With any luck, you can go your entire career in the securities industry without ever participating in the dreaded “Wells process.” And that’s a good thing, as the Wells process occurs only after FINRA has completed an examination and has concluded that whatever it has encountered is so serious that a formal disciplinary action is appropriate to address the perceived wrongdoing.  So, if you have never received a Wells letter, it means that you have managed to stay off of FINRA’s vast radar screen.

FINRA was kind enough to outline the Wells process in Regulatory Notice 09-17, so I need not re-create that wheel:

If a preliminary determination to proceed with a recommendation of formal discipline is made, the staff will call the potential respondent or counsel and inform the individual or firm that FINRA intends to recommend formal disciplinary action.  This is generally referred to as a Wells Call.  During the Wells Call the staff informs the potential respondent of the proposed charges and the primary evidence supporting the charges.  The purpose of a Wells Call is to give the potential respondent an opportunity to submit a writing, called a Wells Submission, which discusses the facts and applicable law and explains why formal charges are not appropriate.

Making a Wells Submission is never obligatory; it is always up to the prospective respondent to decide whether or not a Wells Submission would be helpful. There are several reasons, however, why you may not want to make a Wells Submission:

  •  It likely will have no impact on FINRA’s decision to proceed with formal disciplinary action. While most lawyers who, like me, defend BDs, can tell you a war story or two about how some Wells Submission they made somehow convinced FINRA to drop the notion of filing a complaint, or resulted in charges much less serious than those FINRA initially proposed, in the vast majority of cases, it hardly matters what you say in your Wells Submission, as FINRA’s view of the merits of the case is already galvanized.
  • Wells Submissions can be expensive to prepare. FINRA permits a Wells Submission to run as long as 35 pages. Not everyone uses all those words, of course, but even a 10- or 15-page Wells Submission can easily exceed $10,000 in attorneys’ fees. (Of course, you don’t have to use an attorney to prepare a Wells Submission, but, frankly, since the next step after the Wells process is the filing of the disciplinary complaint, it makes sense to do so.) When you couple this fact with the first bullet point, i.e., the slim chance of success, you can see why not everyone chooses to make a Wells Submission.
  • Wells Submissions are not privileged. Because they are not privileged, whatever you say in a Wells Submission is subject to further examination by FINRA. So, say, for instance, that you make some assertion in your Wells Submission that is based on some fact of which FINRA was somehow unaware, you can bet that not only will FINRA respond with a follow-up 8210 request, but, if the complaint issues and the matter goes to hearing, you will be thoroughly cross-examined about the assertion.

Because of these issues surrounding Wells Submissions, many, perhaps most, recipients of Wells letters don’t bother with them. In fact, what generally happens is that when a Wells letter is received, rather than automatically begin to prepare a response, I will, instead, ask FINRA for a settlement proposal (except, of course, in those matters where my client absolutely, positively refuses to settle under any circumstances, and is ready and willing to go to hearing). If the initial settlement proposed is reasonable, I can, typically, through the give-and-take of negotiations, get that proposal down even further, hopefully to the point where my client is willing to accept it.

This is absolutely a standard process. FINRA expressly acknowledged as much in 09-17: “In many cases, after reviewing the charges that the staff is considering, the potential respondent initiates settlement discussions instead of making a Wells Submission.”

But, here is where it gets weird. In two cases this past week, two different clients who received a Wells letter and asked FINRA for a settlement guideline, so they could decide whether or not to make a Wells Submission, were told that no settlement proposal would be provided until after they made their respective Wells Submissions. Oddly, in one of those situations, the FINRA Enforcement attorneys even argued with me when I told them their stance was hardly usual.

I cannot say that two cases constitutes a trend, but I am very troubled that FINRA, for whatever reason, is making the decision to condition a settlement proposal on the receipt of a Wells Submission. If FINRA feels strongly enough about its case to send the Wells letter – which triggers a U-4 disclosure for the recipient – then it should already be willing and able to engage in a dialogue about potential settlement. I concede, readily, that sometimes that dialogue is unsuccessful in achieving a settlement, and sometimes it barely gets started (as in those cases where FINRA demands a settlement term too onerous to be given serious consideration). But, for FINRA simply to decree that the dialogue will not take place at all unless and until a Wells Submission is made skews the process entirely, and takes away from a prospective respondent the option of making a Wells Submission or not.

Clearly, FINRA needs to go back and re-read its own Regulatory Notices, to remind itself of its own policies.