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FINRA Investigation Process

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FINRA Investigates Broker-Dealers and Brokerage Firms for Fraud and Other Violations—Often with Criminal Implications

The Financial Industry Regulatory Authority (FINRA) shares responsibility for regulating the United States’ securities market with the U.S. Securities and Exchange Commission (SEC). Specifically, FINRA has oversight of broker-dealers and brokerage firms that offer investment services to the public.

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Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

Joe Brown
Joe Brown

Former U.S. Attorney
& Former District Attorney

Local Counsel

John W. Sellers
John W. Sellers

Former Senior Trial Attorney
U.S. Department of Justice

Local Counsel

Joanne Fine DeLena
Joanne Fine DeLena

Former Assistant U.S. Attorney

Local Counsel

Lynette S. Byrd
Lynette S. Byrd

Former Assistant U.S. Attorney

Partner

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Aaron L. Wiley
Aaron L. Wiley

Former Federal Prosecutor

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (OIG)

Chris Quick
Chris Quick

Former Special Agent (FBI & IRS-CI)

Kevin M. Sheridan
Kevin M. Sheridan

Former Special Agent (FBI)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

FINRA Investigations Can Present Significant Risks for Broker-Dealers and Brokerage Firms

All broker-dealers and brokerage firms in the U.S. must register with FINRA, and all registrants must comply with FINRA’s Rules. When FINRA has reason to believe that a broker-dealer or brokerage firm has violated these Rules, it will investigate. The targeted broker or firm must participate in the investigative process as required under FINRA Rule 8210, and violations of Rule 8210 can themselves lead to disciplinary action. According to FINRA, in recent years “more than a third of the enforcement cases that resulted in individuals being barred from the brokerage industry involved violations of Rule 8210.”

But, for many broker-dealers and brokerage firms, disciplinary action is not the only risk that comes with facing a FINRA investigation. These investigations can have criminal implications as well. If FINRA determines that a broker or firm has violated federal law (or may have violated federal law), it can refer the broker or brokerage firm to the SEC or the U.S. Department of Justice (DOJ) for further inquiry and possible prosecution.

Possible Criminal Allegations Resulting from FINRA Investigations

Depending on the substantive focus of a FINRA investigation, the targeted broker-dealer or brokerage firm could potentially be at risk for a broad range of criminal allegations. While many violations of FINRA’s Rules are administrative and technical in nature, FINRA’s enforcement authority also overlaps with the SEC’s and DOJ’s statutory enforcement jurisdiction. As a result, violations such as the following can lead not only to disciplinary action (i.e., suspension or debarment), but federal criminal prosecution and judicially-imposed criminal penalties for securities fraud as well:

  • Account churning and other conflicts of interest
  • Embezzlement and theft of customer assets
  • Front-running
  • Misrepresenting and omitting material information in disclosures to investors
  • Significant recordkeeping and oversight violations
  • Unauthorized trading
  • Unlicensed sale of securities

With these risks in mind, broker-dealers and managers of brokerage firms targeted in FINRA investigations need to take these inquiries very seriously. This starts with knowing what to expect and being prepared to execute a strategic defense focused on both the substantive issues at hand and the unique procedural aspects of FINRA investigations.

What To Expect During a FINRA Investigation

When FINRA initiates an investigation under Rule 8210, the targeted broker-dealer or brokerage firm has immediate responsibilities—and attendant immediate risks. FINRA expects registered brokers and firms to strictly comply with Rule 8210’s requirements, and it readily acknowledges that the penalties for non-compliance “are severe,” and “most often [entail] a bar from the securities industry.”

As a result, being prepared for the investigative process is critical. Targeted broker-dealers and brokerage firms must have a clear understanding of their obligations, and they must work diligently with their defense counsel to meet these obligations in order to avoid penalization under Rule 8210. At the same time, however, targeted brokers and firms must also be extremely careful not to be overly cooperative—particularly when the allegations underlying FINRA’s investigation have possible criminal implications.

Here is an overview of the major steps involved in a typical FINRA investigation:

1. Records Request Under FINRA Rule 8210(a)(2)

Most FINRA investigations begin with the issuance of a request for copies of the targeted broker-dealer’s or brokerage firm’s records under FINRA Rule 8210(a)(2). This Rule provides that FINRA “shall have the right to . . . inspect and copy the books, records, and accounts of [a registered broker or firm] with respect to any matter involved in [an] investigation, complaint, examination, or proceeding that is in such member’s or person’s possession, custody or control.”

FINRA will often request voluminous records under Rule 8210(a)(2), and complying in a timely manner can be an arduous and time-intensive process. Along with making copies for FINRA to review, targeted brokers and firms must also be careful to withhold or redact any documents that contain potentially incriminating information or that are subject to the attorney-client privilege. This requires a careful and informed approach, and it requires targeted brokers and firms to engage experienced outside defense counsel as early in the process as possible.

2. Internal Protective Measures

Upon receiving a records request from FINRA under Rule 8210(a)(2), targeted broker-dealers and brokerage firms must also work with their outside counsel to undertake appropriate internal protective measures. Along with preserving the broker’s or firm’s privileges as discussed above, this also principally involves:

  • Instituting a legal hold (or document preservation plan) to prevent the deletion or destruction of records that are relevant to FINRA’s investigation—and that could be relevant to any ensuing federal criminal investigation; and,
  • Conducting an internal audit in order to assess compliance and identify any issues that are likely to come up during FINRA’s investigation (including, but not limited to, any issues with possible criminal implications).

Both of these measures are of equal importance—not only with respect to FINRA’s inquiry, but with respect to the targeted broker’s or firm’s broader risk as well. FINRA, the SEC, and the DOJ all generally consider the failure to preserve records during an investigation to be a red flag for fraud, and being unprepared for allegations of administrative or statutory violations can leave brokers and firms unnecessarily exposed.

3. On-the-Record (OTR) Interview Requests Under FINRA Rule 8210(a)(1)

In addition to issuing a records request under Rule 8210(a)(2), FINRA will also typically issue one or more requests for on-the-record (OTR) interviews under Rule 8210(a)(1). These are, as their name suggests, interviews conducted under oath and documented for FINRA’s enforcement purposes. During FINRA investigations, OTR interviews often take place over multiple days; and, crucially, FINRA can share interviewees’ statements with federal authorities if it makes a referral for criminal prosecution.

4. Meeting with FINRA Enforcement Staff

Along with complying with FINRA’s requests for records and interviews under Rule 8210, broker-dealers and brokerage firms targeted in investigations should also generally seek to make their investigations interactive processes. Through their counsel, they should seek to meet with FINRA enforcement staff regularly in order to understand the current status of the investigation and steer it toward a favorable resolution. This interactive approach often proves crucial, particularly when flawed assumptions or incomplete information supplied by third parties appears to be guiding FINRA toward a decision to pursue enforcement action and potentially refer the targeted broker or firm to the SEC or DOJ.

5. Next Steps

At this stage, a FINRA investigation can proceed in a variety of different ways. For example, in some cases FINRA will schedule a Wells call, which is similar to the issuance of a Wells Notice in an SEC securities fraud investigation. Alternatively, FINRA may simply proceed with pursuing enforcement action; or, if the targeted broker’s or firm’s defense has been successful, FINRA may drop the investigation. If FINRA does not drop its investigation, then the targeted broker or firm must not only prepare to defend itself against FINRA’s enforcement efforts, but it must assess its risk of facing prosecution at the federal level as well.

FAQs: Defending Against a FINRA Investigation (and Avoiding a Criminal Referral)

Q: Why Is FINRA Investigating Me (or My Brokerage Firm)?


FINRA investigations can have a variety of triggers, from customer complaints to negative publicity. When facing a FINRA investigation, determining the investigation’s trigger is critical, as this will assist with assessing the risks that are on the table.

Q: How Likely is a FINRA Investigation to Lead to Criminal Prosecution?


The risk of a FINRA investigation leading to criminal prosecution depends on the substance of the underlying allegations. Many violations of FINRA’s Rules do not have criminal implications. But, some do, and FINRA works closely with the SEC to ensure strict enforcement of all administrative and statutory investor protections.

Q: Should I Cooperate with FINRA During Its Investigation?


While targeted broker-dealers and brokerage firms must generally comply with requests for records and OTR interviews under FINRA Rule 8210, they must also be careful to avoid being overly cooperative. While cooperating to an appropriate extent can be an effective defense strategy in many cases, voluntarily providing too much information (or the wrong information) can increase a target’s risk of prosecution.

Q: Should I Engage Outside Defense Counsel for a FINRA Investigation?


Yes, due to the risks that FINRA investigations entail, targeted broker-dealers and brokerage firms should engage outside defense counsel promptly. When facing a FINRA investigation, it is imperative to choose defense counsel with specific experience handling high-stakes securities fraud matters.

Q: What Should I Do If I Am Aware of FINRA Rule Violations or Federal Securities Law Violations?


If you are aware that your firm (or you personally) have violated FINRA’s rules or federal securities laws, this will play a critical role in both the form and substance of your defense strategy. This is something you will need to discuss with your defense counsel promptly, and you will need to rely on your defense counsel to guide you forward.

Speak with a Securities Defense Attorney at Oberheiden P.C. in Confidence

If you need to engage defense counsel for a FINRA investigation, we encourage you to contact us promptly for more information. To speak with a senior securities defense attorney at Oberheiden P.C. in confidence, please call 866-603-4540 or request a complimentary consultation online now.

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