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Finra Denial of Application To Associate by Sanctioned Rep Upheld

Leslie A. Arouh, Exchange Act Rel. 62898, September 13, 2010

Arouh was barred from associating with a broker or dealer by the Commission in 2004 with a right to reapply after two years.

After that order Arouh acted as a "consultant" for a broker-dealer whereby he would provide recruiting, hiring, and training assistance for traders for the firm. Soon after the Commission denied his motion to reconsider its earlier sanction. He also attended numerous management meetings at another firm and was involved with various compliance issues.

Arouh had obtained two opinions from counsel that he might possibly avoid the bar order by acting as a contractor. However, both concluded that counsel could not provide a definite opinion on the matter unless he provided the precise details of any contemplated activities as a consultant. He ended his association with the firm after about four months.

In 2008 Raymond James applied to Finra for consent to continue as a Finra member if Arouh became an associated person. Because Arouh had not successfully reapplied he was a statutorily disqualified person and under Finra rules a firm may not allow a disqualified person to associate with it and still remain a member. The application proposed that Arouh would be supervised but would spend 20 percent of his time traveling. Under the supervisory plan Arouh would be required to sit adjacent to his supervisor when he was in the office. Finra denied the application and this appeal followed.

Finra found that Arouh had violated the Commission bar order, rejecting his argument that he had relied on legal advice. It also found the supervisory plan inadequate.

This case is important for three reasons. First, it reiterates a long standing Commission policy that advice of counsel as a defense will be very strictly construed. Among other things, counsel must specifically advise on the exact conduct at issue.

Second, the definition of association is a very broad one. "All persons engaged in the investment banking or securities business of a Finra member who function as principals are required to register." The key to determining whether someone is an associated person is the actual functions that they perform. It matters not whether those functions are performed as an "employee" or a "consultant". As noted in the opinion, a person "actively engaged in the management of a member's ... business, including supervision, solicitation, conduct of the business or training of associated persons for any of these functions are principals, whatever their title may be." Function, not title is the analytic key.

Third, the Commission upheld Finra's conclusion that the proposed supervisory plan was deficient because it included very few "stringent" supervisory procedures directed at Arouh beyond the requirement that he sit next to his supervisor. It found that much of the supervision in the plan was no different than for all employees. Nor did it include details of what records would be kept of Arouh's supervision or how precisely his supervisor would carry out his duties.

Those designing heightened supervisory plans should study this opinion.