Experienced FINRA Defense Attorneys Representing Brokers and Brokerage Firms in Investigations and Enforcement Matters
The Financial Industry Regulatory Authority (FINRA) oversees the U.S. securities industry alongside the U.S. Securities and Exchange Commission (SEC). FINRA specifically regulates brokerage firms and their “associated persons,” or registered broker-dealers, with a primary focus on protecting retail investors.
Along with facing civil liability in FINRA arbitration initiated by dissatisfied customers, brokerage firms and broker-dealers can also face penalties in FINRA enforcement proceedings. FINRA regularly conducts investigations targeting various forms of alleged securities fraud—both in conjunction with and separate from customer arbitration filings.
At Oberheiden P.C., our FINRA defense attorneys have significant experience representing clients in investigations and enforcement matters. Our experience includes successfully defending clients against serious allegations of fraud and FINRA Rule violations as well as negotiating favorable settlements with FINRA when warranted. If you or your firm is under FINRA investigation, we can help, and we encourage you to contact us promptly for a complimentary consultation.
Understanding FINRA’s Role in the Securities Industry
FINRA is an independent not-for-profit entity that has received Congressional authorization to regulate brokerage firms and broker-dealers in the United States. All firms and brokers must register with FINRA, and they must comply with FINRA’s Rules which govern everything from internal recordkeeping and supervision to customer relationships and disclosures.
FINRA’s stated mission is “[t]o protect investors and ensure the market’s integrity.” To achieve this mission, FINRA focuses its investigative and enforcement efforts in five critical areas:
- Ensuring that all investors receive the basic protections to which they are entitled;
- Ensuring that anyone who sells securities is qualified and licensed;
- Ensuring that advertisements for securities are truthful and non-misleading;
- Ensuring that investors receive complete disclosures before purchasing securities; and,
- Ensuring that all securities sold to investors are suitable to the investors’ needs and objectives.
Each year, FINRA initiates hundreds of disciplinary actions against registered brokerage firms and broker-dealers for violations of its Rules. FINRA also routinely refers cases to the SEC so that it can conduct securities fraud investigations under federal laws such as the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Advisers Act of 1940. As discussed below, FINRA enforcement proceedings can lead to various penalties, and firms and brokers that fail to defend themselves can face these penalties unnecessarily.
Understanding the FINRA Enforcement Process
Most FINRA investigations begin without the subject firm’s or broker’s involvement. FINRA initiates investigations based on information received from customers, whistleblowers, the SEC, and various other sources, and it will typically conduct an initial inquiry prior to deciding whether to open a broader investigation. As a result, once a brokerage firm or broker-dealer learns that it is facing scrutiny, FINRA’s investigators usually already have evidence favoring the institution of enforcement proceedings.
This is critical to keep in mind. Brokerage firms and broker-dealers need to acknowledge the very real risk of facing enforcement action once contacted by FINRA, and they must take this into account when formulating their defense strategies.
OTR Requests (Rule 8210 Letters)
In most cases, targeted brokerage firms and broker-dealers will learn of a FINRA investigation when they receive a request for an on-the-record (OTR) interview. This request usually takes the form of a Rule 8210 letter. Under Rule 8210, all registered firms and brokers are required to comply with FINRA’s investigative requests, including FINRA’s requests for testimony and access to books and records.
If, through its investigative efforts, FINRA determines that enforcement action is likely warranted, it will typically schedule a “Wells call.” A Wells call serves a purpose similar to the Wells Notice in SEC enforcement proceedings. The Wells call provides a final opportunity for the target of a FINRA investigation to state its case and work toward negotiating a settlement (if warranted) before FINRA initiates a formal enforcement action.
If FINRA determines that enforcement action is warranted, it will file a complaint alleging all pertinent violations of the FINRA Rules. This complaint is made public on FINRA’s website, and this publicity alone can have negative consequences for firms and their brokers. As a result, it is generally preferable to resolve FINRA investigations prior to this stage—and at Oberheiden P.C. our FINRA defense attorneys prioritize achieving favorable pre-complaint resolutions for our clients whenever possible.
Absent settlement or dismissal, FINRA’s filing of a formal complaint will lead to a hearing before a three-member panel. During the hearing, FINRA and the targeted brokerage firm or broker-dealer will present their respective claims and defenses. Expert witness testimony often plays a central role, and we routinely work with experts who have significant experience in FINRA enforcement matters
Following the hearing, the three-member panel will consider the evidence presented and issue a final resolution. Depending on the nature of the claims involved, a negative outcome at this stage could also result in a referral to the SEC or the U.S. Department of Justice (DOJ). This is a critical consideration for firms and brokers to keep in mind as well, and those that are at risk for facing federal enforcement action must carefully address this risk with the help of their outside counsel.
Potential Penalties in FINRA Enforcement Cases
FINRA enforcement proceedings can lead to a variety of penalties for targeted brokerage firms and broker-dealers. Depending on the nature and severity of the allegations at issue, potential penalties in FINRA enforcement cases can include:
- Cease-and-desist orders
- Suspension or termination of registration
- Reprimand on the firm’s or broker’s public BrokerCheck® file
When a firm or broker refuses to comply with FINRA’s investigative requests under Rule 8210 or fails to participate in subsequent enforcement proceedings, FINRA can impose penalties in absentia. As a result, targeted firms and brokers cannot simply ignore FINRA enforcement proceedings, but instead must take a strategic approach to addressing FINRA’s allegations head-on.
How To Choose a Team of Experienced FINRA Defense Attorneys
Given the risks involved with facing FINRA investigations and enforcement proceedings, it is imperative that brokerage firms and broker-dealers engage experienced defense counsel. When choosing a FINRA defense firm, targeted firms and brokers should consider factors such as:
- FINRA Experience – The firm’s attorneys should have significant experience and a proven record of success in FINRA investigations and enforcement proceedings.
- SEC Experience – Since FINRA investigations also have the potential to lead to SEC scrutiny, targeted firms and brokers should choose defense counsel with SEC experience as well.
- Efficient Team Approach – Successfully defending against allegations from FINRA requires a team approach, and efficiency is key to mitigating the costs of a firm’s or broker’s defense.
- In-House Experts and Consultants – Since expert witness testimony is often critical in FINRA enforcement matters, having in-house experts and consultants can be hugely beneficial.
- Nationwide Practice – From Silicon Valley to Wall Street, FINRA (and the SEC) target firms and brokers nationwide. Your defense firm should have a nationwide practice as well.
At Oberheiden P.C., our nationwide network of lawyers and consultants brings centuries of combined experience to the table. We have successfully represented numerous clients in FINRA and SEC matters, and several of our team members investigated and prosecuted securities fraud cases at the SEC and DOJ before entering private practice.
FAQs: Successfully Defending Against a FINRA Investigation
Q: What Are Some of the Most Common Allegations in FINRA Investigations?
FINRA targets an extremely broad range of allegations through its enforcement authority. With that said, some of the most common allegations against brokerage firms and broker-dealers include inadequate supervision, recordkeeping violations, disclosure violations, and making unsuitable investment recommendations.
Q: How Does FINRA Identify Firms and Brokers to Target in Its Investigations?
FINRA primarily relies on outside sources to identify potential targets for investigations and enforcement proceedings. Many FINRA investigations arise out of customer complaints, and FINRA regularly acts on tips from whistleblowers, the SEC, state securities regulators, and other authorities as well.
Q: Is It Possible to Settle with FINRA?
Yes, it is possible to settle with FINRA. If it is not possible to avoid sanctions entirely, our FINRA defense attorneys will typically work to negotiate favorable settlements on behalf of our clients (and subject to our clients’ approval).
Q: Do I Need to Engage Legal Counsel for a FINRA Investigation?
We strongly recommend that all brokerage firms and broker-dealers engage experienced outside counsel to handle their FINRA investigations. These investigations can lead to substantial penalties (along with negative publicity), but it will be possible to avoid these consequences with an effective defense strategy in many cases.
Q: What Should I Do if I Have Received an OTR Request (Rule 8210 Letter) from FINRA?
If you have received an OTR request (Rule 8210 letter) from FINRA, you should consult with a FINRA defense attorney promptly. When responding to OTR requests, brokerage firms and broker-dealers need to be very careful, and they need to make informed decisions based on the advice of experienced legal counsel.
Contact the FINRA Defense Attorneys at Oberheiden P.C.
If you or your firm needs defense counsel for a FINRA investigation or enforcement proceeding, we encourage you to contact us promptly. To speak with a senior FINRA defense attorney at Oberheiden P.C. in confidence, please call 866-603-4540 or request a complimentary consultation online today.