I used to work for NASD (before it became FINRA). First as an attorney for the Department of Enforcement, and, later, as the Director of the Atlanta District office. Given the scope of my experience, I was able to see Enforcement cases as they were developed in the examination phase, conducted by Member Regulation, through the referral to Enforcement, through the disposition of the case, whether by settlement or after a hearing. The process really hasn’t changed much since I left (except, perhaps, for the fact that increasingly Enforcement treats Member Reg as its “client,” meaning that Enforcement is much less likely today than it used to be to disagree with a recommendation by Member Reg to proceed with formal disciplinary action). But, there is one thing that has most certainly changed.
Back in the day, when Enforcement concluded that the prospective respondent’s actions were serious enough to merit formal disciplinary action, we would do as FINRA counsel do today, i.e., we would advise the respondent of this determination. While some cases got resolved without a Wells letter ever being issued, in most instances, respondent would receive a Wells letter. This provides formal notice that NASD/FINRA has reached the preliminary determination to recommend that a disciplinary complaint be issued. In most cases, the recipient of the Wells would respond by requesting a settlement guideline, i.e., a description of the sanctions that NASD would accept to resolve the matter. I would respond, and specifically tell the prospective respondent (1) who I intended to name as respondent(s), (2) the rule violation(s) I intended to charge, and (3) the sanctions (monetary and/or non-monetary) that I would recommend be accepted. The respondent then had a simple decision to make: take my offer and settle, or reject it. If rejected, I would draft a complaint naming exactly the respondents I said I would name, and including the exact rule violations I had articulated.
Sadly, it does not work that way anymore. Today, for whatever reason, FINRA has become a horse trader, routinely engaging in lengthy negotiations over settlements. Rather than simply offering their bottom line sanctions, as I had done, FINRA counsel start high, asking for way more than they are actually willing to accept. A vigorous back-and-forth inevitably ensues, as I probe the Enforcement lawyer, trying to divine FINRA’s true bottom line.
Frankly, it is a bit unseemly. FINRA has a statutory mandate to enforce the rules. If the rules are broken, then FINRA has an obligation to take appropriate action, and to mete out the appropriate sanction. The notion, however, that FINRA may, for instance, initially ask for $200,000 and a six-month suspension when, in fact, it will really accept $50,000 and only ten days off is, well, odd.
Even worse, however, is FINRA’s occasional practice, not to put too fine a point on it, of pressuring respondents into settling. FINRA accomplishes this by threatening/promising the respondent that if he will not settle on FINRA’s stated terms, thus requiring a complaint actually to be issued, the complaint will include (1) additional respondents beyond those who would have been included in the settled action, and/or (2) additional rule violations to those that would have been in the settled action.
There are a couple of typical scenarios. In one, FINRA will express its willingness to settle with only the firm being named; but, if the firm will not deign to settle, then FINRA will name both the firm AND a principal of the firm as respondents in complaint. Often, this threat alone is enough to compel the firm into signing an AWC, saving the individual’s U-4 from a nasty disclosure. In another common case, FINRA will agree to settle without a finding of fraud, but, if a settlement is not forthcoming, the complaint will include fraud allegations. For many firms, the potential downside to defending a fraud claim, even if unfounded, presents too much risk (even if only in terms of negative publicity) to contemplate seriously.
It is tough enough to defend a FINRA Enforcement case, given FINRA’s historic disinclination to proceed with any matter that poses what it deems to be a realistic chance of the respondent prevailing. FINRA just doesn’t bring too many “hard” cases, preferring, instead, the proverbial low-hanging-fruit cases. In light of this fact, the strong-arm tactics it employs to wrest settlements from broker-dealers unwilling to see their presidents named personally is troubling. I concede that no one puts a gun to anyone’s head to work in an industry as regulated as the securities industry, where one’s history, disciplinary and otherwise, is put on open display for the world to see and judge. But, it is not too much to expect fairness from a disciplinary process that is already heavily tilted in FINRA’s favor.