FINRA Rule 1113

Statutory Disqualification Under Exchange Act Section 3(a)(39) and FINRA By-Laws Article III, Section 4

To understand FINRA Rule 1113's mandatory rejection requirement, it is essential to understand what constitutes a statutory disqualification. Exchange Act Section 3(a)(39) — incorporated into FINRA's By-Laws through Article III, Section 4 — defines statutory disqualification broadly to encompass persons who are subject to any of a series of specified adverse regulatory, criminal, and civil events within defined time periods.

Under Exchange Act Section 3(a)(39), a person is subject to statutory disqualification with respect to membership in or association with a member of an SRO if, among other things, the person:

Has been and is expelled or suspended from membership or participation in, or barred or suspended from being associated with a member of, any self-regulatory organization, any national securities exchange, registered securities association, registered clearing agency, or registered national market system plan — or has been denied trading privileges on any such exchange, association, or market. This category captures persons who have already been excluded from one SRO and would effectively import that exclusion to FINRA membership.

Has been convicted within the preceding ten years of any felony, or of any misdemeanor involving the purchase or sale of any security, the taking of a false oath, the making of a false report, bribery, perjury, burglary, larceny, theft, robbery, extortion, forgery, counterfeiting, fraud, embezzlement, misappropriation or conversion of funds or securities, or the wrongful taking of property, or conspiracy to commit any such offense. This category addresses criminal history whose character directly bears on fitness to participate in the securities industry.

Is subject to any order of the SEC, the CFTC, any federal or state agency, or any foreign financial regulatory authority that bars the person from association with specified categories of regulated entities. This category captures persons whose fitness has been determined adversely by a regulatory authority through formal order — the most direct form of fitness determination short of criminal conviction.

Is subject to a United States Postal Service fraud order. Is subject to a final order of a state securities commission or equivalent authority that bars the person from association with specified entities or imposes sanctions for fraudulent, manipulative, or deceptive conduct. Is subject to an order of the SEC pursuant to Exchange Act Section 15(b) barring or limiting association with specified entities.

Has been found by a court of competent jurisdiction to have willfully violated the federal securities laws or the rules thereunder, or willfully aided, abetted, counseled, commanded, induced, or procured such violation.

Has been subject to an order revoking or suspending registration as a broker, dealer, or investment adviser.

This comprehensive definition reflects Congress's intent to prevent persons who have demonstrated fundamental unfitness for the securities industry — through criminal convictions, regulatory bars, or adjudicated violations — from simply joining a new SRO after being excluded from or sanctioned by another.

The Mandatory Rejection Requirement

FINRA Rule 1113's first sentence establishes the operative rule — the Department of Member Regulation shall reject an application for membership with FINRA pursuant to NASD Rule 1013 in which either the applicant or an associated person, as defined in Article I of the FINRA By-Laws, is subject to a statutory disqualification, as defined in Article III, Section 4 of the FINRA By-Laws.

The shall reject formulation is categorical — the Department has no discretion to approve such an application through the ordinary NMA process under FINRA Rule 1013, regardless of how favorably the fourteen Rule 1014(a) admission standards might otherwise be assessed for the applicant. Where a statutory disqualification exists for the applicant itself or for any associated person (under Article I's broad definition, encompassing controlling entities, officers, directors, and other specified persons), rejection is mandatory.

This categorical approach represents a deliberate policy choice — distinguishing the ordinary admission standard (the fourteen Rule 1014(a) factors, which involve weighing and balancing against a rebuttable presumption to deny for specified adverse events) from statutory disqualification (which is categorically disqualifying through the ordinary NMA process, with no balancing test and no presumption-rebuttal mechanism). The policy basis for this distinction is the severity and specificity of the disqualifying events under Exchange Act Section 3(a)(39) — these are not merely adverse background facts that might reflect on fitness; they are formal determinations by courts, regulators, or SROs that the person in question poses a specific, adjudicated risk to the markets or investors.

The FINRA Rule 9520 Series: The Exclusive Relief Pathway

FINRA Rule 1113's mandatory rejection requirement does not make FINRA membership permanently unavailable to every person or entity touched by statutory disqualification — it makes the ordinary NMA process under FINRA Rule 1013 unavailable. The FINRA Rule 9520 Series — the Eligibility Proceedings framework this dictionary has examined in its coverage of those rules — provides the exclusive pathway through which a firm or person subject to statutory disqualification may seek relief from this bar.

Under the Rule 9520 Series, a member firm seeking to continue to employ an associated person who has become subject to statutory disqualification, or a prospective member firm whose principals or associated persons are subject to statutory disqualification, must file a Form MC-400 application. The Form MC-400 process involves a hearing before a Hearing Panel that evaluates whether the firm has demonstrated adequate safeguards to permit the statutorily disqualified person's continued or proposed association with a FINRA member notwithstanding the disqualification.

This two-pathway structure — categorical rejection through the NMA process under FINRA Rule 1113, paired with a specialized eligibility proceeding under the Rule 9520 Series for those seeking relief — reflects a nuanced regulatory design. FINRA does not permanently and automatically bar every person touched by statutory disqualification from any connection to the securities industry; it requires that such persons and the firms seeking to associate with them go through a more rigorous, specialized review process that specifically addresses the disqualification and the safeguards proposed to manage its risk. The ordinary NMA process is simply not that vehicle — FINRA Rule 1113 enforces this by making rejection mandatory at the NMA stage.

The Cancellation Provision — Misstatement, Omission, and Department Error

FINRA Rule 1113's second sentence addresses what happens when the mandatory rejection requirement is not properly applied — any such application as described in this Rule that is approved by virtue of Department of Member Regulation error or applicant error (including, but not limited to, an inadvertent or intentional misstatement or omission by the applicant or associated person) shall be subject to cancellation of membership in accordance with Rule 9555.

This cancellation provision operates in two scenarios. The first is Department error — where the Department, despite FINRA Rule 1113's mandatory rejection requirement, approves an NMA in which the applicant or an associated person is subject to statutory disqualification. Such approval is treated as void ab initio — the membership so approved is subject to cancellation as if the approval had not properly occurred, since the Department lacked authority to grant it under FINRA Rule 1113's shall reject standard.

The second scenario is applicant error — where the applicant or associated person provides information that is inadvertently or intentionally misleading, whether through misstatement, omission, or otherwise, such that the Department approves an NMA without knowing that a statutory disqualification exists. This scenario most directly addresses deliberate fraud — a prospective member that conceals its statutory disqualification on Form NMA or fails to disclose the disqualifying event on Form U4 in order to obtain FINRA membership that FINRA Rule 1113 would otherwise require to be rejected.

The including, but not limited to, an inadvertent or intentional misstatement or omission formulation confirms that the cancellation consequence applies regardless of the applicant's intent — an honest mistake that results in a statutorily disqualified person being admitted to membership carries the same cancellation consequence as deliberate fraud, reflecting the seriousness of statutory disqualification status and the categorical nature of FINRA Rule 1113's rejection requirement. A member whose membership is cancelled under FINRA Rule 9555 pursuant to FINRA Rule 1113 may also face additional consequences under FINRA Rule 1122 — the prohibition on filing misleading information as to membership or registration.

The Relationship Between FINRA Rule 1113 and FINRA Rule 1014's Presumption to Deny

FINRA Rule 1014(b)(1) establishes a rebuttable presumption to deny applications where the applicant or associated persons are subject to the events specified in Rule 1014(a)(3)(A) and (C) through (E) — events that include regulatory actions, sales practice events, pending private civil actions, unpaid arbitration awards, and pending arbitration claims. The presumption is rebuttable — the applicant can overcome it by demonstrating capacity to meet all fourteen Rule 1014(a) standards.

FINRA Rule 1113 operates categorically above this rebuttable presumption framework. Where a statutory disqualification exists — a bar, expulsion, or other Exchange Act Section 3(a)(39) event — FINRA Rule 1113's mandatory rejection applies regardless of whether the applicant could otherwise overcome the Rule 1014 presumption. The statutory disqualification is not merely a factor creating a presumption to deny; it is a categorical bar on the NMA process itself. This hierarchical relationship confirms that FINRA Rule 1113 establishes a floor beneath the Rule 1014 analysis — the Department must first assess whether a statutory disqualification exists under Rule 1113, and only if none exists does the Rule 1014 fourteen-standard analysis apply with its presumption-and-rebuttal framework.

Connection to FINRA Rules 1013, 1014, 1122, 9520, 9521, 9522, 9523, 9524, 9525, 9555, and Exchange Act Section 3(a)(39)

FINRA Rule 1113 connects directly to FINRA Rule 1013 — the NMA process that Rule 1113 categorically prohibits from resulting in approval where statutory disqualification is present. It connects to FINRA Rule 1014 — whose fourteen admission standards and presumption-to-deny framework operate beneath FINRA Rule 1113's categorical bar, applying only to applicants not subject to statutory disqualification. It connects to FINRA Rule 1122 — whose prohibition on filing misleading information as to membership or registration directly addresses the applicant-error scenario FINRA Rule 1113's second sentence contemplates, making an applicant's deliberate concealment of a statutory disqualification both a Rule 1113 issue and a Rule 1122 violation. It connects directly to FINRA Rule 9555 — as the cancellation mechanism FINRA Rule 1113's second sentence invokes for improperly approved applications. It connects to the FINRA Rule 9520 Series — FINRA Rules 9521 through 9527 — as the exclusive relief pathway for persons and firms seeking to overcome FINRA Rule 1113's categorical bar through the eligibility proceedings process. And it connects directly to Exchange Act Section 3(a)(39) — the federal statutory definition of statutory disqualification that FINRA's By-Laws Article III, Section 4 incorporates and that FINRA Rule 1113's mandatory rejection requirement operationalizes.

Examination Relevance and Key Takeaways

FINRA Rule 1113 is tested on the Series 24 examination as the categorical statutory-disqualification bar on new member applications — establishing both the mandatory rejection requirement and the consequences of approved applications that should have been rejected.

The key points to retain are these: FINRA Rule 1113 requires the Department of Member Regulation to reject any NMA under FINRA Rule 1013 in which either the applicant or any associated person (as defined in FINRA By-Laws Article I) is subject to a statutory disqualification as defined in FINRA By-Laws Article III, Section 4 — incorporating Exchange Act Section 3(a)(39)'s definition encompassing expulsions, bars, ten-year criminal convictions, regulatory orders, court findings of willful violations, and registration revocations; the rejection is mandatory — the Department has no discretion to approve such an application through the ordinary NMA process, and no combination of favorable Rule 1014(a) factors can overcome statutory disqualification at the NMA stage; the FINRA Rule 9520 Series eligibility proceedings provide the exclusive pathway through which persons and firms subject to statutory disqualification may seek relief, through a Form MC-400 application process before a Hearing Panel; any NMA approved in violation of Rule 1113 — whether by Department error or by applicant misstatement or omission, inadvertent or intentional — is subject to cancellation of membership under FINRA Rule 9555; and FINRA Rule 1113 operates categorically above FINRA Rule 1014's rebuttable presumption-to-deny framework, establishing a floor beneath the fourteen-standard admission analysis that the presumption-and-rebuttal mechanism cannot reach.