GUEST BLOG: FINRA Hearing Process . . .BIAS . . . Real or Perceived???

August 1, 2019

FINRA Hearing Process . . . BIAS . . . Real or Perceived???
submitted anonymously by a veteran Wall Street compliance officer

While I have been lucky enough to have never had an Enforcement action brought against me, or my firm, I am very familiar with the hearing process after serving on numerous hearing panels. It is from my experience as a hearing panelist that I strongly believe changes need to be made in order to eliminate the potential for bias, whether it be real or perceived.

For those of you that have never been through the FINRA Hearing process, here's a quick rundown of how it works. First, Enforcement, which is made up of FINRA employed attorneys, will bring charges against a registered representative and/or firm. Next comes the long, drawn out process of Enforcement building their case. During this time, which in some cases goes on for a couple of YEARS, you will most likely retain counsel to try to diffuse the situation. After all, you are fighting the giant that is FINRA and their team of lawyers! FINRA Enforcement will most likely offer you the opportunity to sign an Acceptance, Waiver, & Consent ("AWC") to make the case go away. An AWC is a settlement where you neither affirm nor deny the charges against you, but you agree to the lighter sanctions being offered . . .  many times the AWC is signed as a business decision because it is cheaper than the attorney fees incurred in this long, drawn out battle. Be certain to fully understand the AWC before signing or you will be in for some surprises, but that is a discussion for another day.

So you didn't sign the AWC and Enforcement has built a case against you, now a Hearing date and location will be chosen. The location will typically be at a FINRA District Office in a conference room equipped with microphones, video conferencing, and plenty of space for the numerous attorneys that sit on the Enforcement side of the room, while you and your attorney are on the opposite side of the room, and the Hearing Panel is at the head table. There will also be a court stenographer tasked with recording every word for the record.

You finally have a chance to argue your side of the case to the Hearing Panel, who will decide your fate. So, who makes up the Panel? Well, it starts with the Hearing Officer. The Hearing Officer is akin to a Judge in a trial. He/She is responsible for ruling on exhibits being presented, ruling on objections raised, and basically keeping the hearing on track. Sounds like the same role as a Judge in a trial, right? Not so fast, there are some key differences between the Hearing Officer and a Judge. The Hearing Officer is a FINRA employee. That's right, the person that is supposed to be completely impartial is a FINRA Employee. But wait, there is more! In many cases the Hearing Officer is also a former Enforcement attorney. Now FINRA argues an Enforcement Attorney becoming a Hearing Officer is no different than a Prosecuting attorney, or District Attorney, becoming a Judge. I would agree with that statement, except for one big glaring difference . . .  A Judge does not sit in with the jury during the deliberations. A Judge does not have a voice as to whether or not a person is innocent or guilty. A Judge is not allowed to have Ex-Parte conversations with the Jury. The Hearing Officer is both the "Judge" and one member of the three person "Jury". The Hearing Officer often times has lunch and/or dinners with the other panelists during the course of the hearing where discussions regarding the case are the main focus. Hmmm . . . does this sound like a potential for a Hearing Officer to influence the other panelists, especially if the Hearing Officer is ex-Enforcement? Let's hold that thought for a minute while we learn about the other two panelists involved in this procedure in an effort by FINRA to show this is a fair and impartial proceeding. In order to serve as a Panelist, you must be either a current or past committee member (District Committee, SFAC, NAC, or BOG). Past committee members are many times individuals who are retired from the industry and may not be up to date on current rules & regulations. In most cases, the Industry Panelists are not attorneys, but are/were compliance officers, or firm executives.

Large firms are more likely to sign the AWC, pay the fine, and go on with business as usual. To them the fine is simply a cost of doing business and is less than the attorney fees to fight the charges. However, for the Small Firm signing an AWC, which becomes public record, can ruin their reputation and credibility forever. They have to fight to prove their innocence, even though the cost to do so may very well bankrupt them. But, for the Small Firm the driving force behind their business is their reputation . . . without it, they are out of business.

So let's recap for a moment . . . FINRA Enforcement attorneys, FINRA location, FINRA Hearing Officer who is also 1/3 of the Panel. No, that doesn't sound like a recipe for BIAS at all. Who is FINRA kidding???

Now, I'm not the type of person to bitch about something without at least suggesting how it could be made better. So FINRA, hopefully you are listening . . . 

1. Limit the number of individuals allowed on Enforcement's side of the Hearing room. Let's face it, if Enforcement is prepared then there is no reason to have as many as 9 individuals helping the attorney. No, this is not an exaggeration. I have been on a panel where Enforcement had roughly 5 or 6 attorneys, a couple FINRA examiners, and a few administrative people on their side of the room. This is not only an intimidation tactic, but also a complete waste of FINRA money / Members money. You see, the hearing is held at the local district office for of the individual/firm being charged, but the Enforcement team is flown in from all over the U.S., put up in hotels, food, even dry cleaning expenses are paid with membership money. Limit the number to two attorneys and two administrative personnel . . .  no more are needed, if you are prepared and truly have a case.

2. FINRA you are hosting this hearing, so expect your staff to behave like gracious hosts. In almost every hearing, the Respondent's attorney struggles with the equipment that is used to put the exhibits on the computer screens. Enforcement has an administrative person dedicated to operating this equipment. However, when the Respondent's attorney asks if the Enforcement administrative person can please put an exhibit on the screen for them, Enforcement at times has become hostile and unaccommodating. This is absolutely ludicrous! FINRA this is your "house", your equipment . . .  stop playing silly games with the Respondents. Either provide a FINRA staff person familiar with the equipment for the Respondents to use, or novel idea, allow them to use the person that is already being paid to be in the room doing the same task for Enforcement.

3. For the most important change, the role of the Hearing Officer is changed to follow the protocols of a traditional Judge. The Hearing Panel should be 3 industry people instead of 2. The Hearing Officer does not communicate with the Panel unless there are questions regarding procedure, rule interpretation, etc. The Panel deliberations and discussions are done in private, without the Hearing Officer involved. Once the Panel reaches a decision, the Hearing Officer is brought in to give guidance regarding the sanction guidelines.


Now as I stated in the beginning, I have served on numerous Hearing Panels with various Hearing Officers. In my opinion, the majority of the cases I have served on have been fair and impartial. Notice I did not say ALL of the cases. There were one or two instances where I felt the Hearing Officer showed bias, whether through comments made to the panelists during a lunch conversation, or shown in the hearing room by treating the Respondents attorney differently than Enforcement. I believe every step should be taken to ensure bias never enters into the Hearing process . . . whether it is perceived or real, every person/ firm deserves a fair and impartial hearing when their reputation and, in many cases livelihood, is on the line!   

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of BrokeAndBroker.com Blog.

The FINRA Small Firm community must send a clear and unequivocal message to FINRA to "remain strictly neutral" when it comes to Small Firm politics. 

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