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Statutory Disqualification
It is not automatically the end of a career. It is a clock that starts the moment the firm learns of it, and it puts the firm's own membership at risk alongside the individual's registration.
What it is
A status, not a sanction.
Under FINRA's by-laws, no person may associate with a member firm — in any capacity — while subject to a disqualification, unless FINRA approves the association through an eligibility proceeding. The definition comes from Section 3(a)(39) of the Exchange Act.
"Any capacity" means what it says. The process reaches every associated person, including those who are not registered and would only be fingerprinted. A back-office role is not a way around it.
The status attaches on its own. Nobody has to charge anything further, and the underlying event is often years old or entirely unrelated to securities.
The one people do not see coming
A false statement in a filing is itself a disqualifying event. That includes a Form U4. An omission made carelessly years ago, if found to have been willful, can produce a disqualification independent of whatever it concealed.
The same is true of a failure to supervise finding. A supervisor who never touched a customer account can end up disqualified for what someone below them did.
The clock
What has to happen, and how quickly.
The obligations fall on the firm as much as the individual, and the firm's own membership is what is at stake if it does nothing.
Within 10 days
The firm must amend the individual's Form U4 to report the disqualifying event, counted from when it learned of it.
Then a choice, promptly
File a Form U5 and end the association — or file a Form MC-400 to sponsor the person and ask FINRA's permission to keep them. Extensions exist but must be requested in writing and granted in writing.
With the application
An interim plan of heightened supervision, naming a registered principal who signs it and accepts responsibility. It runs for the whole review. Mandatory since June 2021.
Review
FINRA's Statutory Disqualification Group evaluates it and recommends approval or denial to the National Adjudicatory Council. A recommended denial entitles the firm to a hearing.
Even after approval
FINRA must file a notice with the SEC, and the SEC has to acknowledge it before the approval takes effect. A denial can be appealed to the SEC within 30 days.
The firm's own exposure
A member that neither terminates the individual nor files an application becomes ineligible to continue in FINRA membership. Doing nothing is not a neutral option — it converts one person's problem into the firm's.
What decides it
The application is largely a supervision document.
Almost every approval is conditioned on a stringent plan of heightened supervision. FINRA weighs the following, and the last two are the ones an applicant can still influence.
A firm with its own disciplinary history, or a proposed supervisor with a marked record, weakens an application before its facts are reached. Choosing the supervisor is a strategic decision, not an administrative one.
Costs, which nobody publishes
The MC-400 or MC-400A application fee is $5,000. A hearing before the NAC adds $2,500. Firms employing an approved disqualified person then pay an annual examination fee — $1,500 or $1,000 depending on the tier the disqualification falls into.
Traps
Where these go wrong.
Qualification is checked before anything else
FINRA will not process the application until the person is qualified — by examination or waiver — for the capacity they are seeking. A lapsed registration has to be dealt with first, and that takes its own time.
The firm's interests and the individual's diverge quickly
The firm chooses whether to sponsor at all. Filing a U5 is faster, cheaper and safer for the firm, and it leaves the individual disqualified with no sponsor — which is a far harder position than being disqualified with one. Separate counsel is easier arranged before that decision than after.
Approval attaches to a job, not to a person
An approved association is approved on specific terms at a specific firm under a specific supervisor. Moving firms means a fresh application, though an abbreviated route exists where the new terms are materially the same and nothing has happened since.
The plan has to be lived, not filed
FINRA examines disqualified persons and their firms periodically to confirm the supervisory conditions are actually being followed. A plan agreed to and then ignored is a fresh problem for everyone who signed it.
Some routes are shorter than the full proceeding
A purely clerical or ministerial role can be approved without a hearing. An injunction more than ten years old may be handled by written request rather than an application. Knowing which door applies is worth establishing at the outset.
This page is general information, not legal or tax advice. How it applies depends on facts this page cannot know, and the rules change. Reading it creates no attorney-client relationship. Please see our Attorney Advertising, Legal Notices & Disclaimers.
Facing a disqualifying event?
The ten-day amendment obligation runs from the day the firm learns of it, not from the day anyone decides what to do.
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