Receiving an inquiry from a regulatory agency or self-regulatory organization can make anyone nervous. Questions immediately arise as to what to do, how to respond, how to determine the reason for the investigation, and what steps to take. Using Financial Industry Regulatory Authority (FINRA) procedures as an example, we look to answer some of these questions, with an eye toward the overarching obligation of registered representatives and member firms to fully cooperate and respond to FINRA’s inquiries.
FINRA’s 8210 Letter
Most FINRA investigations start with a so-called 8210 letter. This letter is typically issued by a FINRA investigator in the Department of Enforcement and requests documents and information related to an investigation. Certainly, the first step in preparing to respond to an inquiry is to identify, to the extent possible, the subject matter of the investigation and whether the recipient of the inquiry is a subject of the investigation or a witness (although that can—and frequently does—change during the course of the investigation). Firms and individuals should also immediately identify and preserve relevant and responsive documents, data, and information, and identify witnesses with pertinent knowledge and custodians who may have possession of or access to relevant documents and information. With the assistance of counsel, witness interviews should be undertaken to determine the “who, what, when, where, why, and how” of what occurred. Also with counsel’s involvement, documents should be gathered and prepared for production—perhaps with the assistance of an outside vendor, depending on the scope—to ascertain what is at issue. Time usually is of the essence, and care should be taken to protect against destruction or spoliation of evidence.
FINRA Rule 8210 states that FINRA staff has the authority to request that any person subject to FINRA’s jurisdiction provide information orally, in writing, or electronically, and testify under oath with respect to any matter involved in the investigation, complaint, examination, or proceeding. Modifications to the rule, passed in 2013, have broadened FINRA’s authority to request documents and information. This expansion requires a recipient to produce (1) documents in his or her possession and (2) documents in the possession of someone else if he or she “has a right to demand them.”
A recipient of an 8210 letter has limited options. A FINRA member is obligated to cooperate with FINRA during an investigation. FINRA Rule 8210(c) provides that “[n]o member or person shall fail to provide information or testimony or to permit an inspection and copying of books, records, or accounts pursuant to this Rule,” and further states that “any failure on your part to satisfy these obligations could expose you to sanctions, including permanent bar from the securities industry.” Unfortunately, an 8210 letter does not specify whether the recipient is the target of an investigation or merely an innocent third party asked to provide relevant information. All too often, registered representatives see an 8210 letter and think that responding themselves (without counsel) will make the investigation go away or that they can personally explain away whatever situation is being investigated. Unfortunately, these responses often do not address the most important legal points in the investigation and fail to properly articulate the relevant facts to the FINRA investigator. Regardless of a firm’s desire and effort to cooperate, these investigations and inquiries present nuanced issues of law such that the experience of counsel is desirable. Any recipient of an 8210 letter, or a similar letter from the Securities and Exchange Commission, state Department of Insurance, or state Department of Securities, would be wise to immediately consult with counsel to ensure a written response is thoughtfully drafted and to work cooperatively with the investigator to discuss any issues with the document requests to fully comply in a way that directly responds to the investigator’s inquiries without exposing the respondent to unnecessary risk. Care and consideration must be afforded to the scope and timing of the response, narrative descriptions that may accompany a document production, and the scope of objections, if any, to the requests.
Based on the written response, the documents produced, and conversations between counsel and the FINRA staff, FINRA can choose to pursue enforcement, close its investigation, or continue the investigation by requesting on-the-record (OTR) interviews.
FINRA’s On-the-Record Interview
An OTR is similar, but not identical, to a deposition in a civil lawsuit with a witness responding under oath to questions posed by a FINRA investigator. The OTR will delve into the witness’s background and qualifications, work experience, and the subject matter of the investigation itself. Questions may relate specifically to documents the witness produced in response to the 8210 letter or to documents FINRA received in response to 8210 letters directed to other individuals or entities. Keep in mind that the FINRA investigator typically gathers documents and information from multiple sources. Anyone submitting to an OTR would be wise to consult with counsel before providing testimony to properly prepare for what will be the only opportunity (outside of an 8210 letter response) to explain facts to the FINRA investigator before an enforcement action could be filed. As in the response to the 8210 letter, care should be taken to provide full and accurate responses to any questions posed, subject to objections, if any, to the scope, subject matter, or form of the questions.
In an OTR—unlike a civil deposition, where objections may be made for a myriad of reasons—there are limited bases for counsel to object to questions posed by the FINRA investigator. Because of this, counsel’s role is better appreciated from the standpoint of preparing for the OTR and in negotiating a potential dismissal or resolution, as opposed to simply protecting the client during the OTR itself. Should someone invoke the Fifth Amendment privilege against self-incrimination, FINRA may view such invocation as a lack of cooperation and issue harsh sanctions for doing so, including a permanent bar from the securities industry. OTRs also differ from civil depositions in that FINRA will provide the witness an opportunity to make a closing statement, which may be used to further explain prior testimony or to address issues or considerations that were not touched on in the questioning. The decision to make such a statement, and what to include in this statement, will depend on the facts and circumstances of each case and the performance of each individual witness. Because of these unique issues, care should be taken in deciding whether to make such a statement and, if so, what to include. It is advisable for a witness to consult with counsel both prior to and during the OTR to make this determination.
After the OTRs, FINRA will typically decide whether to dismiss the case, pursue sanctions through settlement discussions, or take it to the next level by filing an enforcement action.
FINRA Enforcement Actions
If a FINRA investigation is not dismissed or resolved after the 8210 letter or OTR, it will turn into a formal enforcement action. Customarily, but not necessarily, the respondent is put on notice of an impending enforcement action by means of a Wells notice—a notification from a regulator of its intent to pursue enforcement and the nature of the alleged violations that are believed to have occurred. A recipient of such a notice has the opportunity to respond to it by means of a Wells submission designed to convince the regulator to forgo, alter, or reduce its allegations of wrongdoing against the recipient. Oftentimes, and for many different reasons, respondents choose not to submit a response to a Wells notice because they are neither privileged nor confidential, and anything set forth in a Wells submission can be used against the respondent in a subsequent enforcement proceeding. And they are discoverable and can be used against the respondent in private civil litigation. Of course, there are many circumstances in which a Wells submission is advisable, and the determination whether to make a Wells submission should be the result of careful consideration and analysis.
If the Wells submission is not successful and the dispute cannot be resolved, the Department of Enforcement initiates an enforcement action by filing a complaint against the member or associated person. After the complaint is filed, the material phases of an enforcement action are as follows:
- Answer: The defendant (or defendants) will have an opportunity to file an answer to the complaint, admitting, denying, or stating a lack of sufficient information to admit or deny the allegations.
- Selection of panel: The chief hearing officer will appoint a hearing panel or an extended hearing panel to oversee the hearing.
- Conferences: The parties will participate in an initial pre-hearing conference to discuss a litigation schedule and any other material issues.
- Motion practice: The defendant may file a motion for summary disposition, which is similar to a state court or federal court motion for summary judgment, when there is no genuine issue in dispute with regard to any material fact, and the issues may be decided as a matter of law.
- Discovery: The defendant will have the opportunity to obtain documents prepared or obtained by FINRA staff in connection with the investigation, request that FINRA compel the production of documents or testimony at the hearing from persons over whom FINRA has jurisdiction, or file a written motion requesting that FINRA produce for inspection and copying any witness statements from witnesses who will be called at the hearing.
- Pre-hearing submissions: The parties will submit pre-hearing submissions and exchange witness and exhibit lists, documents to be used during the hearing, an outline or narrative summary of a party’s case or defense, the legal theories on which a party will rely, and other information called for in FINRA Rule 9242.
- Hearing: At the hearing, the parties will have an opportunity to call witnesses and introduce evidence. Within 60 days after final disposition, the hearing officer will issue a written decision.
- Appeal: Either party may appeal the decision within 25 days to the National Adjudicatory Council.
Ultimately, under its Sanction Guidelines (May 2018), FINRA may impose one or more of the following sanctions for each violation of FINRA rules: (1) censure, (2) a monetary fine, (3) suspension, (4) expulsion, (5) a temporary or permanent cease-and-desist order, or (6) any other fitting sanction. As in civil litigation, the opportunity for resolution exists at every stage of the proceeding. However, care should be taken to ensure that settlement discussions occur at the proper time to maximize the likelihood of a mutually acceptable outcome.
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