I have written before about some of FINRA’s procedural processes that seem strange and unfair. For instance, the constitutionally guaranteed Fifth Amendment right against self-incrimination? Doesn’t exist in FINRA world. Try invoking the Fifth at a FINRA OTR rather than answering a question and you will be facing a permanent bar for violating Rule 8210. Tell an arbitration panel that FINRA not only examined you for the very same conduct that the claimant is alleging to have been violative but concluded that you did nothing wrong? Forget it, as that is deemed to be a violation of Rule 2010, even though claimant is free to delve into each and every disclosure on your Form U-4, no matter how old or unrelated to the case at hand.
As incredible as these samples sound, I recently encountered a situation on behalf of one of my clients – admittedly, a very unusual situation, perhaps the first of its kind – that is even worse. It involves the same fairness principle behind the criminal concept of “double jeopardy,” i.e., the protection against being prosecuted twice for the same crime. Apparently, FINRA has concluded that this doesn’t apply to its proceedings, either.
It started with a settlement with a State Securities Commissioner that included as one of the sanctions a one-year suspension as a principal. Even though my client was still free to serve as a registered representative, because the suspension rendered her statutorily disqualified, she still had to file an MC-400 in order to continue to work for her broker-dealer. If you have ever been involved in an MC-400 proceeding, you know that they move rather glacially. Thus, by the time Member Reg got around to dealing with the application, the suspension had already expired. In any event, Member Reg (which has the authority to approve MC-400s but not deny them) recommended denial, based on supposed “intervening acts of misconduct” by my client. What acts? They claimed she had violated the terms of the suspension by acting as a principal in a number of different ways. In addition, Member Reg advised us that they were also making a disciplinary referral to Enforcement as a result of the claimed violations.
We requested our hearing before the NAC subcommittee, and, as you would imagine, FINRA presented evidence in its effort to prove that my client had improperly acted as a principal while suspended, and thus did not deserve to be able to work in the securities industry, period, in any capacity. We put on contrary evidence and we made our arguments and left it in the hands of the NAC.
Well, the NAC doesn’t act that quickly, either. Thus, while we awaited our decision on the MC-400, Enforcement went ahead and filed a formal complaint against my client, alleging the exact same thing that Member Reg had argued in its effort to have the MC-400 denied, i.e., that she had violated the terms of her one-year principal suspension. Cleverly (at least I thought it was clever), rather than answer immediately, I asked for an extension of time, hoping that by the time the Answer was actually due, the NAC would have released its decision on the MC-400. I figured (optimistically) that the NAC would approve the MC-400, and that Enforcement would then simply drop the complaint (since the NAC’s decision would necessarily have to be based on the conclusion that my client did not improperly act as a principal while suspended).
Turns out I was only half right. The NAC did approve the MC-400. And it did conclude that my client did not improperly act as a principal while suspended in that capacity. So, I got that part correct. Unfortunately, perhaps even bizarrely, although Member Reg lost, Enforcement is steadfast in its resolve to push its case forward. Even though the NAC has already published its findings of fact in my client’s favor on the very issues that Enforcement has alleged in its Complaint. (And even though the NAC also serves as the appellate body for Enforcement cases.) This, I cannot understand.
Enforcement has vast prosecutorial discretion. And FINRA has lots of administrative remedies available to it. Why not just drop this case, given the NAC’s ruling on the MC-400? If FINRA wants its pound of flesh, I suggested that they withdraw the complaint and, instead, issue a Cautionary Action Letter. But, Enforcement will have nothing to do with that. As a result, I am forced to continue to defend allegations that have already been decided in my client’s favor by FINRA. This cannot happen in the real world. Whether you call it double jeopardy, res judicata, collateral estoppel, it doesn’t matter. The complaint would have been dismissed, since the MC-400 findings would serve to bar the second attempt to litigate what has already been determined with finality.
I recognize that I am not in court, and that FINRA is a private, quasi-governmental entity that gets to make up its own rules (apparently, sometimes, as it goes). Nevertheless, it would seem that when FINRA has discretion to exercise, as it does here, it should do so in a way that displays at least some respect for fairness and due process. Here, FINRA has elected to sacrifice those principles at the altar of aggressive Enforcement. This is not how the system was designed. Something is clearly broken.
 No MC-400 decision by FINRA is final until “acknowledged” by the SEC (which has the right to disagree with FINRA’s decision). Here, the SEC has already done that, so the NAC decision is truly final.