Frequently Asked Questions on FINRA’s Eligibility Proceedings for Firms Participating in the SCSD Initiative

Questions and Answers on FINRA’s Eligibility Proceedings for Firms Participating in the Securities and Exchange Commission’s (“SEC” or “Commission”) Share Class Selection Disclosure Initiative (“SCSD Initiative”).

To guide firms participating in the SEC’s SCSD Initiative, FINRA is issuing the following questions and answers regarding the statutory disqualification process. Information contained in this guidance applies only to a broker-dealer (a “Participating Firm”) that becomes statutorily disqualified based on an SEC order issued under the SCSD Initiative and is required to file a Membership Continuance Application (“Form MC-400A”) to continue in FINRA membership pursuant to FINRA’s By-Laws. As explained more fully below, a Participating Firm, subject to disqualification, may be eligible to receive an extension of time for filing Form MC-400A.

For general information relating to FINRA’s statutory disqualification process, please review FINRA’s Statutory Disqualification page. More information regarding the SEC’s SCSD Initiative is available on the SEC’s website.

1. What causes a Participating Firm that participates in the SCSD Initiative to be subject to a statutory disqualification?: Based on the SEC’s publicly available guidance on the SCSD Initiative, FINRA understands that a Participating Firm may be subject to findings by the SEC that it willfully violated the federal securities laws. A willful violation of the federal securities laws results in a statutory disqualification, as defined in Section 3(a)(39)(F) of the Securities Exchange Act of 1934 (“Exchange Act”), based on a violation referred to in Section 15(b)(4)(D) of the Exchange Act.
2. At what point in the process does a Participating Firm become statutorily disqualified?: A Participating Firm will become statutorily disqualified under the SCSD Initiative only if it is subject to a Commission’s order finding a willful violation of the federal securities laws. A Participating Firm does not become statutorily disqualified merely upon submitting an offer of settlement to the SEC.
3. What happens when a Participating Firm becomes statutorily disqualified?: Article III, Section 3(a) of FINRA’s By-Laws provides that an entity cannot continue in membership with FINRA, if it is subject to a statutory disqualification, unless FINRA approves its continued membership notwithstanding a statutory disqualification. The filing of an application using Form MC-400A begins a process known as FINRA’s Eligibility Proceedings.; For Participating Firms, after the SEC accepts an offer of settlement and issues an order, FINRA’s Registration & Disclosure Department (“RAD”) will send a letter, known as the SD Notification Letter, to the Participating Firm. The Letter will notify the Participating Firm that it is subject to a statutory disqualification and if it wishes to continue in FINRA membership, it must file Form MC-400A within ten business days after receipt of the SD Notification Letter. The SD Notification Letter will also state that the Department of Member Regulation (“Member Regulation”) may grant an extension of time to file Form MC-400A.
4. Under what circumstances would a Participating Firm be eligible for an extension of time to file its Form MC-400A?: A Participating Firm may be eligible for an extension of time to file its Form MC-400A for “good cause shown.” See FINRA Rule 9522(a)(2). A Participating Firm can show good cause for an extension of time if it can demonstrate that it has taken adequate and substantial steps towards meeting its obligations under the Commission’s order issued as part of the SCSD Initiative. This could include proof that the Participating Firm has deposited any ordered disgorgement and prejudgment interest amount in the manner prescribed in the Commission’s order or demonstrable evidence of on-going compliance with undertakings outlined in the Commission’s order. A decision to grant an extension of time will not be automatic and will be at the discretion of FINRA’s Member Regulation staff. Any request for an extension of time to file Form MC-400A must be submitted in writing to Member Regulation, within ten business days after receipt of the SD Notification Letter from RAD.
5. What is the additional amount of time that may be given to a Participating Firm to file its Form MC-400A?: Generally, a Participating Firm may be granted up to an additional thirty days to submit its Form MC-400A. Under extraordinary circumstances, FINRA may extend that time period for up to an additional thirty days.
6. What are the benefits to receiving an extension of time to file Form MC-400A?: Based on the publicly available guidance on the SCSD Initiative, FINRA understands that a Participating Firm may be subject to findings by the SEC that it willfully violated the federal securities laws and, therefore, subject to a statutory disqualification under Exchange Act Section 15(b)(4)(D). For disqualifications involving willful violations of the federal securities laws, FINRA typically requires its member firms to file Form MC-400A only if the sanction is still in effect.¹ A Participating Firm may use an extension of time to comply fully with the sanctions against the firm, obviating the need to file Form MC-400A.
7. What happens with a Participating Firm that is not eligible for, does not seek, or is denied an extension of time for filing Form MC-400A?: The SD Notification Letter will provide specific instructions regarding how to initiate an Eligibility Proceeding by the timely filing of Form MC-400A in order for a Participating Firm to continue in membership. As part of the Eligibility Proceeding, a Participating Firm will be required to provide FINRA with specified information and should expect that FINRA will require it to consent to a plan of heightened supervision.
8. What information and documents are required to initiate an Eligibility Proceeding?: In general, a Participating Firm will be required to answer designated questions on Form MC-400A and provide a copy of the SEC’s order, as well as a statement explaining why it should be permitted to continue in membership notwithstanding a statutory disqualification. In addition, the Participating Firm should expect that it would be required to submit a plan of heightened supervision with its application.
9. What conditions should a Participating Firm that filed Form MC-400A expect FINRA to require in a plan of heightened supervision?: The conditions that FINRA will require in a plan of heightened supervision will depend in large part on any conditions that are contained in the SEC’s order involving the Participating Firm. FINRA anticipates, however, that at a minimum, the conditions of the plan will align with any undertakings that the SEC imposes on the Participating Firm. FINRA also anticipates that the plan will include an obligation on the part of the Participating Firm to notify FINRA, in addition to the SEC, when the Participating Firm has completed its obligations pursuant to the SEC’s order and to forward confirming documents to FINRA.
10. What parts of Form MC-400A must a Participating Firm that is required to file Form MC-400A complete?: The SD Notification Letter will provide instructions on how to complete Form MC-400A. That letter will detail the questions that must be completed on the application and, to the extent applicable, those that can be omitted. FINRA has the right to request the omitted information or other information as needed during its review process.
11. Where can a Participating Firm obtain a copy of Form MC-400A?: FINRA encourages Participating Firms to review the application in advance. An electronic copy is available on FINRA’s website at the following link:

Form MC-400-A

. The application cannot be submitted until the Participating Firm receives the SD Notification Letter from FINRA that will provide specific instructions for the completion of the application.
12. What is the cost of the Eligibility Proceeding?: The fee is $5,000, as noted in Schedule A of FINRA’s By-Laws. More information on how a Participating Firm can submit payment will be provided in the SD Notification Letter.
13. What happens once a Participating Firm submits Form MC-400A?: FINRA is required by rule to evaluate a Participating Firm’s application and determine whether such firm should be approved to continue in FINRA membership notwithstanding a statutory disqualification. If FINRA determines that approval of the application is warranted, FINRA is required by Exchange Act Rule 19h-1 to provide the SEC with notice of the approval of the firm’s application for continued membership. Should FINRA deny the application, FINRA is required by Exchange Act Rule 19d-1 to file a notice with the SEC of such denial.
14. Will FINRA preclude a Participating Firm from conducting a securities business during the pendency of the Eligibility Proceeding?: No. A Participating Firm will be permitted to continue business operations as normal during the pendency of the Eligibility Proceeding, including the period to file Form MC-400A provided by Rule or by virtue of an extension granted in writing by Member Regulation. It is critical that any statutorily disqualified firm timely file Form MC-400A with FINRA. Failure to timely file an application or receive an extension could result in cancellation of a firm’s membership with FINRA.
15. Can a Participating Firm’s Form MC-400A be denied by FINRA?: Approval of a Participating Firm’s Form MC-400A is not automatic. FINRA’s Eligibility Proceedings are designed to ensure that the continued membership of a statutorily disqualified member is consistent with the public interest and does not create an unreasonable risk of harm to the market or investors.
16. What happens after FINRA files a notice with the SEC approving the Participating Firm’s continued membership?: The SEC will conduct a review of the notice and issue a written communication to FINRA regarding the continued membership of the Participating Firm. Upon receipt of the SEC’s communication, FINRA will forward a copy to the Participating Firm. A Participating Firm may continue in business while the SEC is conducting its review of FINRA’s notice filing.
17. What happens after the SEC issues its written communication to FINRA?: The Participating Firm must implement the agreed-upon plan of heightened supervision and will be required to comply with the provisions of the plan for the time period it is in place. Participating Firms are also reminded of their supervisory obligations under FINRA Rule 3110 and that they must comply with the undertakings and the sanctions in the Commission’s order.
18. Is a Participating Firm obligated to disclose that it participated in the SCSD Initiative in response to any of the disclosure questions on the Form BD?: Yes. A Participating Firm must disclose on Form BD the settlement with, and findings made by, the SEC in connection with the SCSD Initiative (see Question 11C of the Form BD).
19. Is a Participating Firm obligated to disclose that it is undergoing FINRA’s Eligibility Proceeding in response to any of the disclosure questions on the Form BD?: No. A Participating Firm is not required to disclose on the Form BD that it is subject to FINRA’s Eligibility Proceedings.
20. Is the reporting requirement provided for in FINRA Rule 4530(a)(1)(H) triggered as a result of a Participating Firm’s settlement with the SEC?: FINRA Rule 4530(a)(1)(H) requires a Participating Firm to report to FINRA that it is subject to statutory disqualification). In addition, the rule requires, among other things, that a member report to FINRA whenever it is involved in the sale of any financial instrument, the provision of any investment advice or the financing of any such activities (“financial dealings”) with any person that it knows or should have known is statutorily disqualified.; However, FINRA Rule 4530(a)(1)(H) provides that a firm will not need to report financial dealings with another firm that is subject to statutory disqualification, if the statutorily disqualified firm has been approved (or is otherwise permitted pursuant to FINRA rules and the federal securities laws) to be a member. Subject to some exceptions, FINRA’s current practice permits a FINRA member firm that becomes statutorily disqualified to continue in membership without interruption to its business activities, provided that a timely Form MC-400A is filed or an extension to file such application is granted in accordance with FINRA Rule 9522(a)(2). Based on this practice, for the purpose of any statutory disqualification that arises from the SCSD Initiative, FINRA will not require a firm, including a Participating Firm, to report to it that it engaged in any financial dealings with a Participating Firm during the period that the application is pending or an extension to file such application is granted, provided that the Participating Firm that is the subject of reporting has filed a timely application with FINRA or is granted an extension to file such application pursuant to Rule 9522(a)(2). This deferment period is only available, if the reporting firm knows or should have known that the Participating Firm that is the subject of reporting has filed a timely application or has been granted an extension to file such application pursuant to Rule 9522(a)(2). If FINRA approves the Participating Firm’s application, the reporting firm has no reporting obligation under FINRA Rule 4530(a)(1)(H). If FINRA denies the application, the reporting firm has an obligation to retroactively report financial dealings that occurred with the Participating Firm during the deferment period as well as any future financial dealings with such Participating Firm.; In the SD Notification letter, a Participating Firm will be requested to include with its Form MC-400A or with its request for an extension to file Form MC-400A, a statement indicating whether the Participating Firm consents to making public the fact that it has submitted Form MC-400A or received an extension to file such an application as a result of the SCSD Initiative. The statement consenting to the publication of the Participating Firm’s name can be submitted as an exhibit to Form MC-400A or included as a statement in the written request for an extension to file such application. FINRA will publish on its website a list of Participating Firms that have consented to publication in order to help members comply with their reporting obligations pursuant to FINRA Rule 4530(a)(1)(H).; A current list of Participating Firms that have given FINRA their consent to this publication will be compiled in the near future and made available on FINRA.org.
21. My firm is a participating in the SCSD Initiative, but it is not a registered broker-dealer, it is only a registered investment adviser. Will my firm be required to file an application with FINRA?: No. Only Participating Firms that are registered as a broker-dealer are required to file an application with FINRA to seek continued membership.
22. Will FINRA contact other self-regulatory organizations (“SROs”) of which a Participating Firm is a member regarding the Form MC-400A?: In the notice that FINRA is required to file with the SEC pursuant to Exchange Act Rule 19h-1, it must identify any other SRO of which the Participating Firm is a member and state whether such SRO is in agreement with the terms and conditions of the proposed continuance. Therefore, FINRA will contact any applicable SRO so that it can identify in its filing with the SEC whether such SRO agrees that the Participating Firm should be permitted to continue in membership.
23. If I have questions regarding the Eligibility Proceedings or a Participating Firm’s Form MC-400A, whom should I contact?: All questions regarding these FAQs may be directed to Deon McNeil-Lambkin at (202) 728-8982 or Lorraine Lee-Stepney at (202) 728-8442 or by email to [email protected].; For questions relating to FINRA Rule 4530 reporting, please contact Dave Troutner at (240) 386-6404 or [email protected].

1. See Notice to Members 09-19 dated June 15, 2009. See also Exchange Act Rule 19h-1(a)(3)(iii).