A unanimous Securities and Exchange Commission decision upheld a Finra industry bar against a former broker who argued that a recent U.S. Supreme Court case prohibits such sanctions.
The former broker, John M.E. Saad, said the high court’s decision in Kokesh v. SEC means the Financial Industry Regulatory Authority Inc. can’t throw brokers out of the industry because doing so is “categorically punitive.”
In its ruling, the Supreme Court held that disgorgement of ill-gotten gains operates as a penalty, and said that the SEC must seek disgorgement within five years of when the violation commenced.
Mr. Saad asserted that a bar by Finra, which is overseen by the SEC, serves as a deterrent and is therefore punitive.
He asked the U.S. Court of Appeals for the District of Columbia to review the Finra bar. The court remanded the case to the SEC to determine whether Kokesh applied in this instance.
In an Aug. 23 opinion, the five SEC commissioners said the Kokesh decision centered on whether disgorgement, a pecuniary sanction, constituted a penalty and that the Kokesh test said nothing about nonpecuniary sanction. The commissioners argued debarment is remedial rather than punitive and is meant to protect investors from further harm rather than to return money to them.
“We conclude that Kokesh’s test for determining whether a pecuniary sanction is a penalty … should not apply when determining whether a Finra sanction is punitive and therefore excessive or oppressive,” the SEC opinion states. “Finra has appropriately barred stockbrokers who have failed to live up to the high standards to which they are justifiably held. Such bars seek not to punish past transgressions, but to prevent such misconduct from occurring in the future.”
The opinion goes on to state, “We do not read Kokesh as limiting Finra’s or the Commission’s efforts to guard against harm to the public by imposing bars justified by the need to protect investors and others dealing with financial professionals.”
The SEC opinion was first reported by Law360.
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Mr. Saad was a regional director in the Atlanta office of Penn Mutual Life Insurance Co. and was registered with Finra through a broker-dealer affiliate of the insurance firm. In 2006, he filed false expense reports and later that year, Penn Mutual fired him.
In a subsequent investigation by the National Association of Securities Dealers, Finra’s predecessor, Mr. Saad made multiple false statements. In September 2007, Finra brought a disciplinary proceeding against Mr. Saad and then imposed an industry bar that forbid him from associating with any Finra member firm.
The SEC sustained the Finra bar in 2015, and Mr. Saad asked for a review by the D.C. Circuit.
Finra declined to comment. Lawyers for Mr. Saad could not immediately be reached for comment.