Hiring a Statutory Disqualification Candidate Who Wants to 'Consult' While the Paperwork Clears
Your firm wants to bring Peter Lund into its DPP sales group. Lund's Form U4 shows that eight years ago he pleaded guilty to a misdemeanor under the state securities act for selling unregistered securities. His prior firm permitted him to resign after clients complained that he placed them in an outside oil-and-gas program; the recruiter has only Lund's self-prepared summary of that departure and has not obtained the Form U5 or checked the public registration record. Lund asks whether he can start next week as an unregistered 'consultant' to the sales desk, taking calls and helping reps position the firm's current DPP offering, while 'the paperwork clears.' He notes that the conviction is old and 'should have aged off by now.'
1. Is Lund subject to a statutory disqualification? Explain the analysis and what it means for the firm's ability to associate him.
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Yes - and the recruiter's 'aged off' theory is wrong.
The statutory disqualification definition looks back ten years for a conviction of any felony or any misdemeanor in connection with the purchase or sale of any security. Selling unregistered securities is a securities-law misdemeanor squarely within that language, and eight years falls inside the ten-year window. The lookback runs from the conviction; it does not expire because the conduct feels remote to the candidate.
Consequences:
- The firm may not simply hire him. Association with a statutorily disqualified person requires FINRA approval through the eligibility proceeding, initiated by the member filing the application that sets out the disqualifying event and the firm's proposed supervision.
- The firm bears the burden of showing it can supervise him adequately; approval can come with conditions, limitations, or a denial.
- The prior firm's permitted-to-resign event is independently material. It goes to whether the proposed supervision is credible, and it must be investigated before, not after, the application is filed.
The judgment: the answer is not 'apply and see.' It is 'do not associate, develop the supervisory record, then apply.'
2. Can Lund work as an unregistered 'consultant' while the application is pending? Analyze under the definition of associated person.
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No. The label does not control; the function does.
A person is an associated person if, among other things, he is directly or indirectly controlled by or associated with the member and is engaged in the investment banking or securities business, including functions such as supervision, solicitation, conduct of business, or training. Lund's proposed role - taking calls and helping reps position a DPP offering - is solicitation and training. Calling him a consultant and withholding a registration number changes nothing.
Additional problems:
- A statutorily disqualified person performing associated-person functions without approval exposes both him and the firm to sanctions, including bars and expulsion-level charges.
- If he is paid transaction-based compensation for DPP sales while unregistered, that is a separate registration violation with its own consequences.
- Permitting it would also be inconsistent with the firm's obligation to observe high standards of commercial honor and just and equitable principles of trade.
The practical answer to give him: no customer contact, no sales-desk support, no training role, and no compensation tied to securities transactions until FINRA acts.
3. What due diligence and supervisory steps should precede any application, and what should the firm do if it decides the risk is not worth it?
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Due diligence first, because the application is only as good as the record behind it.
- Obtain the Form U5 from the prior firm and reconcile it against Lund's self-prepared summary. If the U5 has not arrived, request it in writing and wait; a self-report is not a disclosure record.
- Pull the public registration record and public court dockets; verify the conviction date, the statute, and the disposition, since the ten-year window turns on the date.
- Contact the prior firm's compliance contact and ask what was investigated and what the clients alleged about the outside program.
- Map the proposed role against the disqualifying event: if the problem was outside product sales, the supervisory plan must include pre-approval of all outside activities, heightened email and correspondence review, and a named principal responsible for oversight.
If the firm declines to pursue the hire, it should still close the file with the reason documented - the interview and the self-reported summary were created in anticipation of a registration, and the firm should be able to show what it knew and when. Neutral reference language, no disparagement, and no suggestion that the candidate 'withdrew' to avoid a record.
The trap is treating the eligibility application as a formality. It is an adjudication in which the firm is a party, and the firm's supervision plan is the evidence.