Getting Back into the Game

The procedures are not always clear for financial advisors seeking to reapply with a securities regulator to sell financial products and services after being barred from the securities industry. I’ve had occasion to navigate these procedures, and here I offer what I hope is a helpful primer on the reapplication process.

Overview of Securities Regulatory and Licensing Structure for Financial Professionals

The purchase and sale of securities and the provision of investment advice in the United States are regulated by the U.S. Securities and Exchange Commission (SEC), as authorized by Congress under the Investment Advisers Act of 1940 and the Securities Exchange Act of 1934. These retail securities services are generally provided by individuals who must be registered with and licensed by the SEC, a state securities regulator, or a self-regulated organization. The SEC wields significant power over these professionals and can impose criminal-like sanctions if it determines that they have violated the securities laws. An industry bar order is arguably the SEC’s severest sanction because it cuts off a person’s ability to earn a living in the person’s chosen profession and industry.

Given the gravity and long reach of an industry bar, it stands to reason that a barred individual may reapply to participate in the securities industry as long as the individual is “rehabilitated” and the public’s interest is served and not harmed.

Overview of Reapplication Options for Licensed Financial Professionals

A securities industry bar order is issued by the SEC as part of a settlement, by an SEC administrative law judge as part of an administrative proceeding, or by a federal court after an enforcement action filed by the SEC. The order will typically permit the barred individual to reapply for association “subject to the applicable laws and regulations governing the reentry process.” Generally speaking, there are three options for a barred financial advisor to regain admission to the industry: (1) A financial advisor can petition the SEC to modify or vacate the bar order; (2) a broker-dealer representative can apply with the Financial Industry Regulatory Authority (FINRA) to associate with a broker-dealer; or (3) a broker-dealer or investment advisor representative can apply to associate with an investment advisor or broker-dealer under SEC Rule of Practice 193 (17 C.F.R. § 201.193). Because the SEC informally requires that a Rule 193 application be filed and rejected as a precondition to filing a petition to vacate a bar order, and because Rule 193 does not permit a Rule 193 application to be filed concurrently with a FINRA application to associate, this article focuses on Rule 193 applications to associate.

The SEC Reapplication Process under SEC Rule of Practice 193

SEC Rule 193 allows someone to apply to the SEC for permission to associate with a broker-dealer, an investment advisor, and several other classes of securities brokers, dealers, and agents. The following are general steps to consider in framing and drafting a Rule 193 application:

Step 1. Know the standard of review and your audience.

Rule 193 requires an application to “make a showing satisfactory to the Commission that the proposed association would be consistent with the public interest.” Though the public interest standard is not expressly defined, the long list of materials and undertakings required by the rule is essentially the standard. Advocates should research and use as illustrative authority SEC decisions on prior Rule 193 applications and court opinions reviewing commission decisions on Rule 193 applications. Though not required, it may make the application more persuasive to illustrate why your client’s application is more like prior applications that have been granted than those that have not. In any event, it makes sense to convey a clear and consistent theme that it is in the public interest for the SEC to grant your client’s application.

The initial audience for your client’s Rule 193 application will be the chief counsel for the SEC’s Division of Enforcement and his or her staff. The staff will make a recommendation on the application to the five SEC commissioners. Establishing a good working relationship with the staff during this process is important for a variety of reasons, not the least of which is that it enables you to understand particular areas of concern the staff or the commissioners may have with an applicant or an application.

Step 2.  Understand and implement in the application the principles distilled from Rule 193’s preliminary note.

Rule 193 is fairly unique in that it begins with a “preliminary note” that does not contain formal or required elements but does contain important guideposts that a persuasive application should highlight. Distilled to its essence, the preliminary note provides four principles around which the application should be drafted:

• The application “must demonstrate that the proposed supervision, procedures, or terms and conditions of employment are reasonably designed to prevent a recurrence of the conduct that led to the imposition of the bar.”
• An applicant’s burden will be “difficult to meet” if the applicant proposes to be supervised by another barred individual or seeks to become a sole proprietor of a registered entity with an absence of supervision.
• An application will not be considered if it “attempts to reargue or collaterally attack the findings that resulted in the Commission’s bar order.”
• Applicants would do well to include written statements from former customers and others who are “competent to attest to the applicant’s character, employment performance, and other relevant information.”

Step 3. Understand whether the SEC considers your client’s bar order “unqualified,” whether your client is applying to associate with a self-regulated organization, and the effects these issues have on the applicant’s burden in the eyes of the SEC.

Rule 193 provides for two classes of applications:

• applications from barred individuals who seek “to become associated with an entity that is not a member of a self-regulatory organization [SRO]” such as FINRA; “or”
• applications following an order barring the individual that “contains a proviso that application may be made to the Commission after a specified period of time.”

Under a plain reading, a person can apply to associate with a non-SRO such as a registered investment advisor. But if a person applies to associate with a member of an SRO—such as a broker-dealer member of FINRA—that person’s bar order must contain a proviso that permits him or her to reapply after a certain period of time. There is some controversy over how a bar order with a general right to reapply, but without a proviso permitting reapplication after a certain period of time, affects applicants who do not seek to associate with an SRO.

The SEC has taken the position that a bar order that does not contain a provision permitting reapplication after the expiration of a certain period of time is an “unqualified,” permanent bar. The SEC’s position has been that an applicant faces a higher burden to reapply from an unqualified bar than is found in Rule 193. The SEC has also taken the position that an order barring non-SRO applicants without providing a reapplication time period is unqualified, which could be interpreted as contrary to the plain language of Rule 193. This raises various issues, including whether the heightened standards imposed by the SEC on its interpretation of unqualified bars runs afoul of the Administrative Procedure Act.

A detailed analysis of these issues is beyond the scope of this article. (In the spring of 2023, the Michigan Business Law Journal will publish a more detailed analysis of Rule 193 applications and the various issues and arguments set forth in this article.) But the takeaway is that securities lawyers negotiating securities fraud settlements with the SEC or FINRA should understand the effect of the language of any bar order in the eyes of the SEC if their client wants to reapply down the road. And if a person is subject to what the SEC says is an unqualified bar, lawyers should understand how to navigate this standard and preserve objections to it in applications filed pursuant to Rule 193.

Step 4. Satisfy all the remaining requirements under Rule 193 to complete the application to associate.

Boiled down to its essence, a Rule 193 application must contain the following materials:

• A copy of the SEC order imposing the bar
• An undertaking by the applicant to notify the SEC if any information submitted in support of the application becomes materially false or misleading while the application is pending
• A copy of the relevant draft registration form, depending on which securities entity the applicant seeks to become associated with
• A written statement from the applicant’s proposed employer that describes the following:
  • The terms and conditions of employment and supervision to be exercised over the applicant
  • The qualifications, experience, and disciplinary records of the proposed supervisor or supervisors of the applicant
  • The compliance and disciplinary history, during the two years preceding the filing of the application, of the office in which the applicant will be employed
  • The names of any associated persons in the same office who have been previously barred by the commission and whether they are to supervise the applicant
• An affidavit by the applicant addressing each of the following:
  • The time elapsed since the imposition of the bar
  • Any restitution or similar action by the applicant to repay any person injured by the misconduct that led to the bar
  • The applicant’s compliance with the bar order
  • The applicant’s employment during the period subsequent to the bar order
  • The capacity or position in which the applicant proposes to be associated
  • The manner and extent of supervision to be provided over or by the applicant
  • Any relevant courses, seminars, examinations, or other action by the applicant to prepare for his or her return to the securities business
  • Any other information material to the application.

Step 5. Understand the unique SEC procedures, formatting, and electronic filing system.

A full analysis of all the various procedures and rules governing a Rule 193 application and lawyers practicing before the commission, and appealing adverse Rule 193 determinations, is beyond the scope of this article. Applications should ideally be handled by someone with experience practicing before the SEC. But at a minimum, practitioners should review and understand the SEC’s Rules of Practice in general and the relatively new rules pertaining to electronic filing and service under the commission’s Electronic Filings in Administrative Proceedings (eFAP) system.