While it is pretty likely that anyone reading this is already familiar with the Wells process, I am going to start with a short history lesson.
Way back in 1972, the SEC created an Advisory Committee to take an objective look at how the SEC was conducting its enforcement program. John Wells was the guy who chaired that committee, and it is his name that has been applied ever since to the process – the Wells process – that his committee recommended. In short, Mr. Wells concluded that in some, but hardly all, instances, at the conclusion of an exam, the SEC staff would not only advise a prospective respondent of the fact that formal disciplinary action was being contemplated, but would also provide the individual or firm the chance to try and talk the staff out of that view. For the most part, however, the committee determined that it was up to the prospective respondent (or, more accurately, his attorney) to understand that this opportunity to push back even existed. The committee decided that this wasn’t necessarily fair, and so recommended that, generally speaking, the staff should affirmatively volunteer to prospective respondents against whom the staff was intending to obtain approval to initiate disciplinary proceedings, and invite a response. In theory (but rarely, in actuality), depending on what is included in that response, it could result in the staff reconsidering its position. Or, alternatively (and more often), it could devolve into settlement discussions.
At some point in time, FINRA adopted the Wells process, and it looks very much like the SEC’s version. Namely, when the exam is done, at which point, having asked all the possible questions there are to be asked and having reviewed all the documents available, FINRA examiners purport to understand all the facts, they are called upon to determine the appropriate disposition of the matter. If the examiners determine that formal disciplinary action is called for, based on what their exam yielded, they will issue the Wells notice.[1] The prospective respondent can then submit a written response, explaining why the examiners have managed to come to the completely wrong decision about the disposition of the exam.
Makes sense, right? It builds an element – illusory, perhaps, based on my own experience, which teaches that a Wells response almost never alters the trajectory of a case – of fairness into the process. Despite the fact that a Wells response has only a slim chance of success, most prospective respondents submit one nonetheless, reticent not to take advantage of one of the few tangible components of what passes for “due process” in the context of the FINRA Enforcement program.
Now, with that understanding of the Wells process, let me get to the point: why would FINRA take this process, designed to occur at the conclusion of an exam, and move it to the very beginning of the exam? Why would FINRA issue a Wells notice before its examiners know the facts? Before they ask all their questions? Before they review all the documents? Before they take OTRs and before they issue their 8210 requests?
These are the very questions I was forced to ask – and to which I received no answers – when a client of mine got Wells’d at the beginning of an exam, rather than at the end.
I want to be very clear about something: I am not making it up when I say that the Wells notice is designed to come at the end of the exam. This is evident despite the fact that FINRA has no publicly available procedures manual (as the SEC does) or a Code of Conduct. Consider the following:
- In the SEC Enforcement Manual, in the section dealing with Wells notices, it explicitly recites that in considering “whether or when to provide a Wells notice, staff should consider all of the relevant facts and circumstances, including but not limited to . . . [w]hether the investigation is substantially complete as to the recipient of the Wells notice.” Given that the Wells process has been lifted by FINRA directly from the SEC, it seems logical that the SEC’s view that the process should only be undertaken when “the investigation is substantially complete” carries significant weight.[2]
- In a pretty folksy and non-legalese explanation of its Enforcement process that appears on the FINRA website, FINRA includes this: “Once all the relevant facts are gathered, the Enforcement attorney will recommend a disposition for the matter—i.e., no further action, informal action, or formal action. Importantly, in making this recommendation, the attorney is required to consider all relevant facts, including any exculpatory or mitigating facts that may counsel for no action or informal action and against formal action.” While this description does not characterize this moment in the exam as the “Wells process,” it seems rather clear that that is precisely what it is being referred to. Remember, the operative word in a Wells notice is that it represents the staff’s preliminary determination to “recommend” formal disciplinary action, the same verb employed here. Anyway, note the timing: “once all the relevant facts are gathered.” By definition, this cannot occur at the outset of an exam.
- Consistent with that, about eight months later, FINRA aired a podcast with its then-head of Enforcement, who said this about what occurs “[a]t the point where we feel like we have all the relevant facts to understand what happened”: “then the attorney will recommend a disposition. The recommendation can be to go formal, to bring a formal disciplinary action that is, or to go informal or no further action. And when I say that we gather all relevant facts, I’m not just talking about facts that help bolster our case. I’m including mitigating and even exculpatory facts. And by that, I mean facts that would push us towards informal or no formal action.” Again, no mention of the Wells process by name, but the reference to “gather[ing] all relevant facts . . . including mitigating and even exculpatory facts,” is clearly about the dynamics involved in the Wells process.
- On a more personal note (and this one you just have to take my word for it), not too long ago, I was discussing settlement with a senior Enforcement attorney, in a pre-Wells setting. Looming over our conversation, however, was the unwelcome prospect of FINRA ditching the settlement talks and simply issuing a Wells. Mind you, the exam here had been completed long ago, so there was no question that the staff were well aware of all the pertinent facts and, therefore, were, theoretically, already at a place where they could have issued the Wells notice. To his credit, the senior Enforcement attorney basically told me I had no need to worry that FINRA would, without any warning, simply issue the Wells. The reason, he said, is that FINRA will generally only issue a Wells notice “when resolution [via a negotiated settlement] has reached an impasse.” Thus, as long as we continued to negotiate in good faith and make some progress, my client didn’t have to worry about receiving the Wells notice.
I couldn’t agree more with that thinking. Except . . . it makes pretty bizarre what happened in the exam I am blogging about here, an exam in which my client was Wells’d long before the exam was over – the Wells notice came before a single 8210 request was sent, and while it came a couple of weeks after his first OTR, it was sent long before his second OTR – and before a single word about a negotiated settlement was ever exchanged with FINRA. Certainly not consistent with FINRA’s historical practice, or with the SEC’s approach.
So, why did this happen? It took me a while to figure it out, but, ultimately I did. The reason FINRA issued the Wells notice so early into the exam was because FINRA knew that by doing so, it would cause my client to have to amend his Form U-4 to disclose the fact that he had been Wells’d, and what the investigation was all about.[3] (As well, it gave FINRA the right to file a Form U-6, which also disclosed that the Wells had been issued.) That is something that appears in BrokerCheck, which anyone with a computer can access. So, by having the Wells letter publicly available, it gave the examiners a means of sharing with people – namely, my client’s customers – exactly what they suspected had happened, thereby inducing customers to cooperate with them.
Imagine this phone conversation between a FINRA examiner and a customer:
Examiner: Hi, I’m from FINRA, and I’d like to talk to you about your broker.
Customer: My broker? Why are you asking about him?
Examiner: Well, I am not permitted to tell you. But, if you’re interested, you can go to www.brokercheck.finra.org and look him up and it will show you what this call is about.
Customer: I can do that, hold on. Holy cow! This says that you guys believe he mishandled my account and caused me to lose a bunch of money! That doesn’t sound good!
Examiner: Oh, it isn’t. Now, may I ask you a bunch of questions?
Customer: Ask anything you want, I am all ears!
What if I told you that this conversation was not imaginary, that it happened like this, more or less, at least according to the customer who received this call from FINRA. Is there anyone who would agree that this represented a proper use of the Wells process? Frankly, I expect that old John Wells is spinning in his grave, seeing how his eponymous process, designed to augment the fairness of a regulatory exam, has been twisted into a weapon.
Finally, as I said in my last blog post, I am fine defending a FINRA claim when there’s a level playing field. But, for FINRA to resort to tricks like this that tilt the field in its favor, that’s simply unfair. And, like my last post, I have to say again that my complaint to the Ombudsman about this has yielded no evident results. Not that I expect any from that office, but, still, at some point you’d think that it might become too hard to continue to turn a blind eye to blatant misconduct. I guess we are still, somehow, not at that point.
[1] This does not happen in every case. Recognizing the gravity of the consequences of being “Wells’d,” in some instances, rather than simply issuing a Wells notice (which almost always immediately becomes a matter of public record), FINRA will, instead, enter into a “pre-Wells” dialogue with a prospective respondent. The point of the dialogue is the same, i.e., to apprise the prospective respondent of the claims that would be included in a complaint, and to invite feedback, including feedback that might make the examining staff conclude that formal disciplinary action isn’t warranted.
[2] Admittedly, the SEC Enforcement Manual makes it clear that there may be certain exigent circumstances where the amount of time consumed by the Well process, and the resultant delay in the initiation of legal proceedings, may result in harm to investors. In such cases, the Wells notice may be skipped.
[3] Question 14G(2) on Form U-4 asks, “Have you been notified, in writing, that you are now the subject of any . . .
investigation that could result in a “yes” answer to any part of 14A, B, C, D or E?” The word “investigation” is italicized, which means it is defined. And the definition of the word “investigation” when it comes to FINRA is “investigations after the ‘Wells’ notice has been given or after a person associated with a member, as defined by The FINRA By-Laws, has been advised by the staff that it intends to recommend formal disciplinary action.”