Before I became a District Director for NASD, I was an attorney with its Department of Enforcement. In those days, I would occasionally take someone “on the record,” but only when it was clear that a formal disciplinary action, i.e., a complaint, would be forthcoming. The purpose of the OTR was principally to memorialize and set in stone the testimony of the prospective respondent, thus enabling me to use the transcript to impeach him at the hearing, should he be silly enough to change his story from what he swore to at the OTR. We didn’t take too many people’s testimony, maybe ten in the course of a year.

Now, things are different. Now, as defense counsel, it seems that I am in FINRA OTRs constantly. This is because OTRs have somehow become an integral part of the routine exam process for FINRA. Even in exams that, happily, never become formal actions, FINRA regularly summons witnesses to appear and give sworn testimony. Sometimes lots of witnesses. A single exam may entail multiple people appearing before FINRA over a period of several days or weeks, requiring repeated trips to whatever location FINRA dictates.[1] And, unlike federal (and some state) courts, where depositions are limited by rule to a set number of hours (barring an agreement by the parties or an order from the judge extending the time limit), FINRA OTRs can continue for as long as the examiners desire. OTRs extending more than one day are, sadly, all too common.

I have lost track of the number of OTRs I have defended over the years, but it is somewhere in the hundreds. Having a lawyer with you at an OTR may not change the ultimate outcome of the exam, but it most certainly keeps things honest and ensures that the record created will be fair and orderly. Knowing this, and because testifying at an OTR can be a frightening experience for both the uninitiated as well as the seasoned witness, given that FINRA always trots out a lawyer to assist in the interrogation, most sensible people, particularly those who can afford to do so, bring counsel with them to an OTR. Some bring more than one (something, absent very unique circumstances, I have never quite understood; one lawyer should be plenty).

News flash: like most lawyers, unsurprisingly, I do not work for free. It is not inexpensive to pay counsel to travel to, prepare for, and appear at an OTR. Multiply that by several OTRs, and the cost to a broker-dealer just to get through an examination – and remember, this is all before a complaint is filed, or before the decision to issue a complaint is even made – can become exorbitant. When you couple OTRs with the need for counsel to assist with the responses to serial 8210 requests for documents and information, the amount of legal resources necessary to get through a FINRA exam adds up quickly and dramatically.

News flash two: FINRA doesn’t care. The financial impact that OTRs have on a firm, or worse, an individual, causes FINRA not the slightest concern. If FINRA determines that your testimony is necessary, there is little if anything that can be done to derail that process, regardless of cost. But, by and large, FINRA seems blind to any questions of economy when it comes to OTRs. It is increasingly common to have gangs of FINRA examiners and attorneys appear at OTRs. My indoor record for the number of FINRA people at an OTR is seven – it happened a few years ago in an exam out of the Dallas District Office.[2] If FINRA doesn’t care how much it spends on its own resources to conduct an OTR, it sure isn’t going to care about how much the OTR costs the witness.

The point is, FINRA should care about this. When deciding whether to conduct OTRs, and where and when to do so, FINRA ought to consider how these decisions impact its members and their associated persons. Like it or not, the subjects of FINRA exams are deemed innocent unless and until either they agree they’re not, in the form of a settlement, or a hearing panel concludes that FINRA has met its burden of proving they’ve violated some rule. By forcing member firms to spend thousands and thousands of dollars to hire counsel simply to defend OTRs, which are conducted during the examination phase, FINRA is, in essence, exacting a financial penalty from prospective respondents before the formal disciplinary process even commences, assuming it will ever commence. That is simply not consistent with one of the “General Principles” behind the FINRA Enforcement process, which, according to the Sanction Guidelines, is supposed to be remedial, not punitive.

[1] Under Rule 8210, FINRA has the right to compel a witness to appear anywhere, at any time, for an OTR. While the FINRA office located closest to the witness is often the venue selected, and sometimes FINRA will actually travel to where the witness happens to live, or conduct the OTR by video, that is hardly always the case. For example, for exams being conducted by FINRA Enforcement or Market Regulation out of Rockville, the OTRs will be set in that bucolic location, regardless of where the witness resides or works. Similarly, most of the time, FINRA will work with me to schedule the OTR on a date that works well for all concerned. On occasion, however, I have had to fight hard to move the OTR to a date that would not cause my client extreme inconvenience.

[2] FINRA explained this by saying the OTR was to intended cover both the exam of the BD, as well as a related branch office exam, and different examiners were involved in each. Regardless, it was just my client and me on one side of the table, and the seven FINRA people – a combination of examiners and lawyers – on the other.