Last week, I published a post about the benefits of “lawyering up” when dealing with FINRA, particularly to handle the defense of an OTR.  Here, my partner Michael Gross, who, like me, is a former FINRA Enforcement attorney, offers his advice about how properly to prepare for an OTR.  While this post is helpful, it clearly underscores that the only way to prepare adequately is to engage competent counsel.  And, speaking of that, a friend sent me a comment regarding my post from last week that bears a brief discussion here:  It is not simply a matter of getting a lawyer.  In addition, it is important, especially as a registered rep who is provided counsel by his or her broker-dealer, to appreciate exactly who the lawyer is representing.  An in-house attorney for the BD, if the firm is big enough to have an in-house Legal Department, generally considers the BD to be the client, not necessarily the registered rep.  And sometimes, this distinction matters.  For instance, if a customer arbitration settles for more than $15K, that disclosure will appear on a rep’s Form U-4 forever; thus, many reps only want to settle if a deal can be pulled off for less than $15K.  But, if both the BD and the rep are named as respondents, the firm may want to settle — even if it means the firm paying the entirety of the settlement amount, even if that amount is in excess of $15K — notwithstanding the fact that the rep is dead set against that settlement (because the size of the settlement would result in a mark on Form U-4).  If, in that situation, the rep’s counsel is the BD’s counsel, as well, the rep may need to consider getting separate counsel.  Some BDs will pay for such, to avoid putting their attorney in a conflict situation, but, even if the firm isn’t so generous, the rep needs to carefully consider whether it pays to get truly independent counsel.  – Alan


A Classic Example

During a rep’s OTR, he truthfully testifies that he does not recall being aware of certain facts. (It is not uncommon for FINRA to investigate events years after they have transpired, or not to notify a rep of the subjects to be covered during the OTR.) FINRA becomes particularly perturbed by the testimony because it expected the rep to have been aware of those facts. FINRA then aggressively pursues a disciplinary action. Only after the complaint has been filed does the rep come to appreciate the magnitude of his situation. He finally conducts a thorough search for relevant records, and finds documents that show he must have known about those important facts.  Situations like this (or worse) can potentially be avoided through thorough OTR preparation.

The Presumptive Purposes of an OTR

FINRA, like attorneys who take depositions, presumably takes OTRs for a few basic reasons: to find out what it does not know, to confirm what it does know, to test its factual and legal theories, and to lock the witness’s story down.[1] As FINRA tells its deponents at the outset of an OTR, it wants to obtain information to determine what, if any, violations may have occurred.

It is important to know that FINRA likely will take your OTR testimony to be something from which you cannot easily walk away. If emboldened enough by events surrounding your inaccurate testimony, such as an email that directly contradicts your testimony, FINRA may seek to bar you for not providing truthful testimony.  If you are the target of an inquiry, you would be well advised to prepare for your OTR. Even if you are not the target of an inquiry, you likewise would be well advised to prepare for your OTR so you do not say something to make you the target of that inquiry or another one (yes, this happens).

How to Prepare for an OTR

Preparation begins with understanding the “who,” “what,” “where,” “when,” “why,” and “how” of the topics to be covered during your OTR. Simply put, you need to try to figure out what questions FINRA will ask you — FINRA certainly won’t tell you in advance — and how you will answer them (within, of course, the bounds of honesty and candor). There is no shortcut to doing this. You may need to review emails, notes, calendar entries, account documents, account activity, etc. to best answer questions. You may even want to speak with others about their recollection of events, although this can be dicey at times.

You also should have a solid understanding of the FINRA rules and securities laws at issue so that you have the same appreciation for your answers that FINRA will have. This entails reviewing the relevant rules, laws, Regulatory Notices, etc. It is quite common for FINRA to ask a deponent about his understanding of what the rules and laws require. If you do not appreciate what the rules and laws require of you, FINRA likely will not appreciate your answer.

Preparation also includes understanding the written and unwritten rules of OTRs. It is nerve-racking enough to testify with a room full of people staring at you (and FINRA typically rolls at least three deep at OTRs) and a court reporter taking down your every word; it is even more nerve-racking to do that when you do not understand the rules of engagement. You should know: what to expect; what will be expected of you; which questions are fair; which questions are unfair; how to deal with unfair questions; what, if any, objections you can make; how much or how little detail to provide in response to a question; and how to create a record that will best benefit you.

It certainly may feel good, at least momentarily, to politely or otherwise tell the FINRA staffers who are half your age that they do not know what they are doing, that you have significantly more industry experience and knowledge, or that FINRA would not have missed the Madoff and Stanford scandals if it did not waste time on matters like yours. It, however, is best to bite your tongue, kiss the ring, and remember that you are trying to convince those FINRA staffers that you are an upstanding member of the industry, not incite them to burn midnight oil to prove otherwise.

Lastly, preparation includes knowing when not to sit for an OTR. As the famous Kenny Rogers song goes: “You’ve got to know when to hold ‘em, know when to fold ‘em, know when to walk away, and know when to run.” The worst thing that FINRA can do to you may not be to bar you from the securities industry; it may be to share your sworn OTR testimony with government agencies that can do a lot more than that to you. Some OTRs have been terminated when counsel realized that FINRA was the least of the client’s problems. Other OTRs have never been taken because counsel decided it was more prudent for her client to accept a bar and show the judge meting out criminal sanctions that her client has accepted responsibility for the misconduct by, in effect, surrendering his securities licenses. Other times, it may be in your best interest to try to settle a matter without subjecting yourself to the seemingly boundless scope of questions that can be asked during an OTR. You, of course, cannot make this determination if you are not properly prepared for your OTR.


[1] As noted above, unlike civil litigation where a complaint has been filed, and everyone is generally aware of the events at issue, FINRA will take an OTR without providing a full or complete picture of the topics to be covered. This, however, is the subject for another post.