Statutory Disqualification Index
NOTE: Stipulations of Fact and Consent to Penalty (SFC); Offers of Settlement (OS); and Letters of Acceptance Waiver, and Consent (AWC) are entered into by Respondents without admitting or denying the allegations, but consent is given to the described sanctions & to the entry of findings. Additionally, for AWCs, if FINRA has reason to believe a violation has occurred and the member or associated person does not dispute the violation, FINRA may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a hearing panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted. The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed.

In the Matter of the Association of X as a General Securities Representative with The Sponsoring Firm Redacted Decision Notice Pursuant to Section 19(d) Securities Exchange Act of 1934

Decision No. SD07003

APPROVED by National Adjudicatory Council

On June 19, 2006, the Sponsoring Firm (“the Firm”) submitted a Membership Continuance Application (“MC-400” or “the Application”) with FINRA’s Department of Registration and Disclosure, seeking to permit X, a person subject to a statutory disqualification, to associate with the Firm as a general securities representative. In April 2007, a subcommittee (“Hearing Panel”) of FINRA’s Statutory Disqualification Committee held a hearing on the matter. X appeared at the hearing, accompanied by his counsel and by his proposed supervisor. LL and CD, appeared on behalf of FINRA’s Department of Member Regulation (“Member Regulation”). 

Pursuant to NASD Rule 9524(a)(10), the Hearing Panel submitted its written recommendation to the Statutory Disqualification Committee. In turn, the Statutory Disqualification Committee considered the Hearing Panel’s recommendation and presented a written recommendation to the National Adjudicatory Council, in accordance with Rule 9524(b)(1). 

Filed Under: Felony, DUI, Willfulness, Treatment/Rehabilitation, Sponsor's Regulatory History, Adequacy of plan, Approval after hearing
SD Event
X is statutorily disqualified because he pled guilty in April 2003, to the felony charge of driving under the influence of alcohol (“DUI”) in State 1. X’s 2003 DUI was a felony because he had two previous misdemeanor convictions for DUI in September 1997 (resulting in three years of probation, 30 days of imprisonment, a $500 fine, and a six-month license revocation) and September 1991 (resulting in 12 days in jail and a $250 fine). For the 2003 felony conviction, the court fined X $1,000, revoked his driver’s license for one year, and placed him on probation for five years. 
Sentence Expiration
In October 2005, X received early termination from probation.
Prior Industry Activity
X first registered in the securities industry as a general securities representative (Series 7) in December 1995. He also qualified as a uniform securities agent (Series 63) in December 1995 and as a general securities principal (Series 24) in July 1997. He was previously associated with 12 firms between May 1995 and June 2006. At the hearing, X testified that he changed firms often in the beginning of his securities career because he was an “account opener” for another broker, and he followed this broker from firm to firm. X also stated that he had changed employers frequently in his early securities career because he was dissatisfied with the quality of many of his early employers’ sales practices, and he sought to find a group of co-workers that emphasized ethical business practices. X stated that some of his early firms encouraged “high-pressure sales tactics.”
X stated that he found a group of co-workers that emphasized ethical business practices at Firm 2 in 2002, and that he stayed there until 2006 when the group transferred to the Sponsoring Firm.

FINRA’s Central Registration Depository (“CRD”) shows that one customer filed a complaint against X in September 2000, alleging unsuitable investments and excessive commissions. The customer sought damages of $225,000. The parties settled the complaint for $30,000 in March 2001. X testified that he contributed the entire $30,000 through monthly deductions from his gross commissions taken by the brokerage firm that employed him at the time. The record shows no other regulatory actions against X.

Sponsoring Firm
The Firm has 1 office of supervisory jurisdiction (“OSJ”), no branch offices, and it employs 7 registered principals and 33 registered representatives. The Firm is engaged in a general securities business.
  • The Firm’s 2001 FINRA routine examination resulted in a Letter of Caution (“LOC”) for an inaccurate balance ledger and trial balance; one late FOCUS Report; and written supervisory procedure violations. The Firm responded to FINRA in a letter dated March 2001, stating that it had addressed the deficiencies noted. 
  • FINRA’s 2005 routine examination of the Sponsoring Firm resulted in a compliance conference for several deficiencies, including continuing education violations; records violations involving inaccurate Uniform Applications for Securities Industry Registration or Transfer (“Forms U4”) and Uniform Termination Notices for Securities Industry Registration (“Forms U5”); and written supervisory procedure violations. The Firm responded to FINRA in a letter dated April 2006, stating that it had addressed the deficiencies noted. 
  • FINRA has begun, but not yet completed, its 2007 routine examination of the Firm.
Proposed Activity
The Sponsoring Firm proposes to employ X as a general securities representative in its home office in State 1.
Proposed Supervisor
The Proposed Supervisor has been employed in the securities industry since January 1994, and he first became registered as a general securities principal in May 1994. The Proposed Supervisor was previously associated with 12 different brokerage firms between January 1994 and September 2006, when he joined the Sponsoring Firm. Proposed Supervisor will be X’s primary supervisor, and they will work in close proximity in the same office. The Proposed Supervisor has been employed by the Firm as a principal since September 2006, and he began working for the Sponsoring Firm full time in February 2007. 

CRD shows one regulatory action and two customer complaints against the Proposed Supervisor:

  1. The regulatory action is a 1998 FINRA Decision and Order of Settlement against the Proposed Supervisor when he was a compliance officer at one of his former firms. Specifically, the findings against the Proposed Supervisor were: 
    1. from July 1996 through March 1997, the Proposed Supervisor failed to timely report to FINRA statistical and summary information regarding 19 customer complaints; 
    2. in March 1997, the Proposed Supervisor failed to timely report to FINRA a state securities consent judgment imposing penalties of $100,000;
    3. the Proposed Suervisor failed to develop and maintain a continuing and current education program for registered persons for the year 1997; and 
    4. the Proposed Supervisor failed to develop a written training plan for the year 1997. 

FINRA censured the Proposed Supervisor, fined him $7,500, and ordered him to requalify as a general securities principal. The Proposed Supervisor paid the fine and requalified as a general securities principal in July 1998. 

  1. Two customers filed complaints in 1996 against one of the Proposed Supervisor’s former employers, naming the Proposed Supervisor as the director of compliance. Both complaints were subsequently withdrawn with no action against the Proposed Supervisor.
Member Regulation Recommendation
Member Regulation recommends that the Application be denied because: 
  1. X does not appear to recognize that his 2003 felony conviction for a third DUI offense is serious and reflects irresponsible behavior
  2. X failed to amend his Form U4 to disclose his felony conviction; 
  3. X’s employment history has been “very sporadic”
  4. the Firm and X have not acted responsibly because the Firm compensated X at a time when he was ineligible to receive compensation; and 
  5. the Proposed Supervisor’s regulatory history is troubling due to his 1998 FINRA settlement for supervisory failures. 
  1. Is X responsibly addressing his alcoholism;
  2. Did X disclose his felony;
  3. Does X’s employment history support denial of the application;
  4. The Firm's compensation of X; and
  5. The Firm and Proposed Supervision


X’s 2003 felony conviction for a third DUI offense is serious and reflects irresponsible behavior. However, X recognizes the seriousness of his offense and has acted responsibly to address his underlying problem, alcoholism, since his last arrest in January 2003. X testified that within two weeks of the January 2003 DUI arrest, he voluntarily placed himself in an inpatient alcoholism treatment center for 30 days. The record contains documentation to corroborate his testimony in the form of a certificate of completion of inpatient treatment dated March 2003. X further testified that immediately following his inpatient treatment, he voluntarily completed six months of intensive outpatient treatment, during which time he became committed to the ongoing program of Alcoholics Anonymous (“AA”). X stated that he remains an active member of AA to date. This testimony was corroborated by a certificate dated August 2003 from the executive director of the outpatient treatment center and a letter dated March 2006 from X’s AA sponsor. In addition, X’s AA sponsor testified by telephone at the hearing and stated that X has remained sober since February 2003, attends three to five AA meetings per week, and is active in the AA program. Accordingly, X has assumed full responsibility for his addiction and has taken great strides to rehabilitate his alcoholism since his 2003 DUI arrest. 


On six Form U4 amendments filed by Firm 2 for X between January 2004 and August 2005, the response to question 14A(1)6 indicates only that X had been charged with a felony, with no mention of a conviction. based on the record evidence and on our assessment of X’s credibility as a witness. The preponderance of the evidence in this record supports X’s contention that he promptly informed his supervisor at Firm 2 of his felony conviction in 2003.

  • Arrest: X testified that immediately after his felony arrest in January 2003, he orally informed the Former Proposed Supervisor about the felony charge. X stated that he and the Former Supervisor prepared an amendment to X’s Form U4 at that time to reflect the felony charge but that the Former Supervisor opined that it would “not be a problem” because the charge was not securities-related. X further testified that the Former Supervisor and others at Firm 2 were intimately aware of X’s alcoholism treatment because he was out of the office for 30 days in February-March 2003 to attend his inpatient treatment, and for six months thereafter he attended the outpatient treatment program three days per week during work hours—from 10:00 a.m. until 1:00 p.m. Moreover, X stated that because he was not permitted to drive, he had to add one hour each way to those days in order to use local mass transportation. 
  • Plea: X also testified that he orally timely informed the Former Supervisor that he had pled guilty to the felony DUI charge in April 2003 and been convicted, and that the Former Supervisor again opined that it was “not a problem” because the conviction was not securities-related. He stated that he never attempted to conceal the felony conviction from Firm 2, and that he recalled timely giving court documents to the Former Supervisor and completing some paperwork to amend his Form U4 to reflect the conviction. 
  • U-4 Amendments: X testified that he assumed that the Former Supervisor had submitted this revised Form U4 to FINRA, but he admitted that he had never checked his CRD on-line or later Forms U4 to see if the conviction had been properly disclosed. X stated that he did not know about the deficiency in his Form U4 until June 2006, when he attempted to register with the Sponsoring Firm. X fully disclosed his felony charge and conviction to the Sponsoring Firm in June 2006, and he testified that he was surprised when the Sponsoring Firm informed him that the felony conviction was a statutory disqualification. As to the six Forms U4 referenced, X testified that he did not recall if he had ever reviewed them or signed them. He further noted that each of those amendments appears to have been made to add a state registration for him, and that he might have reviewed only the state registration portion of the Form U4 without going back to review the remaining sections of the Form U4. The copies of the six Form U4 amendments submitted by Member Regulation are not signed, and Member Regulation conceded that they were copies of electronic filings. 

X also submitted affidavits from two former employees of Firm 2, attesting that they were aware in 2003 of X’s arrest for DUI, that X had never attempted to conceal his arrest from anyone at Firm 2, and that several of X’s co-workers were aware of his DUI and his treatment for alcohol abuse. The record does not include any statement from the Former Supervisor, and X testified that he had not had any recent communication with the Former Supervisor. As X testified, such complete disclosure was necessary to address the questions of his continuing employment while attending six months of outpatient alcoholism treatment and the suspension of his driver’s license. Although X should have been more diligent by checking his CRD online or by following up with his employer to ascertain that the amended Form U4 had been promptly filed with FINRA, he did not willfully fail to disclose the DUI felony conviction to Firm 2. 


X first entered the securities industry in 1995, and between May 1995 and June 2006, he was employed by 12 different firms. While such a work record may not be ideal, such a fact does not support denial of the Application. First, the Forms U5 filed by X’s former employers indicate that the terminations were voluntary. Second, the record shows that only one regulatory event stemmed from those associations—the March 2001 settlement of a customer complaint against X for $30,000. Third, X testified credibly that, early in his career, he acted as an account opener for another broker and chose to follow this broker from firm to firm. X also credibly testified that he was dissatisfied with the work ethic at many of his early firms and moved to other firms to attempt to find a group of co-workers that employed good business practices. 


The Sponsoring Firm submitted the MC-400 on June 19, 2006. X was listed in CRD as being registered with the Sponsoring Firm solely for the purpose of satisfying FINRA prerequisites for the pending Application. During the course of a routine examination of the firm in January 2007, FINRA staff discovered that X had been receiving compensation from the Firm. In answer to FINRA staff’s written questions, the Sponsoring Firm responded by letter dated January 2007, that between August and November 2006, the Firm engaged X as “a recruiter of personnel pursuant to an oral contractor arrangement unrelated to his registration at the Sponsoring Firm.” The Firm paid X $6,500 per month, for a total of $26,000. At the hearing, X testified that he has been out of work since June 2006, supporting his family with his savings and a second mortgage on his home. He stated that he welcomed the opportunity to make some money when the Sponsoring Firm offered to pay him to speak to brokers that he knew and try to get them to interview with the Firm. X stated that he and the Firm did not realize that this activity was prohibited because he acted only as an “introducer” of possible brokers to the Firm and did not receive an override on any production that those brokers achieved if they did join the Firm. X and the Firm did not make any effort to conceal the relationship or the payments, which FINRA examiners readily identified in the Firm’s routine examination. As soon as FINRA informed the Firm that this practice was not permitted during the Application process, the Firm ceased the payments, and X again began living off his savings. X stated that he and the Firm were extremely sorry to have made this error. 


The Firm has no formal disciplinary history. FINRA held a compliance conference with the Firm after its 2001 routine examination and issued an LOC to the Firm after its 2005 routine examination. The Firm satisfactorily responded to FINRA regarding the deficiencies cited in those reviews and has made the necessary corrections to its procedures. 

As to the Proposed Supervisor, we find that he is well qualified to supervise X under heightened supervisory conditions. The record shows that the Proposed Supervisor has been in the securities industry since 1994, qualifying as a general securities principal (Series 24) in May 1994 and requalifying in such capacity in July 1998. Prior to 1994, he was employed by FINRA for more than four years as a compliance examiner. There is no indication in the record that the Proposed Supervisor left any of his prior employers on other than a voluntary basis, and the two customer complaints that named him in his role as compliance director of a firm were withdrawn with no action against the Proposed Supervisor. Although the Proposed Supervisor entered into a settlement with FINRA in 1998 for certain violations that occurred while he was acting as a compliance officer for a former firm,  complied with the terms of the settlement by requalifying as a general securities principal in July 1998. The Proposed Supervisor also testified that he has had experience with supervising certain individuals who are subject to heightened supervision due to various state infractions. 

The Firm also proposed the beginning of a well-structured plan of heightened supervisory conditions to impose on X. After reviewing the Firm’s proposal, we accept it, with the addition of several enhancements:

1. The Firm will amend its written supervisory procedures to state that the Proposed
Supervisor is the primary supervisor responsible for X;
2. The Proposed Supervisor will supervise X on-site, in the Firm’s home office in
State 1;

3. The Proposed Supervisor must approve every new account to be serviced by X
prior to the commencement of trading and will evidence his review by signing the
new account paperwork. The Proposed Supervisor will also review all account
suitability updates and initial the paperwork as evidence of his review;
4. On at least a daily basis, the Proposed Supervisor will promptly review every
placed by X on behalf of his customers, including a review for suitability
with the client’s investment objectives. X must place all orders while he is
located on-site at the Firm’s home office in State 1. In the Proposed Supervisor’s
absence, another qualified principal will perform this review. Upon the Proposed
Supervisor’s return, he will review the orders and initial them to indicate such
5. On at least a monthly basis, the Proposed Supervisor will meet with X to review
all aspects of his work at the Sponsoring Firm, including compliance with the
Sponsoring Firm’s policies and procedures. the Proposed Supervisor will
maintain a log of the meetings and the matters discussed and reviewed;
6. On a quarterly basis, the Proposed Supervisor will review reports and/or account
statements and will discuss the accounts with X at their monthly meetings. The
Proposed Supervisor will certify quarterly (March 31, June 30, September 30, and
December 31) to the Firm’s compliance department that he and X are in
compliance with the conditions of heightened supervision to be accorded X;
7. X will not be allowed to have any discretionary accounts;
8. X will not act in a supervisory capacity;
9. The Proposed Supervisor will review X’s incoming correspondence (which
includes e-mail communications) upon its arrival and will review outgoing
correspondence before X sends it out;
10. For the purposes of client communication, X will only be allowed to maintain an
e-mail account that is held at the Firm
and all e-mails will be filtered through the
Firm’s e-mail system. The Proposed Supervisor will conduct a weekly review of
all e-mail messages that X sends or receives, print them, and keep them
segregated for ease of review during any statutory disqualification audit (in
addition to complying with the e-mail retention requirements in NASD Rule 3110
and Rules 17a-3 and 17a-4 of the Exchange Act);
11. All complaints pertaining to X, whether oral or written, will be immediately
referred to the Proposed Supervisor for review, and then to the compliance
department. The Proposed Supervisor will prepare a memorandum to the file as
to what measures he took to investigate the merits of the complaint (e.g., contact
with the customer) and the resolution of the matter. The Proposed Supervisor will
keep documents pertaining to these complaints segregated for ease of review;
12. The Firm’s compliance department will amend the Firm’s special supervision list
to include the special supervision procedures relating to X that the Proposed
Supervisor will perform;
13. X will not be allowed to maintain securities accounts at any other broker-dealer
except the Sponsoring Firm; and
14. For the duration of X’s statutory disqualification, the Firm must obtain prior
approval from Member Regulation if it wishes to change X’s responsible
supervisor from the Proposed Supervisor to another person.

Frank Kufrovich, 55 S.E.C. 616, 625-26 (2002): (upholding FINRA’s denial of a statutory disqualification applicant who had committed non-securities related felonies “based upon the totality of the circumstances” and FINRA’s explanation of the bases for its conclusion that the applicant would present an unreasonable risk of harm to the market or investors).

Question 14A(1) of the Form U4 is in two parts. The first part, (a), asks if a person has ever “been convicted of or pled guilty or nolo contendere (“no contest”) in a domestic, foreign, or military court to any felony?”, and the second part, (b), asks if a person has ever “been charged with any felony?”

Dep’t of Enforcement v. Gebhart, Complaint No. C02020057, 2005 NASD Discip. LEXIS 40, at *51 n.18 (NASD NAC May 24, 2005), aff’d, Exchange Act Rel. No. 53136, 2006 SEC LEXIS 93 (Jan. 18, 2006), appeal docketed, No. 06-71021 (9th Cir. Feb. 27, 2006).“Credibility determinations of the initial fact-finder, which are based on hearing the witnesses’ testimony and observing their demeanor, are entitled to considerable weight and deference and can be overcome only where there is substantial evidence for doing so.” 

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