Handling a FINRA Investigation
by Rob L. Wiley
A stockbroker, financial advisor, or other investment professional who receives a letter from a FINRA examiner needs a lawyer. FINRA, of course, is the Financial Industry Regulatory Authority. A self-regulatory organization, FINRA is not part of the federal or state government, but all broker dealers and many others involved in marketing financial products and services to the public are accountable to FINRA and could find themselves the subject of a FINRA investigation. This article provides a brief overview of the FINRA investigative and disciplinary process. While it does not substitute for the advice of competent, experienced counsel, it gives an investment professional an indication of what to expect as the FINRA process goes forward.
FINRA monitors compliance with industry rules and regulations of its members. It conducts routine examinations of members to make sure those members adhere to a variety of FINRA rules and procedures. It also follows up on potential rule violations that come to light as a result of claims made by customers against members. A broker or financial advisor may find himself or herself under FINRA scrutiny because of facts that came to light in an arbitration or litigation proceeding brought by a customer against a member firm or an individual broker or advisor. No matter how it learns of potential violations, FINRA may launch a full scale investigation leading to accusations of rule violations by a broker or advisor only tangentially involved in the underlying customer claim.
Some FINRA proceedings involve the failures to comply with disclosure requirements contained in FINRA rules and procedures. Brokers and advisors should regularly check their disclosures regarding outside business activities, involvement in litigation, financial setbacks, criminal charges, and regulatory actions. With FINRA, failure to disclose may represent as much of a concern and basis for disciplinary action as the underlying issue or transgression.
The FINRA Process
A FINRA investigator’s contact with a broker or advisor triggers a clearly defined, step-by-step process. The need for guidance from experienced counsel would seem obvious but, unfortunately, some individuals who find themselves the subject of a FINRA investigation choose to go it alone. The FINRA lawyers investigating and later prosecuting claims often have years of experience with the organization or the Securities Exchange Commission or both. Going it alone in the face of such experience seems particularly unwise.
Once FINRA launches an investigation, its staff will first seek from the broker or advisor all documents and records potentially relevant to the matter at issue. The broker or advisor should remember that the FINRA rules include an ongoing obligation to supplement his or her response.
After the FINRA staff reviews the documents, contacts others who may have relevant information, and otherwise investigates the matter, FINRA may request a testimonial appearance – a deposition under oath – from the broker or advisor. FINRA will set a date for the deposition, usually in one of its regional offices. A court reporter will transcribe the testimony. FINRA counsel will conduct the examination. The broker or advisor’s lawyer may attend and ask questions. Preparing a broker or advisor for the deposition represents an important responsibility of counsel representing that person in the FINRA investigation.
After the deposition, FINRA counsel will continue the investigation, including review and evaluation of the testimony. At some point, usually several months after the deposition, FINRA will notify the broker or advisor – through counsel if the individual is represented – of the FINRA staff’s conclusions. If the staff believes rules have been violated, it will identify those rules and indicate what penalty the FINRA staff intends to propose.
Once FINRA staff states its findings regarding the rule violations and proposed penalty, the broker or advisor can present a written submission contending that no violations occurred and/or proposing a lesser penalty. Instead of offering such a written statement, the broker or advisor may negotiate with FINRA staff regarding the proposed penalty. Such negotiations ultimately resolve many FINRA investigations.
Should the broker or advisor choose not to settle the case, the process moves into a litigation phase. That includes a formal disciplinary complaint, potentially extensive discovery involving additional depositions, a trial before a FINRA hearing officer, and an appellate process.
A FINRA investigation represents a serious matter for any broker or advisor. The FINRA process includes a number of pitfalls and traps for the unwary. While this overview provides someone facing a FINRA inquiry a general idea of how the process works, it does not substitute for representation by counsel experienced in the FINRA process.