End the ban on felon participation in the securities markets

Americans love a good comeback story. Some of the best stories are about people who have made mistakes, served time in prison and then find the strength to change their lives and start new careers upon re-entering society. Some of the most-viewed posts on LinkedIn feature inspiring stories of entrepreneurs making a fresh start in this way. Unfortunately, this story is impossible for many careers in the financial services industry because of prohibitions in federal securities and banking law and in rules administered under those laws. 

Many progressives share Sen. Bernie Sanders’s (I-Vt.) view that new laws should be adopted to “ban the box” and prohibit companies from asking job applicants about prior felony convictions. Libertarians come at the same problem from another angle and urge companies to show leadership by banning the box voluntarily, and further urge that we reconsider government laws and regulations that limit opportunities for those with felony convictions. 

There should be a path for bipartisan work to amend these laws and abolish blanket bans on applicants with felony convictions in favor of more nuanced background checks targeting convictions for fraud and specific financial crimes. Indeed, limited reforms by the Federal Deposit Insurance Corporation (FDIC) recently show that to be the case.

In 2020, the FDIC took action to expand opportunities for individuals with minor criminal convictions. While this reform improves the situation, and it shows that federal agencies are willing to engage on the topic, the 2020 FDIC reforms leave much work left to be done.

The FDIC administers a statutory prohibition focused on crimes of dishonesty or theft, and yet some felons convicted of solely drug offenses are compelled to seek a waiver.   The Brennan Center reports that this is because the FDIC interprets crimes of “dishonesty” under its statutory authorization as including crimes that involve the sale or manufacture of drugs.

Most waiver requests are not historically granted, and typically only if the employing bank commits resources supporting the potential employee through the waiver process.  Further, some potential employees who may otherwise be eligible for employment may fail to obtain waivers because of outstanding fines associated with their sentence that they may be unable to afford.

The felony prohibition is more rigid in the securities industry. FINRA, the licensing body for stockbrokers, administers the basic series 7 license to become a stockbroker.  FINRA bylaws provide that any applicant with any felony conviction is disqualified from obtaining a series 7 license for 10 years from the date that the applicant was convicted. This requirement stems from a related provision in the Securities Exchange Act of 1934.  

FINRA’s application requires applicants to disclose criminal charges regardless of whether they were dropped or dismissed. FINRA further prohibits member firms from associating with anyone convicted of a felony, which has discouraged member firms from participating in pro bono mentorship programs designed to help convicted felons transition into careers in finance.

This blanket ban on felony participation in the securities markets is often why, in prosecutions of financial services firms, the Department of Justice will employ deferred prosecution tools like corporate monitors to limit collateral damage from a felony conviction that would otherwise prohibit the firm from ever dealing in securities again. In all fairness, former felons seeking a new start in finance deserve the same nuanced view of their application.

This blanket ban on felons in the federal securities laws was adopted in 1934, long before the nation’s failed over-prosecution strategy in the war on drugs. In 1934, there were fewer than 150,000 Americans serving in state and federal prison. In 2018 that number was 1.8 million. And hundreds of new felonies have been added to federal statutes since 1934. The blanket ban on felony participation in the securities markets no longer makes sense and needs to be reconsidered.

Blanket prohibitions contained in law, and in financial firm policies, should give way to a more nuanced definition of what crimes should result in an outright ban (like money laundering), to background checks and to disclosure. More nuanced approaches will prove more efficient and should be considered against improvements in controls and compliance systems at large financial firms that limit risk of malfeasance by client-facing brokers and investment advisers.

Treasury Secretary Janet Yellen has urged that diversity in the financial services profession is important, and the CEOs of many big banks that have brokerage arms have committed to diversity hiring targets. Many traditionally underserved communities are hit hardest by the prohibition on hiring those with criminal convictions across the economy. Those diversity hiring goals would be easier to achieve with reasonable reforms to these barriers.

Seventy-seven million people have criminal records. While not all of them are interested in working in the financial services industry, they should not face a blanket ban on doing so.

J.W. Verret is an associate professor at the Antonin Scalia Law School at George Mason University. He leads the Fresh Start in Finance Initiative, a non-profit dedicated to financial literacy education for formerly incarcerated entrepreneurs and to policy reforms that eliminate barriers against former felons working in finance.