include being barred from association with any member firm. A sanctioned person can go through the FINRA appeal process and from there to the SEC.
In reviewing a FINRA sanction the SEC must determine whether the sanction is oppressive or excessive. But what is the standard against which to make such a determination?
The SEC recently affirmed a FINRA bar order against John Saad that raised just this question. Saad was barred because he converted firm assets for his own use and then tried to cover it up when questioned about it by the firm. Saad appealed the SEC’s affirmance up to the D. C. Circuit Court of Appeals in two (2) separate appeals. The first appeal argued that the SEC failed to consider mitigating factors in affirming the bar. The court sent the case back to the SEC, which determined that despite Saad’s arguments the bar was merited. His last appeal argued that the bar was excessive and punitive. The court again sent the matter back to the SEC to determine if a bar in this case was punitive in light of a recent Supreme Court order holding that SEC fines were by their nature punitive.
In its last order, the SEC concluded the FINRA bar was not a punitive action based on three (3) arguments: First, bars are statutorily authorized and the SEC has authority to review them to ensure they are not impermissibly punitive; Secondly, the fact that a bar is a deterrent does not make it punitive; and Lastly, FINRA bar orders are not punitive under the test applied in that Supreme Court opinion.
But this begs the question: when is a FINRA bar impermissibly punitive. In its last order the SEC said that whether a bar is punitive and thus excessive or punitive must be evaluated under the facts of the case and must be set forth in the SEC order affirming or reversing the bar. The SEC concluded that Saad’s bar was not punitive in light of the threat his return to the industry would pose to investors and other industry participants. Assuming courts accept this standard, it still leaves a window to show why a bar order is excessive based on the facts of the case—e.g. its impact on licensing in other professions and that a similar effect can be achieved otherwise- a suspension with or without the right to reapply.
Please feel free to contact me (phone: 212 455 0476; email: msimkin@securitiesregslawyer.com) if you would like to discuss this further.