I read today about a lawsuit that two registered persons, one of whom is a Chief Compliance Officer, filed against FINRA in federal court a couple of weeks ago. Mind you, lawsuits against FINRA are not particularly common, given the fact that FINRA has “absolute immunity” against monetary claims arising out of its regulatory activities. So, I am not saying that these plaintiffs will ultimately prevail, but their complaint did raise an interesting issue regarding Rule 8210, one of my favorite subjects.

In short, the lawsuit alleges that FINRA (as well as the third-party vendor that was hired to preserve the broker-dealer’s emails in accordance with SEC Rule 17a-4) is guilty of “spoliation,” i.e., tampering with or destroying the emails. What happened was, allegedly, FINRA issued 8210 letters for the firm’s emails, but insisted that the emails be produced in “a special format” – .pst, to be specific. The firm recognized that the vendor would likely be better at responding to the 8210 requests than its own internal people, so it had the vendor supply the emails. Somehow, allegedly, when FINRA subsequently used some of the emails as exhibits during OTRS, they had been altered in some fashion, including language added to the sender line, the substitution or insertion of inaccurate sender and receiver names, formatting and time differences, lost and incomplete content, etc.

I have no idea if these allegations have merit or not. But, what is interesting to me is the allegation that FINRA requested in its 8210 letter that the emails be produced in a particular format. It is pretty common to see 8210 requests that ask that documents be produced in a particular manner (e.g., emails in .pst format), or that data be produced in a certain way other than the manner in which it was originally created (e.g., on a searchable Excel spreadsheet). Here are some actual, verbatim examples of 8210 requests my clients have received:

  • “Provide a spreadsheet showing each time the computer was started-up and shut-down or logged on and logged off from October 1, 2012 to the present.”
  • “Produce a schedule of any customers that affected [sic] purchases from the firm’s inventory accounts during January 1, 2011 through December 31, 2013 (in excel format).”
  • “Provide a listing of all customers of the firm who held XXX as of June 30, 2013 who meet or exceed the below thresholds,” and then went on to list four particular criteria.

Where, exactly, does FINRA get the right to dictate the format in which documents are produced? Or that data be gathered from disparate sources and neatly collected for FINRA on a single document? Clearly, it does not appear anywhere in any of the pertinent rules.

Rule 8210 provides that FINRA has

the right to:

(1) require a member, person associated with a member, or any other person subject to FINRA’s jurisdiction to provide information orally, in writing, or electronically (if the requested information is, or is required to be, maintained in electronic form) and to testify at a location specified by FINRA staff, under oath or affirmation administered by a court reporter or a notary public if requested, with respect to any matter involved in the investigation, complaint, examination, or proceeding; and

(2) inspect and copy the books, records, and accounts of such member or person with respect to any matter involved in the investigation, complaint, examination, or proceeding that is in such member’s or person’s possession, custody or control.

Nowhere in this rule is FINRA given the power to dictate that documents be produced in any format other than the format in which they were created. Indeed, under subsection (1), the rule expressly limits FINRA’s ability to compel the production of electronic information only if the information “is, or is required to be, maintained in electronic format.” Yet, FINRA routinely ignores that language, and demands production in a certain way.

Moreover, the rule certainly does not give FINRA the power to require that firms prepare spreadsheets, or schedules, or lists. The rules that define the universe of documents a broker-dealer must create and preserve are SEC Rules 17a-3 and 17a-4 and FINRA Rule 4511. And I assure you, those rules do not require broker-dealers to create the sort of lists and schedules that FINRA often demands. Strictly read, Rule 8210 gives FINRA the right to “inspect and copy” documents; but, it does not empower FINRA to compel firms to “create” documents. Despite the clarity of that limitation, FINRA regularly ignores it, as demonstrated by the examples I have provided in FINRA requires the creation of some schedule or spreadsheet.

Finally, speaking of FINRA’s right to “inspect” documents, it is also clear that FINRA is not content merely to be provided the opportunity to view a BD’s books and records; rather, it generally requires that the particular requested documents be culled out and formally presented. Consider this real-life scenario: I had a broker-dealer client that sold its assets to one of its competitors and closed shop. It dutifully filed a Form BDW, as it was required to do. That form requires that someone be identified as the custodian of the firm’s books and records, and that the custodian certify that “that the broker-dealer’s books and records will be preserved and available for inspection as required by law.”

The firm’s former president identified himself as custodian, had the documents boxed up, placed in storage, filed a Form U-5 for himself, and happily moved on to his new business (which had nothing to do with securities). Sure enough, months later, FINRA sent him an 8210 request – remember, FINRA retains jurisdiction for two years after the U-5 is filed – seeking particular documents from the defunct BD. We offered FINRA the unfettered right to review the contents of all the stored boxes, for as long as it desired, but we were rebuffed, and instructed that we had to conduct the search for the examiner, or else face a possible 8210 charge. We explained that no one worked for the BD anymore, so there was no one around to go through the boxes and find the specific documents FINRA requested; alas, FINRA did not find that explanation compelling, and insisted that we figure out a way to get them ourselves.

The scope of Rule 8210 is certainly broad, but it is not limitless. Unfortunately, FINRA often disregards its limits. And given the potentially huge price to pay for ignoring an 8210 request, FINRA typically gets what it wants, even when it acts in a manner not countenanced by the rule. As I have said before, there needs to be a mechanism created whereby 8210 requests can be challenged other than through the Enforcement process, so overly broad requests can be examined without the threat of being barred or expelled in the event the challenge is unsuccessful.