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Defending a FINRA Investigation to Avoid a FINRA Enforcement Action


Receiving a Rule 8210 request from FINRA. It's the moment that every broker-dealer dreads. But what many broker-dealers fail to appreciate is that what happens immediately thereafter ­- from the first contact with FINRA's enforcement staff through the Wells Process - can make the difference between walking away from an investigation unscathed or incurring sanctions, penalties, and regulatory disclosures.

Many broker-dealers first attempt to navigate investigations on their own and bring in counsel only when an enforcement action is inevitable. But, by then, the broker-dealer is often left with only two unenviable choices: either settle with FINRA (for frequently inflated penalties and sanctions, and regulatory disclosures to boot) or roll the dice at a hearing, in which a FINRA panel will ultimately determine the broker-dealer's fate. That's why it is imperative for broker-dealers to establish the credibility and merits of their position with FINRA at the commencement of the investigation. This article explains how to do exactly that.

Institute a Document Preservation Plan
During the investigation process, few things will call a broker-dealer's credibility into question more than the spoliation of information or documents that are—or could be—responsive to the Rule 8210 request. To avoid this undesirable result, a broker-dealer and its counsel should, within 24 hours of receiving a Rule 8210 request: (1) craft a document preservation memorandum designed to ensure the retention of all information in the broker-dealer's possession or control that is or could be responsive to the Rule 8210 request; and (2) circulate that memorandum to all of the broker-dealer's employees and representatives who have or may have responsive information or documents. If possible, the firm should also follow up with each employee and representative who received the memorandum to discuss their obligation to preserve all information and documents, regardless of where such information and documents are located or the format in which they are maintained (paper, electronic, etc.).

Establish a Good Working Relationship with Enforcement Staff
Broker-dealers and their counsel often underestimate the importance of their interactions with FINRA enforcement staff. To be clear, enforcement staff are the individuals who will investigate, analyze, and ultimately draw conclusions concerning the merits of a potential enforcement action against a broker-dealer. Thus, every interaction a broker-dealer and its counsel have with enforcement staff should be viewed as an opportunity to establish the broker-dealer's credibility and the merits of the broker-dealer's position.

To promote a cordial working relationship, counsel for the broker-dealer should reach out to FINRA’s enforcement staff promptly after receipt of a Rule 8210 request to introduce themselves, indicate their desire to work constructively with FINRA on behalf of their client throughout the investigation process, and establish their role as an intermediary between their client and FINRA. Further, if an extension is necessary for the broker-dealer to respond to a Rule 8210 request, counsel should request an extension from FINRA as soon as possible, but for only as long as necessary to compile responsive information. Counsel should also confirm whether enforcement staff have any preferences concerning the broker-dealer's responses (in addition to any identified in the request itself), communications between counsel and staff, and the investigation process in general. Being well-prepared, conscientious, and courteous when dealing with FINRA enforcement staff can pay dividends both for the broker-dealer under investigation and its counsel.

Interview Key Witnesses
Ideally, prior to responding to FINRA enforcement staff, a broker-dealer's counsel will interview each witness who was involved with or has knowledge of the matters referenced in FINRA's Rule 8210 request. The benefits of these early interviews are threefold. First, conducting interviews allows counsel to discuss the location of potentially responsive information and documents with each key witness, thereby helping to ensure that the broker-dealer produces all such information and documents to FINRA. Second, witness interviews allow counsel to ascertain key facts relevant to the matters under investigation and assess a broker-dealer's potential liability. Third, based on witness interviews, counsel will be able to develop an accurate narrative concerning the matters under investigation, which may be raised during counsel's ongoing communications with FINRA enforcement staff.

Provide Complete Responses to FINRA's Rule 8210 Request
The credibility of a broker-dealer and its counsel can quickly be called into question if it turns out that the broker-dealer failed to produce all non-privileged information and documents called for in a particular Rule 8210 request. At best, FINRA may conclude that the broker-dealer was negligent or, at worst, guilty of concealing unflattering information or documents. It is therefore imperative that both the broker-dealer and its counsel follow up with each employee and representative who could potentially possess or have control over information or documents responsive to the request and confirm that all such information and documents have been turned over to counsel. Further, if one or more items in a FINRA Rule 8210 request are vague, ambiguous, or susceptible to multiple interpretations, counsel should clarify their interpretation of the request in the cover letter transmitting the broker-dealer's response to the request.

Prepare, Prepare, Prepare for OTR Interviews
Few things are more unnerving for a witness than being the subject of an On The Record ("OTR") interview with FINRA. OTRs typically consist of a witness being peppered with rapid-fire questions from multiple FINRA enforcement officers, to which the witness must respond under oath. OTRs have no time limitations and can (and frequently do) take place over multiple days. Making matters worse, unlike depositions in civil proceedings, defense counsel's ability to object to questions posed by FINRA enforcement officers is limited.

Adequate preparation is essential to survive (and thrive) at a FINRA OTR. All too often, counsel will spend only a couple of hours meeting with a witness the witness's OTR interview. Although commonplace, this limited preparation does little to ensure a successful OTR interview. To the contrary, in addition to describing the OTR process, counsel should conduct multiple mock OTR interviews with the witness wherein counsel (and possibly others) play the role of FINRA enforcement staff and aggressively question the witness. Counsel should provide ongoing feedback to the witness to ensure the witness's responses are accurate and complete.

Consider Requesting an Early Meeting with FINRA Enforcement Staff
In certain cases, it may behoove a broker-dealer for its counsel to meet with FINRA enforcement staff prior to enforcement staff's final review of the evidence and possible recommendation of an enforcement action. This is particularly useful if the broker-dealer and/or its counsel believe that enforcement staff, for example, has obtained inaccurate information or is not aware of facts and/or law that tend to refute charges that enforcement staff may consider pursuing against the broker-dealer.

Respond to a Wells Notice
If, at the conclusion of an investigation, enforcement staff intends to recommend that FINRA take disciplinary action against a broker-dealer, they will send the broker-dealer a Wells Notice. Typically, a Wells Notice notifies its recipient of the allegations made by FINRA's enforcement staff along with supporting facts and provides an opportunity for the broker-dealer to respond.

How a broker-dealer responds to a Wells Notice can be the difference between walking away from a FINRA investigation unscathed or being forced to endure long and costly process. Although responses to Wells Notices vary greatly based on the nature of the underlying case, counsel for broker-dealers typically focus on why FINRA's proposed charges are unwarranted in light of relevant facts or controlling law, recite evidence (to the extent any exists) refuting FINRA's allegations, and, where appropriate, argue for reduced sanctions and/or penalties.

Broker-dealers should also be aware of their options in determining how to respond to a Wells Notice. Written submissions, for example, ensure that the firm's arguments will be reviewed by most - if not all - of the FINRA personnel with authority over the investigation at hand. However, if FINRA proceeds with an enforcement action, written submissions can be introduced as evidence against the broker-dealer (and are also discoverable in civil and/or regulatory proceedings involving the broker-dealer). On the other hand, responding to a Wells Notice at a meeting with FINRA enforcement staff ensures that the response cannot subsequently be used to the detriment of the broker-dealer, but this type of in-person presentation will likely reach a much smaller audience at FINRA.

In defending against a FINRA investigation, a broker-dealer and its counsel have one overarching goal: present the relevant facts and law in a manner designed to convince FINRA enforcement staff that charges are unwarranted. This presentation must be prepared and refined at the outset of a FINRA investigation, or the broker-dealer under investigation risks being subjected to a lengthy and costly FINRA enforcement action. By incorporating the practices referenced above into its defense of a FINRA investigation, a broker-dealer puts itself in the best position to avoid this undesirable result.

Read more Quarterly Securities Newsletter:

SEC Adopts New Disclosure Form CRS and Issues Official Guidance Regarding Investment Advisers’ Fiduciary Duty

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