Four Warnings Brokers Miss When Settling With FINRA

April 12, 2012


Readers of "Street Sweeper" are familiar with my frequent coverage of Financial Industry Regulatory Authority ("FINRA") settlements that are known as Letters of Acceptance, Waiver and Consent ("AWC").  At the beginning of many columns in which I discuss the allegations and sanctions in these AWCs, you often find this explanation:

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing and without an adjudication of any issue, Reggie Repp submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Reggie Repp, Respondent (AWC 12123456, January 1, 2012).

What is all that mumbo jumbo trying to say?

For starters, these AWC settlements are entered into without the respondent admitting or denying the findings.  What exactly does that mean?  Well, after some 30 years on Wall Street, with stints as a regulatory attorney and as a defense lawyer, I'm not quite sure - and I mean that seriously. What FINRA might suggest it means is that the respondent has agreed to the sanctions imposed and to the technical "entry" of the findings against him or her - but that neither FINRA nor the respondent are requiring an admission or denial of the regulator's findings as a term of accepting th settlement.

On the other hand, ask most respondents what that same phrase means and they will tell you - likely to the horror of their lawyer - that FINRA is full of crap, the charges were garbage, and the settlement was only entered into because the lawyer wanted $50,000 to defend the case and it was cheaper to pay the $5,000 fine and take a 5 business day vacation.  So much for the not denying part of the agreement.

A few months after the respondent settles and all the paperwork is done, the settling industry participant is often in for a shock.  Seems that there was a major misunderstanding between lawyer and client. The registered person started getting telephone calls from reporters, friends, colleagues, and some troubled clients. That AWC was noted in a FINRA press release. That AWC is online as part of a FINRA monthly compilation of regulatory cases. That AWC is available in full-text on FINRA's website. That AWC is the subject of articles in "Street Sweeper," other blogs, newspapers, magazines, and the rest of the media.

What genuinely upsets many settling respondents is that they thought the whole process was confidential and secret and, hey, who the hell needs to know?  Sometimes those who have this belief represented themselves and misunderstood some of the nuances of the AWC process.  Many respondents who contact me complain that if they had only known that their settlements would be publicly posted by FINRA on its website and published in a press release or monthly notice, they would have taken the case to the mat and demanded a hearing. I'm often told that the settlement was simply undertaken to save time or money but without understanding that it could haunt the respondent for the rest of his or her life.

This is an issue that impacts all of Wall Street's associated and registered persons. If you're at an indie or regional firm, if you're at LPL or Charles Schwab, if you're with Merrill Lynch, Wells Fargo, JP Morgan, Morgan Stanley Smith Barney, it's all the same. Before you agree to settle regulatory charges, make sure that you understand what you're agreeing to and what kind of an afterlife the settlement will have.

In my professional experience, far too many respondents opt for settlement believing that they're merely making a business decision that's balancing the costs of defense against the cost of a fine (or the value of a suspension).  While such a decision is often the correct one, it's not always so.  In an effort to drive home this warning, let me quote from the typical Section C that is in most current FINRA AWCs:

C. If accepted:

1. This AWC will become part of Respondent's permanent disciplinary record and may be considered in any future actions brought by FINRA or any other regulator against Respondent;

2. This AWC will be made available through FINRA's public disclosure program in response to public inquiries about Respondent's disciplinary record;

3. FINRA may make a public announcement concerning this agreement and the subject matter thereof in accordance with FINRA Rule 8313; and

4. Respondent 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. Respondent 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 Respondent's right to take legal or factual positions in litigation or other legal proceedings in which FINRA is not a party.

Bill Singer's Comment

So, let's go through those four points.


What's with that "permanent disciplinary record" warning? It's letting you know that this is strike one. The next time you run into trouble, FINRA may point to this AWC and say that you're just not getting it and that future sanctions need to get your attention. It's also putting you on notice that this mark isn't for a few months or years but is "permanent."


For those of you who enter into an AWC believing that it's some private thing between you and FINRA, think again. FINRA has a "public disclosure program," and your settlement will likely be disclosed to a customer or potential customer inquiring about your disciplinary record.  And look back up at #1 and note that your disciplinary record is "permanent" . . . as in a long, long time.


Many of you think that once you sign the AWC, that's it. Not so fast. FINRA may well issue a "public announcement" about your settlement, which typically discloses your name, the allegations against you, the findings made, and the sanctions imposed.  The form of such a public announcement could be a press release, an item in a monthly report, and any number of online links.  Moreover, given the fast pace of the change in media, who knows what the future might hold.


This is something that far too many lawyer fail to discuss with their clients, so let me do that now.  After you've signed the AWC you "may not take any action or make or permit to be made any public statement . . . denying, directly or indirectly, any finding in this AWC or create the impression that the AWC is without a factual basis." Do me a favor a re-read that several times.  You might have missed the warning about not denying the AWC's findings in the future. No, you don't have to admit the findings but you are not permitted to deny them.  In summary, you might want to consider keeping your mouth shut about the AWC.

So, you know how you call me up to complain about my story about your AWC, and the first thing out of your mouth is that FINRA forced you to settle and the charges are garbage and the allegations are bull and you only settled to get this behind you?  You know how you make it a point to deny everything and tell me how you would have beaten the rap if you weren't broke at the time? Ummm, can I quote you on that next time you call and threaten me?