## Facts

- A FINRA predecessor self-regulatory organization (NASD Regulation) considered a Membership Continuance Application (MC-400) submitted by a member firm (the Sponsoring Firm) to associate “X” as a general securities representative despite X’s statutory disqualification.
- The Sponsoring Firm submitted the MC-400 on August 4, 2000.
- X was statutorily disqualified because of a 1995 federal court consent judgment and permanent injunction entered in an SEC enforcement action.
- Without admitting or denying the SEC’s allegations, X consented to an injunction barring future violations of Exchange Act § 10(b) and Rule 10b-5.
- The SEC’s complaint alleged that, during July and August 1990, X engaged in a scheme involving purchases of a public company’s stock (a company of which X was president) without the ability or intent to pay in full and on time, causing brokerage-firm losses exceeding $112,000.
- The SEC further alleged that X manipulated the market price of the stock and made false statements or omissions about, among other things, his ability or intent to pay and the manipulation.
- X had worked in the securities industry beginning in the early 1980s, registering with multiple firms over time, and later became associated with an affiliate of the Sponsoring Firm involved in acquiring mineral rights for oil and gas activities.
- NASD Regulation’s Department of Member Regulation opposed the application.
- In February 2001, a subcommittee of the Statutory Disqualification Committee held a hearing at which X appeared with the Sponsoring Firm’s counsel; the Proposed Supervisor (PS) and the firm’s president/owner also appeared; Member Regulation staff appeared for NASD Regulation.
- The Sponsoring Firm proposed that X would be supervised by PS, who held representative and principal registrations (including options), had passed securities-agent law and investment-adviser law examinations, had been associated with multiple firms, and supervised at least one other registered person.
- The Sponsoring Firm represented that PS would not receive transaction-based overrides tied to X’s activity.

## Issues

1. Whether permitting a statutorily disqualified person, enjoined for Exchange Act § 10(b) and Rule 10b-5 violations, to associate with a member firm as a general securities representative would be consistent with the public interest and the protection of investors.
2. Whether the Sponsoring Firm’s proposed supervisory structure and conditions were sufficiently specific and stringent to manage the risks raised by X’s disqualifying misconduct.

## Decision

- The National Adjudicatory Council (NAC) denied the Sponsoring Firm’s MC-400 application.
- The NAC concluded that the application did not demonstrate that X’s proposed association as a general securities representative would be consistent with the public interest and the protection of investors.
- The NAC issued the determination as a notice under Exchange Act Section 19(d), making the denial subject to the Exchange Act review framework.

## Legal Principles

- A person subject to a statutory disqualification may not associate with a member firm unless the self-regulatory organization determines that the association is consistent with the public interest and the protection of investors under the Exchange Act eligibility process.
- An injunction for violations of Exchange Act § 10(b) and Rule 10b-5 is a serious disqualifying event because it involves fraudulent conduct and market integrity concerns.
- In evaluating an MC-400 request, the decision-maker considers the nature and gravity of the disqualifying event, the risk posed by the proposed role, and whether the applicant has shown facts supporting fitness for association.
- The sponsoring firm bears the burden to show that its proposal, including supervision, conditions, and internal controls, is sufficient to address the risks posed by the statutorily disqualified person.
- A supervision proposal must be concrete and enforceable; general assurances of oversight are not enough where the underlying misconduct involves fraud or manipulation.
- The qualifications of a proposed supervisor and the absence of transaction-based compensation tied to the disqualified person’s activity are relevant, but they do not by themselves establish that investor-protection concerns have been adequately addressed.

## Conclusion

The NAC denied the Sponsoring Firm’s MC-400 application to associate X as a general securities representative because X’s statutory disqualification stemmed from a federal injunction in an SEC action alleging fraudulent conduct and market manipulation, and the record did not support a finding that the proposed association—given the role sought and the supervision presented—was consistent with the public interest and the protection of investors.


In the Matter of the Association of X as a General Securities Representative with the Sponsoring Firm, SD11007 (2001)