What are the different stages of a FINRA investigation and disciplinary proceeding?

Robert W. Pearce, a Florida based securities lawyer with a practice that represents broker-dealers and financial advisors answers one of the more frequently asked questions: What are the different stages of a FINRA investigation and disciplinary proceeding?

Video Transcript

My name is Robert Pearce, and I’m often asked the question about what are the different stages of a FINRA investigation and disciplinary proceeding. And let me summarize them for you.

What happens, without your knowledge, is that FINRA starts an investigation. They get a tip from the whistleblower program or one of their automated surveillance systems. There are FINRA cycle examinations of broker-dealers, where they pick up information and decide to investigate. There may be referrals from other agencies like the SEC or the NFA that cause the investigation.  But the most common way that FINRA investigations start without your knowledge is from the U-4s and U-5s filed by your employer, your broker-dealer. Your U-4 is amended when customer complaints are filed, when arbitration awards are entered, when there are final judgements, or, in

the case of a U-5, when the termination of employment entry is “discharge for cause” or “permitted to resign.” You don’t know about the things that triggered the investigation, but behind the scenes, FINRA starts its investigation.

The next stage is what I call the 8210 stage, and this is when you first learn about a FINRA investigation. You usually receive a letter in the mail from FINRA requesting that you supply them some information and some documents. And they tell you at that stage, it’s only an informal inquiry but it’s an investigation. You haven’t been accused of anything. But this is the beginning, and you have to respond to the letter request. And this is when you need to hire an attorney.  At this point in time, you need to hire an attorney because it’s critical, very critical, in terms of whether a disciplinary proceeding is ultimately filed against you. You need an attorney to advise you on how to answer the questions, what documents to supply, and what you can legitimately withhold, because maybe because it wasn’t expressly asked for in the 8210 letter.

Now, the next stage, after you supply the documents and answer the questions, is what I call the OTR stage. FINRA calls it the “On-the-Record” examination, FINRA’s form of a deposition, a deposition in which you really don’t have rights like you do in a court supervised deposition. The consequences of not supplying the documents in the 8210 stage or not agreeing to testify in an OTR examination is that you could be permanently barred from the industry.

After the OTR and after they have finished the investigation, hopefully, you get a letter that says we’re not going to pursue this further. But most often, you get what they call a Wells Submission. A Wells Submission is an advisory to you and your attorney that they’re going to commence an enforcement action, and they give you some information about what they’re going to sue you for. And they give you an opportunity to file a response and persuade them in writing not to file the enforcement action. Generally, this is a waste of time and money, but you do have the opportunity, and in some cases, it’s worthwhile. Again, you need an attorney to help you make that decision.

Now, after the opportunity to make a Wells Submission is given by FINRA, generally, you enter into negotiations to see if you can settle the dispute before the disciplinary proceeding is filed. And your attorney, you, the FINRA attorneys and investigators communicate with one another and negotiate just like any other settlement.

After the negotiation, if you’re successful, is what I call the AWC stage, and that is where you execute an agreement known as the acceptance, waiver, and consent agreement, whereby you accept the FINRA findings, you consent to the sanctions, and you waive many procedural rights in connection with the investigation, in connection with the disciplinary proceeding, in any appeal.

If you don’t settle the case, then FINRA will proceed to the enforcement action and will file a complaint just like a court complaint, but only with that agency. You’ll be given an opportunity to answer the complaint. You’ll be given the opportunity to do some discovery, obtain the investigation file, obtain the on the record examinations of other witnesses who may have testified for or against you, so that you can evaluate the evidence.

Now, the disciplinary hearing is something that you really want to avoid because it’s run by FINRA. In fact, one of the hearing officers is a FINRA employee, and he sits on the panel with two other members of the regional committee appointed by FINRA to hear the case and decide whether or not you violated the law after hearing the evidence presented by the FINRA attorneys. So you have the FINRA attorneys, then you have the hearing panel, which consists of one FINRA employee, the hearing officer, who makes all the evidentiary rulings, and two other members of the regional committee to decide your case.

The only chance you have of winning is persuading the two members of the committee that are not FINRA employees to prevail, to rule two-to-one. And it’s very difficult to do. And if you’re unsuccessful, or even, if you’re successful, there can be appeals, appeals by FINRA. FINRA’s National Adjudicatory Committee (NAC) can file a review of the decision on its own. And you can file an appeal if you lose. You can appeal to the NAC, and if that’s unsuccessful, you can appeal to the Securities and Exchange Commission (SEC). And if that’s unsuccessful, you can appeal to the District Court of Appeals in Washington, D.C. And that’s the end.

And as I said, your best opportunity is to hopefully get this case to go away early. And if you can’t get it to go away early, to make a settlement, because usually once you go down the road of the disciplinary hearing, it becomes very difficult for you to win, very expensive, and this is why you need an attorney from the very beginning. Like I said, right at the time you receive that 8210 letter, you need to hire an attorney to represent you. Not only an attorney, but an attorney that’s knowledgeable of FINRA defense. And that’s what we do at our law firm, FINRA defense, and I suggest that you contact us.

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