Veteran Wall Street Lawyer Bill Singer Dissects The FINRA AWC
Written: June 28, 2013
Over the years, "BrokeAndBroker" readers have asked me to explain the nuances involved in entering into Acceptance, Waiver, and Consent settlements ("AWC") with the Financial Industry Regulatory Authority ("FINRA"). While AWC's appear to be the most common outcome for FINRA regulatory investigations, the mechanics and consequences of such a settlement are rarely understood by many registered representatives acting as their own counsel, and often not properly explained by lawyers to their industry clients. Consequently, let's go directly to the FINRA rule pertaining to AWC's and see what's what (Note my commentary in "SIDE BAR").
FINRA Rule 9216: Acceptance, Waiver, and Consent; Plan Pursuant to SEA Rule 19d-1(c)(2)
(a) Acceptance, Waiver, and Consent Procedures
(1) Notwithstanding Rule 9211, if the Department of Enforcement or the Department of Market Regulation has reason to believe a violation has occurred and the member or associated person does not dispute the violation,
SIDE BAR: The launch-pad for entering into the world of the AWC is that FINRA has formed a belief that you engaged in a violation of its rules. Once FINRA has formed that opinion, you are given a choice:
Door #1: If you are prepared to throw in the towel and settle the allegations, you can opt to do so before a formal Complaint is issued and pursue resolution via an AWC, but you will have to agree not to dispute FINRA's allegation of the violation(s).
Door #2: If you are incensed, outraged, and prepared to take the fight all the way down to the mat, then you are likely headed for a contested hearing.
Keep in mind, however, that once a formal FINRA disciplinary Complaint is issued, you may still settle via an Offer of Settlement, but that is a separate and distinct option from the AWC.
the Department of Enforcement or the Department of Market Regulation may prepare and request that the member or associated person execute a letter accepting a finding of violation, consenting to the imposition of sanctions, and agreeing to waive such member's or associated person's right to a hearing before a Hearing Panel or, if applicable, an Extended Hearing Panel, and any right of appeal to the National Adjudicatory Council, the SEC, and the courts, or to otherwise challenge the validity of the letter, if the letter is accepted.
SIDE BAR: At the start of the AWC process, you will execute a letter -- and that act may become a bone of contention long after your AWC is approved because many respondents will claim that FINRA drafted the settlement, twisted their arms, gave them no choice -- and that the settling respondent was basically forced to sign off on it. In fact, to some degree, FINRA has anticipated that position and makes you execute the AWC letter (even though you will be given what effectively amounts to a non-negotiable format with which to work).
Okay, so now you finally have cracked the code as to the source of the terms "Acceptance" and "Waiver" and "Consent." In your letter, you will:
ACCEPT FINRA's finding of violation;
CONSENT to the sanctions imposed upon you;
WAIVE your right to a hearing.
Why didn't they call it a Acceptance, Consent, and Waiver, an ACW? I dunno and they didn't ask my opinion.
Sure -- you may still harbor some disagreement with FINRA about the underlying facts, but once you submit the AWC, you are agreeing that whatever the self-regulator found as a violation of its rules is an accepted finding -- and you don't get to cross your fingers on that. Similarly, you don't get a mulligan after you have consented to the fines and/or suspension and/or other sanctions imposed upon you. Once your signature is dry on an accepted AWC, you don't have the right to a hearing on the matter. Finally, if you have second thoughts after the AWC is accepted, you also waived your right to appeal to FINRA's NAC, to the Securities Exchange Commission, and to the courts. Game. Set. Match.
The letter shall describe the act or practice engaged in or omitted, the rule, regulation, or statutory provision violated, and the sanction or sanctions to be imposed. Unless the letter states otherwise, the effective date of any sanction(s) imposed will be a date to be determined by FINRA staff.
SIDE BAR: In negotiating an AWC, there are no fixed and fast rules as to when a specific fine must be paid or a suspension served. You may have some limited ability when negotiating the AWC to ask the FINRA staff to agree to an earlier or later date for particular sanctions. Some folks prefer to get things moving immediately; others need time to get their affairs in order -- and some just want to serve the 30-day suspension in August or during a holiday season.
(2)(A) If a member or person associated with a member submits an executed letter of acceptance, waiver, and consent, by the submission such member or person associated with a member also waives:
(i) any right of such member or person associated with a member to claim bias or prejudgment of the General Counsel, the National Adjudicatory Council, or any member of the National Adjudicatory Council, in connection with such person's or body's participation in discussions regarding the terms and conditions of the letter of acceptance, waiver, and consent, or other consideration of the letter of acceptance, waiver, and consent, including acceptance or rejection of such letter of acceptance, waiver, and consent; and
(ii) any right of such member or person associated with a member to claim that a person violated the ex parte prohibitions of Rule 9143 or the separation of functions prohibitions of Rule 9144, in connection with such person's or body's participation in discussions regarding the terms and conditions of the letter of acceptance, waiver, and consent, or other consideration of the letter of acceptance, waiver, and consent, including acceptance or rejection of such letter of acceptance, waiver, and consent.
SIDE BAR: If your AWC is accepted, you waive your right to claim bias or prejudgment by FINRA's General Counsel, the NAC, and any NAC member concerning the discussions involving the terms and conditions of your AWC. Similarly, you know how you really, really believe that during the negotiations about the AWC's terms and conditions, the Staff had some improper private chat about you with someone on the NAC or that the separation you were promised between the Staff and the NAC was winked at? Well, kiss that claim goodbye if the AWC is accepted because you will have waived your right to claim those improper acts.
(B) If a letter of acceptance, waiver, and consent is rejected, the member or associated person shall be bound by the waivers made under paragraphs (a)(1) and (a)(2)(A) for conduct by persons or bodies occurring during the period beginning on the date the letter of acceptance, waiver, and consent was executed and submitted and ending upon the rejection of the letter of acceptance, waiver, and consent.
SIDE BAR: In essence, FINRA has taken out an insurance policy during the period that you executed the AWC and until it was rejected. During that period, you are bound by all the waivers you made in the submitted but now rejected AWC. Something of a heads I win and tails you lose proposition. On the other hand, this is how it goes with virtually all such settlements and it is something of the grease that allows the process to spin its wheels.
(3) If the member or associated person executes the letter of acceptance, waiver, and consent, it shall be submitted to the National Adjudicatory Council. The Review Subcommittee or the Office of Disciplinary Affairs may accept such letter or refer it to the National Adjudicatory Council for acceptance or rejection by the National Adjudicatory Council. The Review Subcommittee may reject such letter or refer it to the National Adjudicatory Council for acceptance or rejection by the National Adjudicatory Council.
(4) If the letter is accepted by the National Adjudicatory Council, the Review Subcommittee, or the Office of Disciplinary Affairs, it shall be deemed final and shall constitute the complaint, answer, and decision in the matter. If the letter is rejected by the Review Subcommittee or the National Adjudicatory Council, FINRA may take any other appropriate disciplinary action with respect to the alleged violation or violations. If the letter is rejected, the member or associated person shall not be prejudiced by the execution of the letter of acceptance, waiver, and consent under paragraph (a)(1) and the letter may not be introduced into evidence in connection with the determination of the issues set forth in any complaint or in any other proceeding. . .
SIDE BAR: Ya gotta love the bureaucracy that is now FINRA. They got a Review Subcommittee, the NAC, and the Office of Disciplinary Affairs all involved in possibly accepting a given AWC.
A Journey Of A Thousand Miles: According to the rule, you must submit the AWC to the NAC. You got that? The first step in the AWC journey is to submit your AWC to the NAC.
The Power To Accept: Next, the AWC apparently winds up before a Review Subcommittee or the Office of Disciplinary Affairs ("ODA"). The Review Subcommittee or the ODA can accept an AWC.
The Power to Reject: The Review Subcommittee can reject an AWC but the ODA lacks such power.
Unrejected But Not Accepted: Both the Review Subcommittee and the ODA may "refer" an unrejected AWC that they don't accept to the NAC for further consideration but only the Review Subommittee may "reject" an AWC. An unrejected AWC that they don't accept -- you really can't make up such gobbledygook like that without being a wordsmith with great talent.
The Plenary Power of the NAC: The NAC can accept or reject whatever the hell it wants.
If the above process makes sense to you, give yourself a gold star -- in fact, take two!
Three For The Price Of One: If the Review Subcommittee, the ODA, or the NAC accepts your AWC, that document magically is transformed into a trinity of a FINRA Complaint, your Answer, and FINRA's Decision.
Tabula Rasa: If the Review Subcommittee or the NAC rejects your AWC, the good news is that the slate is wiped clean by FINRA and the self regulator promises not to use your proposed AWC as evidence in connection with a determination concerning the issues set forth in any Complaint or in a proceeding. Ummm . . . one word of caution from an old hand at dealing with FINRA. Be careful about what you disclose during the AWC negotiations. Yeah, all well and fine that FINRA promises not to introduce any of your damaging admissions into evidence or to incorporate them into the Complaint. By the way, have you ever tried to un-ring a bell?
So, at long last you have decided, for whatever reason, to go along with the whole AWC thing and FINRA gets back to you with the semi-good news that it's now a done deal. Trust me, the pain ain't done yet. If you look at a typical AWC, you will likely find this language:
C. If accepted:
1. this AWC will become part of their permanent disciplinary records and may be considered in any future actions brought by FINRA or any other regulator against them;
SIDE BAR: You know all those water cooler lawyers in your branch office who told you to go with the AWC because it's no big deal and it's simply a settlement and no settlement can ever be used against you? Well, next time you see that idiot dispensing his nonsense, maybe you should dump the water jug on his head. The AWC goes into your Central Registration Depository record and in the future, should you slip up, rest assured that your past AWC "history" will be cited to show that you lack remorse, are a recidivist, should be slammed with the most extreme fines, and are the kind of registered person who should be barred.
2. this AWC will be made available through FINRA's public disclosure program in response to public inquiries about their disciplinary records;
3. FINRA may make a public announcement concerning this agreement and the subject matter thereof in accordance with FINRA Rule 8313; and
SIDE BAR: I beg you -- I plead with you -- read and re-read paragraphs #2 and #3. Your AWC will find its way onto FINRA's database, including BrokerCheck. Your AWC may well find its way into a press release, which could then be picked up by the media -- including blogs such as BrokeAndBroker. An AWC is NOT a confidential, private affair between you and FINRA. Once the AWC is approved, there is a fairly good chance that you have lost the ability to contain the matter and it may well find its way into the public domain.
4. Respondents may not take any action or make or permit to be made any public statement, including in regulatory filings or otherwise, denying, directly or indirectly, any finding in this AWC or create the impression that the AWC is without factual basis. Respondents may not take any position in any proceeding brought by or on behalf of FINRA, or to which FINRA is a party, that is inconsistent with any part of this AWC. Nothing in this provision affects their: (i) testimonial obligations; or (ii) right to take legal or factual positions in litigation or other legal proceedings in which FINRA is not a party.
SIDE BAR: You've seen it. I've seen it. Those idiots who post on social media and comment on published articles and explain that they only settled the AWC because FINRA forced them, that FINRA had no basis whatsoever to charge them, that the whole settlement was a sham, and that they simply agreed to settle in order to avoid paying a lawyer. After you have read #4 above, you tell me -- is that a smart thing to do?
D. Respondents may attach a Corrective Action Statement to this AWC that is a statement of demonstrable corrective steps taken to prevent future misconduct. Respondents understand that they may not deny the charges or make any statement that is inconsistent with the AWC in this Statement. This Statement does not constitute factual or legal findings by FINRA, nor does it reflect the views of FINRA or its staff.
SIDE BAR: Every so often I see a Corrective Action Statement. Generally, I don't like them, don't see the point in authoring them, and would typically counsel against such recourse. Some clients find it cathartic. Some think it may give them an edge in the future -- that they sort of get to put a bit of a spin on the story. FINRA is not going to let you append some statement that denies the charges or offers a cutesy explanation of an alleged fact. In the end, I would suggest that if you have any unresolved issues with FINRA that you go to the gym, hit the heavy bag, and maybe spend an hour on the treadmill.
Wall Street ain't always a happy place when it comes to labor relations. You got hundreds of thousands of registered persons lacking union representation (for better or worse) or even an effective trade group. Worse, FINRA, the so-called industry's self-regulatory organization, is essentially run on the revenues from its member firms, which have th... Read On