“Willful” Violations, Statutory Disqualification, and the Path Back: What Financial Professionals Need to Know.

In securities regulation, a single word can change the trajectory of a career. “Willful” is one of those words. When a regulator or SRO finds that a broker or supervisor “willfully” violated the federal securities laws or SRO rules, that finding does more than color the enforcement record; it can trigger statutory disqualification under the Securities Exchange Act of 1934. Once disqualified, a person may not associate with a FINRA member firm in any capacity unless and until FINRA approves that association through an eligibility proceeding.

Statutory disqualification is a status defined by the Exchange Act and incorporated into FINRA’s By-Laws. Disqualifying events include certain criminal convictions, injunctions, expulsions or bars by regulators, specified state “final orders,” and, critically for this discussion, findings by the SEC, CFTC, or an SRO that a person “willfully” violated the federal securities or commodities laws or MSRB rules, “willfully” aided or abetted such violations, or failed to supervise another who committed such violations. The consequence is not theoretical; it is a bright-line prohibition on association absent FINRA’s approval.

If a firm learns that one of its associated persons became statutorily disqualified, the clock starts immediately. The firm must amend the individual’s Form U4 within ten days, and then either terminate the association on a Form U5 or file a Membership Continuance Application (the MC-400) if it intends to sponsor the individual. Failure to file or to terminate renders the firm ineligible to continue FINRA membership.

Today, an MC-400 must come bundled with an interim plan of heightened supervision tailored to the disqualifying event and the person’s proposed activities. It must identify and be signed by an appropriately registered principal responsible for carrying it out, and it must comply with Rule 3110’s supervisory standards. That plan remains in effect for the entire review process, and the firm must represent that the person is already subject to it on day one.

The requirement is not perfunctory. If the interim plan is missing or deficient, Member Supervision’s Statutory Disqualification Group will deem the application substantially incomplete, issue a Notice of Delinquency, and, if the firm fails to cure within the prescribed period, require immediate termination of the individual and forfeit part of the application fee.

Heightened supervision is the backbone of investor protection when a firm chooses to associate with higher-risk individuals. FINRA has long reiterated that Rule 3110 obligates firms to establish supervisory systems reasonably designed to achieve compliance and, where appropriate, to adopt tailored heightened procedures for associated persons with a history of industry or regulatory incidents. Plans should align to the person’s activities and incident history; firms that ignore red flags or fail to tailor supervision risk separate supervisory violations.

 Overcoming statutory disqualification is not about glossing over the past; it is about building a credible supervision environment that gives FINRA confidence that investors will be protected. The interim plan must operate from the moment the application is filed, and the final plan will be examined for compliance on an ongoing basis. Supervisory lapses can jeopardize continued association and, separately, expose the firm to its own disciplinary risk.

The system is designed to weigh the nature and gravity of the misconduct, the time elapsed, intervening behavior, proposed activities, and the strength of the supervisory plan. When a firm makes a thoughtful case, with a responsible principal ready to own day-to-day oversight, FINRA has the tools to grant relief that serves both investor protection and fair participation in the industry.

 “Willful” finding does not have to be the end of the story; it’s the point at which the path back must be built. Statutory disqualification creates a barrier, but the Exchange Act and FINRA’s eligibility process are designed to allow firms to prove that risk can be mitigated and controlled. The professionals who return to good standing do the following things well: they act immediately on U4/U5 and MC-400 obligations and operate pursuant to a Rule 3110 heightened-supervision plan that is tailored, enforced, and auditable. When those elements are well designed and present, the “willful” finding marks a difficult chapter but not a career-ending one.

AMW Law PLLC advises financial professionals, compliance officers, and brokerage firms in supervisory matters and regulatory inquiries. We respond to FINRA Rule 8210 requests, conduct internal reviews, and counsel on U4/U5 strategy and collateral consequences. Led by Artur M. Wlazlo, former FINRA Senior Enforcement Counsel, former big-law defense counsel, and current FINRA arbitrator, we bring a 360° perspective to protecting your registration and your firm. Contact us for a confidential consultation about a supervisory issue or FINRA investigation.