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Appeal From Finra Association Denial Based on Felony Conviction Dismissed – Heightened Supervision Found Inadequate

Timothy H. Emerson, Jr., Exchange Act Rel. 60328, July 17, 2009

Time since appeal filed – 6 months 5 days
Time since last brief filed – 2 months 29 days

Finra denied the application of a member firm to allow Emerson to associate with it despite Emerson's statutory disqualification. Emerson pleaded guilty to felony DUI. As a result he was disqualified from association with a Finra member without Finra's consent. Exchange Act § 3(a)(39) bars persons from associating if they have been convicted of any felony within ten years.

Emerson's work history has been troubled as well. After 10 years working for a major national firm as a representative, Emerson was discharged by that firm in 1999 in connection with two customer complaints that the firm settled by making payments to clients. After seven years with another national firm he was terminated in 2006 for violating firm policy by taking discretion over client accounts. Also, when Emerson was arrested on the DUI charge he failed to notify his firm when the charges were upgraded to a felony (because it was his fourth DUI arrest).

The firm that submitted the pending request purportedly had a plan for heightened supervision of Emerson yet he was allowed to work unsupervised from home. His proposed supervisor had never supervised a disqualified person before. Finra denied the application for association and Emerson appealed.

The applicant must meet a burden of showing that it is in the public interest to allow him to associate despite the statutory disqualification. The standard the Commission uses in evaluating these cases is to determine whether Finra has explained "how the particular felony at issue, examined in light of circumstances relating to the felony, creates an unreasonable risk of harm to the markets or investors." The three years since Emerson's conviction was simply too short a time period according to the Commission. Also important was Emerson's failure to notify his employer that the charges were a felony as this reflected badly on his "candor and forthrightness." Also, his checkered disciplinary history "reflects poorly on [his] judgment and trustworthiness." Further, the Commission noted that the supervisory plan for Emerson was lacking due to the inexperience of his proposed supervisor and the fact that the supervisor would be responsible for the supervision of nine others.

Finally, the Commission rejected Emerson's argument that because the DUI was not securities related it should not form the basis for his disqualification. The Commission made clear that this does not weigh in Emerson's favor because the statute makes no such distinction. Emerson also argued that the statute is unconstitutional and in violation of a purported fundamental "right to work" liberty guaranteed by the 14th Amendment. The Commission rejected this claim. It noted that Finra is not a state actor and is therefore not subject to Constitutional due process requirements. It also noted that cases finding a fundamental right to employment involved state government attempts to limit employment to state or municipal residents – a claim Emerson doesn't make.


It is interesting that one factor the Commission considered in finding that the heightened supervisory plan was insufficient was the fact that the supervisor was also supervising nine other reps. The Commission found Finra's questioning of the ability of the supervisor to devote enough time to supervision of Emerson due to this supervisory load to be reasonable.