April 22, 2019 Articles

Five Strategies for Effectively Trying FINRA Disciplinary Cases

When FINRA enforcement actions culminate in a disciplinary proceeding before FINRA’s Office of Hearing Officers, defense counsel are faced with a unique (and often unfamiliar) proceeding.

By James D. Bedsole and Michael R. Gaico

Brokerage firms and their registered representatives understandably prefer to avoid litigation against their regulators. Consequently, most investigations by FINRA’s Department of Enforcement (referred to as “Enforcement” in this article) are resolved through settled outcomes, rather than formal disciplinary hearings before FINRA’s Office of Hearing Officers (OHO), the independent FINRA branch tasked with adjudicating disciplinary actions. Indeed, even most seasoned regulatory defense counsel have few opportunities to try such cases. Although OHO disciplinary hearings include aspects similar to many other types of trials and hearings (such as jury and non-jury civil trials, criminal matters, administrative proceedings, and arbitration), they are unique. To successfully advocate for their clients in FINRA disciplinary hearings, practitioners must understand the venue’s distinctive features and tailor their strategies accordingly.

With these issues in mind, the Self-Regulatory Organizations (SRO) Subcommittee of the ABA Securities Litigation Committee recently hosted a regulatory forum in New York on strategies for effectively trying FINRA disciplinary cases. At the forum, FINRA hearing officers, industry panelists, and enforcement counsel provided their unique perspectives on what works in trying FINRA disciplinary cases. This article gives a brief overview of disciplinary hearings before the OHO and relays advice for achieving a successful outcome at trial.

Overview of FINRA OHO Disciplinary Hearings

FINRA bylaws require that formal disciplinary proceedings be heard before the OHO. Disciplinary cases (governed by FINRA Rule 9000, et seq.) are initiated when Enforcement files a complaint with the OHO alleging that a respondent has violated FINRA rules or federal securities laws. Respondents have 25 days to answer the complaint and must include a request for a hearing, if so desired.

  • The Panel. Cases are heard by a three-member panel chosen by FINRA’s chief hearing officer. A FINRA hearing officer (an attorney who is a current or retired employee of the OHO) must serve as the panel chair. With input from the hearing officer assigned to a case, the chief hearing officer then selects two industry panelists. Industry panelists (who may or may not be attorneys) are associated with or retired from employment with a FINRA member firm and have served in one of several qualifying positions on FINRA boards, councils, or district offices. In selecting the industry panelists, the chief hearing officer considers factors such as expertise, availability for service, and lack of bias or conflict. The panel, which decides cases by a majority vote, must issue an explained decision authored by the hearing officer.
  • Pre-Hearing Discovery. Enforcement is obligated to provide respondents access to most non-privileged documents prepared or obtained by FINRA staff in connection with the underlying investigation that Enforcement intends to use at trial. Additionally, both Enforcement and respondents may seek discovery after Enforcement files the complaint. Though Enforcement typically gathers significant information through its underlying investigation, it may seek post-complaint discovery regarding affirmative defenses, allegations contained in the answer, or information that was previously unavailable. Respondents may request discovery from persons or entities subject to FINRA’s jurisdiction if the information sought is relevant, material, and non-cumulative, and provided that the respondent has attempted to obtain the information through other means.
  • Hearings. Most cases are heard within five to eight months of the complaint filing. Settlement is a possibility prior to the hearing, and the OHO offers mediation services. However, the hearing officer, unlike a typical judge, is not active in trying to work toward a settlement. Unless counsel is proactive about settlement, the case will likely proceed to hearing. Once a hearing begins, settlement is rare. Hearings are often held at FINRA offices and generally last two to four days, though complex cases can extend through multiple weeks. Much like in arbitration, formal rules of evidence do not apply, but hearing officers may look to the Federal Rules of Evidence for guidance. Opening and closing statements are generally permitted, though time limits are sometimes imposed. Enforcement presents its case-in-chief first, followed by the respondent’s case-in-chief. Enforcement is permitted an opportunity for rebuttal, both in presenting evidence and in closing arguments. Surrebuttal by a respondent is rarely permitted.
  • Sanctions and Appeals. Panels may impose a wide variety of sanctions that include fines, disgorgement of commissions, restitution, suspensions, bars, or requalification requirements. Panels may also design sanctions tailored to specific cases, such as requiring respondents to retain independent consultants, limiting particular business lines, or requiring specific disclosures to clients. Both respondents and Enforcement may appeal adverse decisions to the National Adjudicatory Council (NAC), a FINRA committee that reviews disciplinary decisions. Respondents may further appeal NAC decisions to the U.S. Securities and Exchange Commission, and then to federal circuit courts of appeals.

Five Strategies for Successful Outcomes

Given the distinctive features of FINRA disciplinary hearings, practitioners must carefully tailor their approaches when trying cases before the OHO:

  1. Keep Opening Statements to the Point. Because hearings often take place in small conference rooms with tight quarters, counsel should keep a calm and measured tone to avoid appearing overly combative. Moreover, OHO panelists closely review the complaint, answer, and prehearing briefs in advance of the trial. Therefore, the limited time provided for opening statements is better spent emphasizing primary arguments and addressing charges, rather than reciting an exhaustive set of facts. It is imperative that counsel introduce an over-arching theme of the case at the outset of a hearing. Subsequent direct and cross-examinations should be designed to illicit testimony in support of the theme. Clear, uncluttered demonstrative exhibits are typically permitted and useful during opening arguments. The hearing officers and panelists expressed preference for a tailored set of key exhibits providing a roadmap to the case, rather than introduction of every conceivably relevant exhibit. A demonstrative providing a timeline of key events may be particularly useful to a panel during openings and throughout the hearing. Additionally, proceedings are not bifurcated between liability and sanctions, so defense counsel must make a tactical decision about whether to address sanctions, assuming a finding of liability, in their opening statements. Defense counsel may want to focus on mitigating sanctions if they believe they will lose on liability. This should be a case-by-case decision that hinges on the strengths of a respondent’s defenses.
  2. Prepare the Respondent to Be the Best Witness He or She Can Be. As noted above, Enforcement presents its case first, and it generally calls both the FINRA examiner (the investigator who conducted the underlying investigation) and the respondent during its case-in-chief. In fact, the respondent is often Enforcement’s first witness. Defense counsel must decide whether to cross-examine their client during Enforcement’s case-in-chief (though technically a cross-examination, defense counsel is not bound by the scope of Enforcement’s direct examination on any witness on both sides’ witness lists) or wait until respondent’s case-in-chief to call the respondent back to the stand. To avoid inconsistencies in a respondent’s testimony, defense counsel should re-familiarize their client with any on-the-record (“OTR”) testimony from the underlying investigation (most impeachments are conducted using OTR transcripts). Defense counsel’s line of questioning should always support their theme of the case. Panelists, however, may choose to question witnesses on their own initiative—thus, counsel should prepare witnesses for all manner of questions.
  3. Call an Expert Witness to Clarify Complex Investment Products. Expert witnesses have become increasingly common in FINRA disciplinary hearings, though use of an expert requires the permission of the hearing officer. Experts are useful in cases involving complex or unusual investment products and trading patterns. Both Enforcement and respondents may be permitted to use expert witnesses. Counsel should expect their experts to prepare a report to be admitted into evidence, which sometimes serves as the “direct” examination of the witness.
  4. Anticipate “Relaxed” Evidentiary Procedures and Use Them to Your Advantage. Though hearing officers may use the Federal Rules of Evidence as a guide, relevance standards are liberal and panels generally allow hearsay evidence, unless an objection is founded on concerns about reliability. Unless authenticity becomes an issue, little attention is paid to establishing a foundation for exhibits. Counsel should attempt to confer with Enforcement prior to the hearing to develop a joint set of exhibits and eliminate, to the extent possible, the need to argue over admissibility of any particular document at the hearing.
  5. Know Your Panel. As attorneys and full-time neutrals, hearing officers typically have a thorough grasp of legal issues, the applicable law, and sanction guidelines. Industry panelists may be less familiar with legal matters, but they are often highly knowledgeable about industry practices. The involvement of industry panelists in FINRA disciplinary hearings is a reminder of FINRA’s self-regulatory nature: Industry panelists tend to view cases in terms of whether the conduct at issue would be acceptable at their own firm and how decisions could affect the industry more broadly.

FINRA disciplinary hearings before the OHO carry life-changing ramifications for respondents, but few defense counsel have the opportunity to try these cases regularly. By understanding the venue’s procedures and considering the perspectives of OHO panels, defense counsel will be well equipped to provide effective representation.

James D. Bedsole and Michael R. Gaico are with Bressler, Amery & Ross, P.C. in Birmingham, Alabama and New York, New York.

The Regulatory Forum on FINRA Disciplinary Cases was moderated by Andrew Sidman (Bressler, Amery & Ross, P.C.), Christian Cannon (AXA Equitable Life Insurance Company), Lara Thyagarajan (FINRA), and David Boch (Morgan, Lewis & Bockius, LLP). Panelists included Maureen Delaney (Chief Hearing Officer, FINRA OHO), David Sonnenberg (Hearing Officer, FINRA OHO), and John Luburic (Senior Litigation Counsel, FINRA Department of Enforcement). Addressing the issues from the industry perspective were Nick Filing (Industry Panelist, FINRA OHO) and Sarah McCafferty (Industry Panelist, FINRA OHO).


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