Up until now, financial advisors who were statutorily disqualified by Finra had only one course of redress: Find a firm willing to take on their case and file an appeal with the SEC. But a decision by the SEC yesterday acknowledges that advisors themselves have the right to make such an appeal on their own.

The SEC ruling arose from the case of Gregory Acosta, 70, an advisor formerly associated with Kestra Investment Services LLC who was subjected to a statutory disqualification (SD) by Finra in 2018 after agreeing to settle accusations that were issued against him and his firm Diamond Bar Executive Benefits Program & Insurance Services Inc (EBP) by the California Department of Insurance. The accusations alleged that Acosta, EBP’s president, took out a $750,000 life insurance policy in the name of an elderly customer and named EBP as beneficiary without the customer’s knowledge and also took out a loan from the 87-year-old client, who was a lifelong friend.

“We filed 14 briefs in this case in court and with the SEC, knowing there was a gaping hole in the advisor’s due process right to appeal,” Acosta’s attorney, Lydia R. Zaidman, a partner in D’Amura & Zaidman, PLLC, told Financial Advisor.

“We were right. [The] SEC issued a landmark decision yesterday paving the way for financial advisors to challenge a Finra statutory disqualification notice, which effectively bars an associated person from associating with a Finra member firm,” Zaidman said.

In its decision, the SEC acknowledged that an advisor has a right to self-initiate a review of an SD directly to the SEC.

Previously, a financial advisor’s only recourse was for a firm to file a membership continuance application, the SEC said in its decision. Many firms decline to do so, which "left the advisor with zero avenue for due process,” the regulator said.

Finra spokeswoman Michelle Ong said the self-regulatory organization had no comment.

Zaidman said there were other aspects to the SEC decision. “Not only does the SEC decision create an avenue for appeal for financial advisors, it struck down Finra's misapplication of statutory disqualification parameters,” she said.

Finra took the position that while an initial California insurance regulatory complaint included allegations of violations of laws that prohibit fraudulent, manipulative or deceptive conduct, the subsequent settlement by Acosta which triggered the Finra SD did not reference such violations. The SEC held that the specific grounds for Finra's determination—violations of laws that prohibit fraudulent, manipulative, or deceptive conduct—were not cited in Acosta’s final settlement. As a result, the SEC set aside Finra's determination for Acosta’s statutory disqualification, as well.

The SEC decision can be found here.  

Finra fought the case across multiple jurisdictions and argued that neither the SEC nor federal courts, where Acosta also filed motions, had jurisdiction, she said.

“Getting to this decision was an extensive litigation process. Mr. Acosta was determined to clear his name. He settled the matter with California of not knowing taking out a loan from a customer was wrong. Family members of the customer came forward to avow his lifelong friendship with the customer. But Finra used the initial accusation to obtain the statutory disqualification,” Zaidman said.

She said that Acosta does not anticipate going back to work for Kestra, but is planning to work as an advisor for another broker-dealer. 

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