I have watched enough medical shows over the years, from the awesome St. Elsewhere to the never-ending Grey’s Anatomy, to have heard umpteen times that the Hippocratic Oath includes the admonition that doctors “do no harm.” While, apparently (according to Google, anyway), Hippocrates may or may not have ever actually said that, everyone gets the basic point: doctors are supposed to help their patients, not hurt them.
Sadly, there is no equivalent oath that FINRA examiners take. And that’s a shame, for not only do they not try to avoid harming the brokers and broker-dealers they examine, but, to the contrary, it seems that, at least in some, perhaps many, instances, they go out of their way to inflict harm.
The particular situation I am writing about today concerns communications with non-complaining customers. As every reader here presumably knows, while FINRA has considerable ability to compel individuals associated with broker-dealers to produce documents, answer questions, and appear for on-the-record interviews, it has no way to compel anyone else, including non-complaining customers, to cooperate. (Contrast this with the SEC, or the states, which have subpoena power, and can require customers to respond to questions.) Customers must choose to cooperate, or not. Yet, it is pretty common for FINRA to find itself needing to hear what customers have to say. So how does FINRA manage to obtain that cooperation from customers? How does it induce them to help? How does it convince them to spend an hour on the phone, divulging their private financial information?
The answer is that oftentimes FINRA essentially tricks customers into cooperating. And it does this by fostering the misapprehension in customers’ minds that they must, in fact, cooperate by not being clear what the customers’ rights are. But, on balance, while that’s sneaky and a bit of a dirty trick, it’s not nearly as foul and egregious as something else that FINRA does when it reaches out to non-complaining customers: sometimes, rather than simply asking questions to find out the customers’ side of the story, FINRA examiners will flat out tell non-complaining customers that they have been the victim of broker misconduct. As you will see, you don’t have to take my word for this, for the customers themselves have said as much.
But let’s start with the first point, namely, that FINRA deliberately fails to inform non-complaining customers that they have the absolute right not to cooperate. Just so it is clear that there is no doubt that this is true, consider this statement in Regulatory Notice 09-17, in which FINRA outlines how the Enforcement process, and the examination process that leads up to an Enforcement case, works: “The staff may also contact customers and other individuals who are not within FINRA’s jurisdiction and who provide information voluntarily.” Not particularly controversial.
Yet, in the template letter that FINRA sends to non-complaining customers seeking their cooperation, the word “voluntary” is conspicuously absent. In fact, there is nothing in that letter that makes it plain, or even suggests, that the recipient is free simply to ignore it, without consequence. Here is how those letters read:
My name is [fill in the blank], and I am an examiner at the Financial Industry Regulatory Authority (FINRA). FINRA is a non-for-profit, non-governmental regulator for all broker-dealer firms and brokers that sell securities in the United States. FINRA is overseen by the U.S. Securities and Exchange Commission and is authorized by Congress to protect U.S. investors by making sure the broker-dealer industry operates fairly and honestly.
We routinely conduct inquiries to determine whether brokerage firms and the people who work for them are complying with securities laws and regulations, as well as with FINRA rules. These inquiries include contacting investors, such as you, who are customers of a brokerage firm regulated by FINRA.
FINRA currently is reviewing the activities of [fill in name of firm and/or RR], and we would appreciate your assistance as we gather information. We would like to schedule a telephone call at a time that is convenient for you. Please contact me at [fill in Examiner’s phone no.] or email me at [fill in Examiner’s FINRA email address] so that we can set up a time to speak.
This is no accident that the letter omits the use of the word “voluntary,” and does not otherwise make it explicit that the customer’s cooperation is optional. This is no mistake. No scrivener’s error. This letter was intentionally worded in a way to cause the recipient to believe that there is an obligation to respond.[1]
To underscore the reasonableness of my conclusion, it is instructive to compare what FINRA does and says to how the SEC handles the same situation. In the SEC Enforcement Manual, there is a section devoted to “Voluntary Telephone Interviews.” In that section, the SEC requires, pursuant to federal law, that certain explicit disclosures be made when it solicits information voluntarily from witnesses, including that:
- While the federal securities laws authorize the SEC to conduct investigations and to request information from the witness, the witness is not required to respond.
- There are no direct sanctions and no direct effects upon the witness for refusing to provide information to the staff.
As I have noted above, FINRA’s letter fails to make either of these disclosures.
For what it’s worth, I will point out that I have raised this issue with FINRA’s Ombuds, but I have seen no evidence that my complaint has resulted in any actions being taken. Granted, that Office’s work is shrouded in secrecy, and they will not offer insights into what (if anything) they do upon receipt of a complaint. All I can say is that the language of this letter has not changed despite my stated concerns.
But, as I said, it gets way worse. The last paragraph of FINRA’s letter says, “[o]ur inquiry does not mean that any violations of FINRA rules or federal securities laws have occurred and should not be interpreted as a reflection upon the firm or any person associated with it.” Unfortunately, FINRA appears not to be familiar with this language. Rather than scrupulously avoiding doing or saying anything that might create the apprehension in the mind of a non-complaining customer that there’s something to be concerned about, FINRA examiners have done the exact opposite: they have flat out told non-complaining customers that they have been victimized by a firm or an RR.
Let me cite you two examples that happen to be super-well substantiated by documentary evidence. But, understand that there are countless additional examples, backed by anecdotal evidence supplied by my BD clients all over the country.
In this first example, FINRA was examining my client, a registered rep, for potential excessive trading. In pursuit of that exam, FINRA reached out to several of his customers, looking for dirt. One of those customers, who prior to being contacted by FINRA had never once expressed any issues with his trading, ended up not just complaining but filing an arbitration. And here is what he said in his Statement of Claim about the call he received from FINRA (I have redacted the names, and supplied generic replacements):
On March 6, 2023 CUSTOMER spoke in detail with FINRA EXAMINER. FINRA EXAMINER explained to him that FINRA was investigating REGISTERED REP, and informed CUSTOMER that the reason CUSTOMER’S ACCOUNT suffered such large losses over the past couple years was the fact that REGISTERED REP “churned” hundreds of trades and collected nearly $800,000 in commissions . . . .
The second example involved a different customer of my client, but was part of the same exam. At my request (once I heard the story), this customer executed a Declaration, under penalty of perjury, detailing his contact with FINRA. Among the events he recites is this:
They [i.e., the FINRA EXAMINERS, including, notably, the same examiner who was identified in the Statement of Claim that the first customer filed] told me that REGISTERED REP was under investigation by FINRA, and advised me to contact RR’s BROKER-DEALER so I could obtain a refund of the commissions I had been charged on the trades by REGISTERED REP, which they said were excessive.
Two different customers, who do not know one another, were contacted by the same FINRA examiner, and both tell the exact same story: the examiner told me that my account had been churned/excessively traded. And you don’t have to take my word for it, as both customers put it in writing. (For what it’s worth, I mentioned this to the Ombudsman, and requested that, at a minimum, the examiner be removed from the exam. That didn’t happen.)
And it’s not just this exam. Another client of mine, located clear across the country, had a number of his customers contacted by FINRA about an alternative investment they’d made, and several of them were left so unnerved by the conversation that they felt compelled – unbidden by my client – to report it. One of those customers wrote his broker (i.e., my client) an email about his telephone call with the FINRA examiner:
The last third of the conversation was probing into our “wealth”; whether we had availability to enough cash if our alternative investments did not play out as we planned. He was asking questions about where else we had assets other than [with REGISTERED REP]. Basically it is none of their business, and we were very uncomfortable with the conversation.
In my and [my wife’s] opinion, he was pushing us to be unsatisfied with your advice and questioning our “ability” to decide whether we should be making alternative investments . . . .
Seems pretty obvious that a FINRA examiner – someone who is purportedly trained simply to follow evidence trails, whether they lead to the conclusion that there has been a rule violation or to the conclusion that nothing happened – ought not to be “pushing” a non-complaining customer to do or say anything in particular, and especially not to be pushing a non-complaining customer to lodge a complaint.
Sometimes, these stories write themselves, requiring little editorializing from me. This is such a situation. It is almost unimaginable to me that some FINRA examiners act this way. It is even less imaginable that FINRA is aware of it – at a minimum, because I told them about it – yet appears to condone this activity. This amply demonstrates that FINRA has abandoned any goal it may have once harbored of conducting fair exams, of giving firms and brokers the benefit of the presumption of innocence to which they are entitled. Forget anything that Robert Cook may say at big conferences about how well trained and reasonable his exam staff is. In reality, neither is true.
[1] Sometimes FINRA skips the letter, and simply calls the customer. Based on the many stories I have been told by customers who received such calls, whatever script FINRA employs similarly omits any statement right up front that the customer has no obligation to talk to FINRA. It does seem, however, that if pressed by the customer, FINRA will ultimately acknowledge that the customer can simply hang up.