As readers of this Blog know, Rule 8210 is a favorite subject of mine to complain about, particularly the frightening vigor with which FINRA constantly tests the limits of the rule. What follows are some very helpful FAQs about Rule 8210 from Michael Gross. – Alan
The Scope of the Rule
Can FINRA really ask for that?
Probably. Under FINRA Rule 8210, FINRA can require firms and individuals subject to its jurisdiction to produce documents “with respect to any matter involved in [an] investigation, complaint, examination, or proceeding that is in such member’s or person’s possession, custody or control.” Because of the exceedingly broad scope of FINRA Rule 2010 (which requires firms and individuals, “in the conduct of [their] business, [to] observe high standards of commercial honor and just and equitable principles of trade”), the subject matter of an investigation can encompass nearly anything. Consequently, the scope of Rule 2010 is not limited to securities-related misconduct; it also encompasses unethical business-related misconduct. FINRA has successfully prosecuted actions for stealing funds from a political club, improperly obtaining a donation for private school tuition from an employer, and falsely inducing an employer to pay country club fees.
What if I think a request is irrelevant, overly broad, or unduly burdensome?
You should explain your rationale, in writing, to FINRA. If FINRA does not agree to withdraw or limit the request, you have two choices. First, you can provide the requested documents and information. The case law on this issue is clear: only FINRA determines what documents and information are relevant to its investigation. If you elect not to do that, your only alternative, as discussed below, is defend yourself in an Enforcement action. If you lose, however, the consequence is not simply that you have to produce the document or information; the consequence is that you will get barred.
What should I do if I cannot comply with burdensome requests for documents or information in the limited time provided?
You should make a written request for additional time to respond to the requests. In most cases, FINRA will grant a two-week extension of time. Requests for additional time also may be granted. You should obtain written confirmation of any extension. In the Segall case, FINRA’s Office of Hearing Officer’s recently held that “it is ‘essential’ for FINRA and its examiners to be flexible, to make allowances for human error and unintentional failures to meet all deadlines.”
What if I cannot afford, and/or do not want, to travel to a FINRA office that is farther from my home than a FINRA office closer to my home in order to provide on-the-record testimony?
Rule 8210 requires you “to testify at a location specified by FINRA staff.” That being said, you should ask FINRA, in writing, to pay your travel costs or allow you to provide testimony at the FINRA office closest to your home. If those invitations are declined, you should not hesitate to elevate your request to more senior FINRA management. Sometimes, lower level FINRA staff take a hard line, only to have their boss display greater flexibility.
What if I do not have the requested documents but can get them?
You need to get the documents and produce them, if they “are in the possession of another person or entity, such as a professional service provider, but the FINRA member, associated person or person subject to FINRA’s jurisdiction controls or has a right to demand them.” Supplementary Material to Rule 8210. This means that if your bank, accountant, or lawyer has the documents, i.e., someone who must take your direction, then you need to get the documents from them for FINRA.
What if it will cost me a small fortune to get and/or copy the requested documents?
You should ask FINRA, in writing, to pay your costs of obtaining and/or copying the documents. If FINRA declines the invitation, you are no worse off; unfortunately, you still must produce the documents.
What if I do not have the requested documents and cannot get them?
You need to tell FINRA that in writing. The SEC has determined that you also have “a responsibility to provide a detailed explanation of [your] efforts to obtain the information requested and the problems [you] encountered.”
Are there any limits to the scope of Rule 8210?
Very few. FINRA, of course, is not entitled to privileged communications, such as those subject to the attorney-client, physician-patient, or spousal privileges (unless you waive the privilege). In addition, the SEC opined that “[FINRA’s] authority under the Rule might not extend to documents that may belong to a third party, or that may contain a third party’s confidential information not closely related to securities trading with a member or associated person, even if those documents were in the possession and control of a member or associated person.” The Supplementary Material to Rule 8210 likewise acknowledges that “[Rule 8210] does not ordinarily include books and records that are in the possession, custody or control of a member or associated person, but whose bona fide ownership is held by an independent third party and the records are unrelated to the business of the member.”
The Sole Avenue for Appeal
What if I think FINRA is not entitled to the requested documents or information?
Unfortunately, you need to provide the requested documents or information in order to avoid a likely bar. In the Berger case, Mr. Berger argued that “he should have the ability to challenge NASD’s jurisdiction without first appearing at an OTR, and that he should be entitled to do this without the risk that NASD will find that he refused to provide the information and bar him from association.” In a decision ultimately affirmed by a federal court, the SEC held that “subjecting oneself to NASD’s disciplinary process and relying on NASD’s procedures is the appropriate route to challenge NASD jurisdiction.” More succinctly stated by the SEC: “the only recourse against possible overreaching by [FINRA] is for the person to whom the request is directed to refuse to comply, and to appeal any consequent disciplinary action to the [SEC].” Somehow this process has been deemed to be “fair.”
If FINRA can bar someone for not providing requested documents or information, then who in their right mind would not comply with a request?
No one who desires to remain in the industry.
If there is no avenue to appeal whether FINRA is entitled to documents or information (other than risking a bar), then how will the limits of Rule 8210 be tested?
The limits of Rule 8210 will be tested or determined only by the few people willing to risk a bar by not providing requested documents or information. See also above answer. Given the stakes of challenging FINRA on Rule 8210, there are unanswered questions about the scope of the Rule, which firms and individuals, not surprisingly, may choose to answer by providing FINRA with what it wants. These unresolved questions include:
- Can FINRA require me to sign a release, such as IRS Form 4506, so that it can obtain documents or information directly from a third party?
- Can FINRA require me to create a document for it using information that I have?
- What if providing requested documents or information would cause me to violate a duty of confidentiality owed to persons to whom the documents or information relate?
- What if producing requested documents or information would cause me to violate the law of another country?
The Consequences of Non-Compliance
What likely will happen to me if I do not timely provide all of the requested documents or information?
FINRA regularly brings disciplinary actions for not timely providing requested documents or information. The typical sanction is an all capacities suspension, often for a considerable period of time.
What likely will happen to me if I do not provide any of the requested documents or information?
Under FINRA’s Sanction Guidelines, a bar is the “standard” sanction.
What likely will happen to me if I provide most, but not all, of the requested documents or information?
FINRA regularly pursues disciplinary actions for providing partial but incomplete responses. Under the Sanction Guidelines, “a bar is standard unless the person can demonstrate that the information provided substantially complied with all aspects of the request.”
What likely will happen to me if I do not provide any of the requested documents or information and I am out of the securities industry and have no desire to return?
FINRA will not go away. If you are subject to FINRA’s retained jurisdiction (which typically extends for a period of two years after you have left the industry), FINRA likely will bring a disciplinary action against you and have you barred.