In today's BrokeAndBroker.com Blog, veteran Wall Street regulatory attorney Bill Singer explores the world of hurt that can occur should you refuse to provide information or testimony to the Financial Industry Regulatory Authority ("FINRA").
Going to the Rulebook
There will likely come a time if you are a FINRA member firm or associated person when FINRA comes a knockin' and asks you some questions. In addition to that chit chat, the self-regulator may also ask that you provide documents -- or, perhaps a tad less politely, that you stand aside and make way as the Staff inspects your records and copies certain materials.
What gives FINRA the right to barge into your professional and personal lives? What obligations to cooperate must you follow? For starters, consider the all-important Rule 8210 [Ed: my comments inserted]:
FINRA Rule 8210. Provision of Information and Testimony and Inspection and Copying of Books
a) Authority of Adjudicator and FINRA Staff
For the purpose of an investigation, complaint, examination, or proceeding authorized by the FINRA By-Laws or rules, an Adjudicator or FINRA staff shall have the right to:
(1) require a member, person associated with a member, or any other person subject to FINRA's jurisdiction to provide information orally, in writing, or electronically (if the requested information is, or is required to be, maintained in electronic form) and to testify at a location specified by FINRA staff, under oath or affirmation administered by a court reporter or a notary public if requested, with respect to any matter involved in the investigation, complaint, examination, or proceeding; and
(2) inspect and copy the books, records, and accounts of such member or person with respect to any matter involved in the investigation, complaint, examination, or proceeding that is in such member's or person's possession, custody or control.
Bill Singer's Comment: Although FINRA likes to reference its Rule 8210 conduct as "requests," in reality, the self-regulatory organization is making "demands," as supported by the fact that 8210(a)(1) characterizes the activity as requiring you to comply. Further, the breadth of compliant responses covers oral, written, and electronic, and may even extend to testimony under oath, which is typically referred to as an OTR (on-the-record testimony). In more recent times, a great deal of testiness and litigation has surrounded 8210(2), which gives FINRA the right to "inspect and copy" books and records and accounts that are not only in the member's or associated person's "possession" but, more extensively, under that entity's/individual's "custody or control."
(b) Other SROs and Regulators
(1) FINRA staff may enter into an agreement with a domestic federal agency, or subdivision thereof, or foreign regulator to share any information in FINRA's possession for any regulatory purpose set forth in such agreement, provided that the agreement must require the other regulator, in accordance with the terms of the agreement, to treat any shared information confidentially and to assert such confidentiality and other applicable privileges in response to any requests for such information from third parties.
Any such agreement with a foreign regulator must also meet the following conditions:
(A) the other regulator party to the agreement must have jurisdiction over common regulatory matters; and
(B) the agreement must require the other regulator to reciprocate and share with FINRA information of regulatory interest or concern to FINRA.
(2) FINRA staff may exercise the authority set forth in paragraph (a) for the purpose of an investigation, complaint, examination, or proceeding conducted by another domestic or foreign self-regulatory organization, association, securities or contract market, or regulator of such markets with which FINRA has entered into an agreement providing for the exchange of information and other forms of material assistance solely for market surveillance, investigative, enforcement, or other regulatory purposes.
(c) Requirement to Comply
No 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.
Bill Singer's Comment: No, it's not optional or debatable. You are required to comply with the provisions of 8210. Why it was necessary to include this section still escapes me as 8210(1) pretty much indicates that compliancy is required but, hey, I don't write these rules, I just grouse about 'em.
A notice under this Rule shall be deemed received by the member or currently or formerly registered person to whom it is directed by mailing or otherwise transmitting the notice to the last known business address of the member or the last known residential address of the person as reflected in the Central Registration Depository. With respect to a person who is currently associated with a member in an unregistered capacity, a notice under this Rule shall be deemed received by the person by mailing or otherwise transmitting the notice to the last known business address of the member as reflected in the Central Registration Depository. With respect to a person subject to FINRA's jurisdiction who was formerly associated with a member in an unregistered capacity, a notice under this Rule shall be deemed received by the person upon personal service, as set forth in Rule 9134(a)(1).
If the Adjudicator or FINRA staff responsible for mailing or otherwise transmitting the notice to the member or person has actual knowledge that the address in the Central Registration Depository is out of date or inaccurate, then a copy of the notice shall be mailed or otherwise transmitted to:
Bill Singer's Comment: Why do you need to keep your address-of-record current even after you've left the biz? Consider this provision which requires that FINRA send notices to you to your last known business or residential address as disclosed on the Central Registration Depository ("CRD"). If you're going through a divorce, relocating, or simply taking a break, please make sure to keep your new addresses current.
(1) the last known business address of the member or the last known residential address of the person as reflected in the Central Registration Depository; and
(2) any other more current address of the member or the person known to the Adjudicator or FINRA staff who is responsible for mailing or otherwise transmitting the notice.
Bill Singer's Comment: This provision is very fair. If your CRD records says "X" but Staff knows that you're actually at "Y", then a copy of any notices must be sent to Y.
If the Adjudicator or FINRA staff responsible for mailing or otherwise transmitting the notice to the member or person knows that the member or person is represented by counsel regarding the investigation, complaint, examination, or proceeding that is the subject of the notice, then the notice shall be served upon counsel by mailing or otherwise transmitting the notice to the counsel in lieu of the member or person, and any notice served upon counsel shall be deemed received by the member or person.
Bill Singer's Comment: Among the reasons to quickly retain a lawyer when FINRA first contacts you is that notices "shall be served upon counsel . . ." and "deemed received by the member or person."
(e) Electronic Interface
In carrying out its responsibilities under this Rule, FINRA may, as appropriate, establish programs for the submission of information to FINRA on a regular basis through a direct or indirect electronic interface between FINRA and members.
(f) Inspection and Copying
A witness, upon proper identification, may inspect the official transcript of the witness' own testimony. Upon written request, a person who has submitted documentary evidence or testimony in a FINRA investigation may procure a copy of the person's documentary evidence or the transcript of the person's testimony upon payment of the appropriate fees, except that prior to the issuance of a complaint arising from the investigation, FINRA staff may for good cause deny such request.
Bill Singer's Comment: It often comes as a big surprise to folks who testified at an OTR that they are not immediately entitled to a free copy of the transcript of their testimony. As note in 8210(f) you "may inspect" the transcript of your own testimony. This limitation also surprises folks who know that they were one of several individuals testifying in the same investigation but are precluded from reading the transcript of others. Although you may well be entitled to those transcripts during a disciplinary hearing, that is not the case during the inspection phase. Further, you may purchase a copy of your own testimony if you pay the applicable fees BUT that purchase may be denied "for good cause" by Staff prior to the issuance of a complaint.
(g) Encryption of Information Provided in Electronic Form
(1) Any member or person who, in response to a request pursuant to this Rule, provides the requested information on a portable media device must ensure that such information is encrypted.
(2) For purposes of this Rule, a "portable media device" is a storage device for electronic information, including but not limited to a flash drive, CD-ROM, DVD, portable hard drive, laptop computer, disc, diskette, or any other portable device for storing and transporting electronic information.
(3) For purposes of this Rule, "encrypted" means the transformation of data into a form in which meaning cannot be assigned without the use of a confidential process or key. To ensure that encrypted information is secure, a member or person providing encrypted information to FINRA staff pursuant to this Rule shall (a) use an encryption method that meets industry standards for strong encryption, and (b) provide the confidential process or key regarding the encryption to FINRA staff in a communication separate from the encrypted information itself.
*** Supplementary Material ***
.01 Books and Records Relating to Investigations. This rule requires FINRA members, associated persons and persons subject to FINRA's jurisdiction to provide FINRA staff and adjudicators with requested books, records and accounts. In specifying the books, records and accounts "of such member or person," paragraph (a) of the rule refers to books, records and accounts that the broker-dealer or its associated persons make or keep relating to its operation as a broker-dealer or relating to the person's association with the member. This includes but is not limited to records relating to a FINRA investigation of outside business activities, private securities transactions or possible violations of just and equitable principles of trade, as well as other FINRA rules, MSRB rules, and the federal securities laws. It does not ordinarily include books and records that are in the possession, custody or control of a member or associated person, but whose bona fide ownership is held by an independent third party and the records are unrelated to the business of the member. The rule requires, however, that a FINRA member, associated person, or person subject to FINRA's jurisdiction must make available its books, records or accounts when these books, records or accounts are in the possession of another person or entity, such as a professional service provider, but the FINRA member, associated person or person subject to FINRA's jurisdiction controls or has a right to demand them.
Bill Singer's Comment: READ: SEC Sustains FINRA 8210 Document Demand for Third Party Records (BrokeAndBroker.com Blog, February 14, 2013)
What Happens If You Say "No," Or Fail To Respond?
Just as FINRA has a Rule 8210 informing you as to why you must cooperate with their investigations, the self regulator also has a rule setting forth the consequences of non-compliance:
FINRA Rule 9552. Failure to Provide Information or Keep Information Current
(a) Notice of Suspension of Member, Person Associated with a Member or Person Subject to FINRA's Jurisdiction if Corrective Action is Not Taken
If a member, person associated with a member or person subject to FINRA's jurisdiction fails to provide any information, report, material, data, or testimony requested or required to be filed pursuant to the FINRA By-Laws or FINRA rules, or fails to keep its membership application or supporting documents current, FINRA staff may provide written notice to such member or person specifying the nature of the failure and stating that the failure to take corrective action within 21 days after service of the notice will result in suspension of membership or of association of the person with any member.
Bill Singer's Comment: Note that Rule 9552 applies to member firms, associated persons, registered persons, and others subject to FINRA's jurisdiction. The Rule comes into play if there is a failure to "provide any information, report, material, data, or testimony" or there is a failure to maintain a membership application (or its supporting documentation). If there is a "failure" deemed by FINRA, then its Staff "may provide" notice admonishing that "the failure to take corrective action with 21 days after service" will result in a suspension. A couple of takeaways here. One, I'm not exactly sure what the Rule means when it says that the Staff "may provide" the written notice set forth. How would the 21 day warning work absent such notice? Second, it would seem that notwithstanding routine threats by Staff to suspend a firm or individual for alleged non-responsive answer to various demands that, in fact, FINRA is required to fire a 21-day warning flare before imposing a suspension.
(b) Service of Notice of Suspension
Except as provided below, FINRA staff shall serve the member or person with such notice in accordance with Rule 9134. A copy of a notice under this Rule that is served on a person associated with a member also shall be served on such member. When counsel for the member or person, or other person authorized to represent others under Rule 9141 agrees to accept service of such notice, then FINRA staff may serve notice on counsel or other person authorized to represent others under Rule 9141 as specified in Rule 9134.
(c) Contents of Notice
A notice issued under this Rule shall state the specific grounds and include the factual basis for the FINRA action. The notice shall state when the FINRA action will take effect and explain what the respondent must do to avoid such action. The notice shall state that the respondent may file a written request for a hearing with the Office of Hearing Officers pursuant to Rule 9559. The notice also shall inform the respondent of the applicable deadline for filing a request for a hearing and shall state that a request for a hearing must set forth with specificity any and all defenses to the FINRA action. In addition, the notice shall explain that, pursuant to Rules 8310(a) and 9559(n), a Hearing Officer or, if applicable, Hearing Panel, may approve, modify or withdraw any and all sanctions or limitations imposed by the notice, and may impose any other fitting sanction.
Bill Singer's Comment: Sure, you can disagree with FINRA's right to ask you something and you can challenge the Staff's contention that you didn't cooperate (when you believe that you did). Notwithstanding your anger, note that the Staff is technically obligated to inform you as to what you "must do to avoid" a threatened suspension. Sometimes it's best to await that written recitation so that there is no further dispute as to what you are being asked to provide. Further, if you truly are angered by the Staff's demands, you have the right to demand a hearing rather than merely cave in to the Staff's threats.The advantage of opting for such a hearing is that you appear before a purportedly impartial Hearing Officer and may obtain a order either telling the Staff to shove it or to modify per your complaints - and, of course, the worst that happens in some sense is that the Hearing Officer affirms the Staff's demands and you have to produce.
Why opt for a Hearing? One of the main reasons is to send a message to the Staff that you are not going to simply roll over and play dead when they stomp their feet concerning what you deem unreasonable demands or unnecessary (because you've produced the same responses twice already and now they're asking you to do it a third time). As to a tactical reason, it's a way of letting Staff know that you are prepared to be reasonable up to a point, and, thereafter, will dig in your heels. It may not help you with the current investigation but sometimes serves to beter moderate and modulate Staff conduct in upcoming encounters.
(e) Request for Hearing
A member or person served with a notice under this Rule may file with the Office of Hearing Officers a written request for a hearing pursuant toRule 9559. A request for a hearing shall be made before the effective date of the notice, as indicated in paragraph (d) of this Rule. A request for a hearing must set forth with specificity any and all defenses to the FINRA action.
(f) Request for Termination of the Suspension
A member or person subject to a suspension pursuant to this Rule may file a written request for termination of the suspension on the ground of full compliance with the notice or decision. Such request shall be filed with the head of the FINRA department or office that issued the notice or, if another FINRA department or office is named as the party handling the matter on behalf of the issuing department or office, with the head of the FINRA department or office that is so designated. The head of the appropriate department or office may grant relief for good cause shown.
Bill Singer's Comment: This is sort of the Mulligan. If you've lost your battle and were suspended but ultimately complied with the requests in dispute, you can petition for termination of the suspension to the extent that you are in "full compliance with the notice or decision" that invoked the suspension. This concept of "full compliance" seems to escape some suspended firms and individuals. It's not partial compliance; it's full compliance. And in case you haven't quite gotten the hint, by this time you've likely angered some of FINRA Staff by not playing nice and they're going to be real sticklers when it comes to what they think constitutes "full" compliance. Notice that the individual granting the relief is not an impartial Hearing Officer but the head of the department that complained about your failure to comply.
(g) Settlement Procedure
Uncontested offers of settlement shall be permitted under this Rule and shall conform to the requirements of Rule 9270, except that, if an uncontested offer of settlement, made under Rule 9270(e) after a hearing on the merits has begun, is accepted by the Hearing Officer, the Hearing Officer shall issue the order of acceptance, which shall constitute final FINRA action. Contested offers of settlement shall not be considered in proceedings initiated under this Rule.(h) DefaultsA member or person who is suspended under this Rule and fails to request termination of the suspension within three months of issuance of the original notice of suspension will automatically be expelled or barred.
Case In Point
After several years of employment with the banking affiliate of FINRA member firm Huntington Investment Company, Darren M. Smith became associated with the FINRA firm in November 2013, and on November 22, 2013, he attempted to become a registered representative with the firm pursuant to his filing a Uniform Application for Securities Industry Registration or Transfer ("Form U4"). As a result of his failure of the Series 6 examination, Smith's U4 was not processed but he remained employed by both the parent and affiliate until April 25, 2014, at which time Huntington filed a Uniform Termination Notice for Securities Industry Registration ("Form U5"),
FINRA investigated the circumstances of Smith's termination and pursuant to FINRA Rule 8210 requested information on June 2, June 18, and July 16, 2014. Apparently, Smith failed to respond to any of the FINRA 8210 requests and was ultimately barred. He appealed that sanction to the Securities and Exchange Commission ("SEC"). In the Matter of the Application of Darren M. Smith for Review of Disciplinary Action Taken by FINRA (Order Granting Motion to Dismiss Application for Review, Securities and Exchange Commission,'34 Act Release 75705; Admin Proc. File No. 3-16434 / August 14, 2015).According to the SEC Order:
All three of the requests asked Smith to provide FINRA with information concerning the allegations that he used corrective fluid on a legal document and any documentation relating to the allegations. The July request additionally asked whether the customer approved the document's alteration, whether Huntington approved the use of corrective fluid, and whether any other Huntington employees were involved. All three of the requests also asked for information about any other complaints regarding Smith's employment at Huntington. Each of the requests informed Smith of his obligation to fully comply with the request and warned that failure to do so could "expose [him] to sanctions, including a permanent bar from the securities industry." . . .
Page 2 of the SEC Order
As a result of his failure to respond to FINRA's Notice of Suspension and Notice of Bar, Smith was first suspended on December 4, 2014, and, thereeafter, barred on February 13, 2015. Followin g the imposition of the Bar, Smith appealed to the SEC for review and FINRA filed a Motion to Dismiss asserting that he had failed to exhaust his administrative remedies.Smith did not file any opposition to FINRA's motion.
In arguing his case to the SEC, SEC alleged that he had, in fact, sent a letter to FINRA in which he explained that:
his termination from Huntington's banking affiliate was based on an alteration of his "own signature" on a "business checking account document," not "any form of investment paperwork."
Page 6 of the SEC Order
There appears to be a very credible chance that the aforementioned letter was never sent to FINRA, and, further, that even if it had been sent that Smith knew it had not been received. Even assuming that such a letter had been sent to and/or received by FINRA, the SEC diminished its importance by noting that:
It does not address whether the document's alteration was approved by the customer or whether there were other complaints during Smith's tenure. And it does not provide any additional documentation regarding the allegations, such as Huntington correspondence or memoranda. For this reason as well, we conclude that Smith cannot rely on the purported September 2014 letter to exhaust FINRA administrative remedies.
Page 6 of the SEC Order
In considering the appeal, the SEC noted that consistent with federal court rulings, FINRA members must first exhaust applicable administrative remedies at FINRA before presenting such grievances directly to the SEC. Such a policy, the SEC explained, provides FINRA with an opportunity to correct any errors before placing such disputes before the courts. This prerequisite purportedly promotes the efficient resolution of disciplinary disputes between FINRA and its members. Having found that Smith failed to contest his Bar before FINRA prior appealing to the SEC, the federal regulator granted FINRA's Motion to Dismiss.