The SEC determined that FINRA had the authority to ban a former representative from future employment at a broker-dealer, concluding that the Supreme Court's 2016 decision in Kokesh v. Securities Exchange Commission ("Kokesh") is not relevant.

As previously covered, in Kokesh, the Supreme Court held that a five-year statute of limitations applies to claims for the disgorgement of ill-gotten gains obtained through violations of federal securities laws. In reaching that determination, the Supreme Court stated that a civil sanction is considered punishment if it (i) is not solely designed to serve a remedial purpose and (ii) only serves as either a deterrent or retribution.

Former broker-dealer John M.E. Saad was barred by FINRA from associating with any FINRA member firm after he misappropriated employer funds. After the SEC sustained FINRA's bar, Mr. Saad appealed the decision to the D.C. Circuit Court, arguing that the bar imposed by FINRA was impermissibly punitive. The Supreme Court issued its Kokesh decision while Mr. Saad's appeal was pending, and the D.C. Circuit Court remanded his case to the SEC for further consideration in light of Kokesh. On remand, Mr. Saad argued that FINRA's bar was impermissible under Kokesh, as it (i) served as a deterrent and (ii) was "categorically punitive."

The SEC rejected Mr. Saad's argument, saying that it sees "no basis" for applying Kokesh to his case. The SEC stated that a sanction is not punitive solely because the individual (i.e., Mr. Saad) "feels punished." Instead, the SEC determined that the debarment of Mr. Saad counts as a remedial sanction in that it will prevent further misconduct. The SEC based its decision on the following reasons:

  • Congress requires FINRA to adopt rules that authorize the agency to bar brokers in appropriate cases;

  • the Supreme Court has recognized that a deterrent does not solely make a sanction punitive; and

  • even if Kokesh applies, FINRA bars are not categorically penalties according to the Kokesh test.

Commentary

Kyle DeYoung

It is no surprise that the SEC rejected Mr. Saad's arguments here. The SEC has an interest in making sure that Kokesh is not extended to the non-pecuniary sanctions it imposes and the decision seems written with this in the back of its mind. However, Mr. Saad may have a more receptive audience if he appeals the decision to the D.C. Circuit, or perhaps the Supreme Court. In his 2017 concurrence remanding the case back to the SEC, Justice Kavanaugh (then a D.C. Circuit Court judge) made it clear that he believed the FINRA bar was punitive under Kokesh. In particular, Justice Kavanaugh focused on the fact that industry bars do nothing to provide a remedy to the victims, serve a deterrent purpose and, while they do protect the investing public, they are inherently punitive.

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