FINRA Rule 8210 Demands End With Stockbroker Bar

December 10, 2018

For those caught up in a FINRA investigation, there often comes a moment when you open a letter from Staff and it asks for numerous written explanations and what you envision to be tons of documents. In such a moment, you may feel overwhelmed. It may strike you as an effort to force you out of the industry not for any wrong that you did but simply as a ploy. You may not have the resources to assemble everything needed to respond. FINRA knows that. And you think that they're simply playing hardball and want you to agree to a Bar. No matter how you ask Staff for relief from the onerous production demands, their response is either give us what we want or we'll bar you. Produce or Bar. Produce. Bar. That's the choice it almost always comes down to. Of course, FINRA has a job to do and it often starts with an investigation, and such an inquiry depends upon the cooperation of brokerage firms and their associated persons. You would no more expect FINRA to simply withdraw a demand in the face of a mere objection than you would a criminal prosecutor. It's how the system works. That being said, let's consider a recent FINRA investigation in which a respondent pushed back against Staff production demands.

Case In Point

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, Noel Carino submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Noel Carino, Respondent (AWC 2018057737501, November 30, 2018).

Carino entered the securities industry in 1999, and by August 2006 he was registered with FINRA member firm General Securities Corp. The AWC asserts that  "Carino has no relevant disciplinary history."

FINRA's Because We Say So Rule 8210

Few rules in FINRA's rulebook are more powerful than Rule 8210; consequently, let's look at the entire rule:
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.

(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.

(d) Notice

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:

(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.

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.

(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.

(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.

Rule 8210 Letter #1: May 2018 

The AWC asserts that in March 2018, FINRA started an investigation into whether Carino had improperly engaged in outside business activities ("OBA") and private securities transactions ("PST"); and whether he had disclosed all outside brokerage account in which he had an interest. In furtherance of FINRA's investigation, the self-regulatory-organization sent a Rule 8210 letter to Carino's counsel demanding the production of documents and information by May 31, 2018 -- and the letter admonished Carino that his failure to provide the requested documents could subject him to disciplinary action and the imposition of sanctions, including a Bar from the securities industry.

Unwilling Carino and Non-Consenting Wife

In response to FINRA's Rule 8210 demands, the AWC characterizes Carino's counsel's response as stating that his client was 

unwilling to provide bank account statements for entities related to his outside business activities because those statements purportedly contained private information about the finances of Carino's family. Carino's counsel further stated that Carino's wife "had not consented to the release" of a listing of any open securities accounts she owned or controlled. Finally, Carino did not provide information regarding how he came to own a parcel of land that he sold to a General Securities Corp. customer in 2017.

FINRA 8210 Letter #2: September 2018

FINRA sent a second Rule 8201 Letter on September 21, 2018, to Carino's counsel that identified the documents and information Carino had purportedly failed to provide in response to the May 18th demand; and the regulator reiterated its demands for responsive documents and information (and again admonished as to the consequences of non-compliance). 

No Cooperation

As represented by Carino's counsel on October 4, 2018, and by the executed AWC, Carino acknowledged that he had received FINRA's requests for information, that he will not provide the information requested as described above, and that he will no longer cooperate with FINRA's investigation.

FINRA Sanction

In accordance with the terms of the AWC, FINRA imposed upon Carino a Bar from association with any FINRA member in any capacity.

Bill Singer's Comment

For the registered-representative men and women who earn a living at FINRA's member firms invest via said reps and BDs, this case depicts the:

A. reasonable regulatory and compliance protocols designed to protect the investing public from potential sales practice violations and misuse of their confidential information; and/or 

B. unfair crap forced upon registered representatives in the FINRA member community.

As indicated by the "and/or" separating A and B above, sometimes FINRA Rule 8210 is viewed as a bona fide consumer-protection rule, sometimes it's an unfair and unreasonable exercise of power, and sometimes it's both.  

For many registered reps confronted with FINRA Rule 8210, the eventual response may be to tell the regulator to take a hike, not produce jack, and move on to another career when barred. Such an outcome may well be the only sensible option depending on what information is being sought and the consequences of producing same. On the other hand, there are, indeed, moments when FINRA is going overboard and its demands are excessive, burdensome, and improper. Given that FINRA Staff is often both judge and jury when it comes to considering requests to modify their Rule 8210 demands, it's often a futile gesture trying to appeal to notions of fairplay in response to a laundry list of questions and demands for documents. Among FINRA's worst flaws and failures is its persistent failure to provide a disinterested, neutral arbiter for Rule 8210 disputes. 

Assuming Respondent Carino had bona fide objections to the Rule 8210 demands, what else could he have done rather than throw in the towel, yell "uncle," and accept a Bar? On option may have been for Carino to have provided:
  1. copies of the bank statements at issue with redactions of the alleged "private" family finances;
  2. a statement to FINRA that he was not willing to disclose the identification of his wife's securities accounts because, in fact, she owned and controlled them and he affirms that he has no ownership or controlling interest in same (if those assertions are truthful); and
  3. an explanation as to why he was declining to disclose how he came to own a parcel of land at issue, and a citation to FINRA rules, SEC rules, or federal/state law that supports his non-production.
To be clear, Carino's lawyer may have counseled against any or all of the three actions above because such representations could have exposed the client to criminal or tort liability. Further, Carino may well have concluded that he no longer desired to remain in the industry or that he was unwilling to disclose the information sought by FINRA regardless of the justification or consequences. Setting such concerns asides, an advantage of providing the three-point course of action set forth above is that Carino would at least be able to argue that he had "cooperated" with FINRA's Rule 8210 demands but subject to his legitimate legal and jurisdiction defenses. 

No . . . I'm not living in an alternative universe. FINRA's response to any or all of the three explanations above is likely to simply charge an individual with failing to respond. Where does that get you? Perhaps to a hearing where you can contest not only the substantive allegations but also the procedural issues including the Rule 8210 demands. Once you are headed for a hearing or at one, you might be able to persuade a Hearing Officer to modify or deny Staff's demands. Should that fail, then you would be able to argue your case before a hearing panel. On an interim basis, a Hearing Officer could  have found that although Carino's defenses against the Rule 8210 demands were reasonable and made in good faith that Staff had, nonetheless, carried its burden -- and although the Hearing Officer might subsequently order Carino to comply, that order may come with the caveat that he would not be barred for having previously failed to comply but would be disciplined for any ongoing failures. Having now spread the 8210 production dispute on the record, a Respondent at least fully preserves the issue for an appeal to the SEC and federal courts. Again, it is unlikely that such maneuvers will accomplish much beyond delay but in those cases where the disputes are genuine, it may be better to argue the matter at a hearing and then on appeal rather than simply accept a Bar.

Tomorrow, the Blog's publisher, Bill Singer, Esq. will post a detailed analysis of FINRA Rule 8210.