My dissatisfaction with FINRA’s Rule 8210 and, more specifically, the aggressive manner with which FINRA wields that rule, has been the subject of several prior blogs.  I happy to report that my partner, Michael Gross, has drunk the Kool-Aid, and joined me in tilting at this windmill.  – Alan

The first paragraph of a paper calling for reform at FINRA notes that:

FINRA is a regulator of central importance to the functioning of U.S. capital markets. It is neither a true self-regulatory organization nor a government agency. It is largely unaccountable to the industry or to the public. Due process, transparency, and regulatory-review protections normally associated with regulators are not present . . . .[1]

One of FINRA greatest powers – FINRA Rule 8210 – epitomizes its lack of accountability and meaningful due process protections.

The Power of Rule 8210

FINRA Rule 8210 requires members and their associated persons to provide documents, information, and testimony “with respect to any matter involved in the investigation, complaint, examination, or proceeding.” 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 anything business-related. Moreover, FINRA alone determines what is relevant to its investigations.

Rule 8210 is a tremendous power. If a registered rep does not comply with a request for documents, information, or testimony, FINRA can have the rep barred from the securities industry.[2] Once barred, an individual becomes subject to statutory disqualification, which has implications beyond the ability to function as a registered rep. Simply put, FINRA’s power through Rule 8210 extends beyond the securities industry it governs.

The Potential for Abuse

With this much power, Rule 8210 has the potential for abuse. FINRA can seek to expel those whom it deems to be undesirable by making compliance with the nature, volume, or scope of Rule 8210 requests so undesirable or burdensome that providing the requested documents or information is not a real option.

There is no limit on the number of document and information requests that FINRA can issue. It is not uncommon for FINRA to issue pages upon pages of document and information requests, and to follow up one set of overly broad and unduly burdensome set of requests with another set of the same. There likewise is no limit on the number of hours or days for which FINRA can take a rep’s testimony.[3] Multiple-day on-the-record interviews are not uncommon. Under Rule 8210, FINRA can even compel a rep, who lives within walking distance of its New York office, to travel across the country at his own expense to provide testimony in its Los Angeles office.

In addition, there generally is no limit on the scope of document and information requests that FINRA can issue.[4] For example, a rep may possess confidential medical records regarding a client to whom he sold an annuity (which is not a security). FINRA can demand those records, even if the rep did not conduct any securities business with the client. By further example, it may be a violation of state, federal, or international law or a breach of contract to provide certain confidential documents that a rep possesses by virtue of his non-securities-related business, but FINRA still can requests that those documents be produced.

Further, there is no time limitation on the length of a FINRA inquiry.[5] It is not uncommon for FINRA to investigate matters long after the fact, or to conduct inquiries that can be measured in years, not months. It likewise is not uncommon from FINRA to receive a response to a Rule 8210 request, not communicate with the rep for months or longer, and then continue to pursue the inquiry. Lengthy inquiries can be quite stressful to those under scrutiny, as well as their families.

The potential for abuse is there. And there are plenty of firms and reps that will testify that they have been harassed by FINRA through its seemingly limitless Rule 8210 power.

The Unassailability of Rule 8210

If a rep believes that FINRA is abusing its Rule 8210 powers, he has limited options –none of which provide appropriate due process.

The first option is to complain to FINRA. This can be done through complaints at the district and national levels or to its Office of the Ombudsman. This route leaves a rep at the mercy of FINRA – the very same people who issued the requests (and who feel compelled to defend the actions of their organization). This is not due process.

The second option is to not provide the requested documents and information. This is a very risky route. It requires a rep to put his license on the line to assert that FINRA has overstepped the bounds of Rule 8210. If FINRA determines that it is entitled to the requested documents and information (which presumably will be the case), then it likely will initiate a disciplinary proceeding in its forum, the Office of Hearing Officers (OHO), which can be appealed to another one of its forums, the National Adjudicatory Council (NAC). If those tribunals, and any tribunals to which subsequent appeals are lodged, determine that any of the requested materials should have been provided, the likely result is a bar from the securities industry. Needless to say, this method of “due process” discourages challenges to Rule 8210 requests, gives FINRA a tremendous amount of leverage in any attempt to negotiate a limit to the scope of Rule 8210 requests, and emboldens FINRA to push the boundaries of the Rule.

There is no body, independent or otherwise, from which a rep can seek interlocutory relief from overly broad, unduly burdensome, harassing, or otherwise abusive Rule 8210 requests, without running the risk of being barred from the securities industry. Given the power that FINRA wields through Rule 8210, there should be.

[1] A copy of the paper, entitled “Reforming FINRA,” by David R. Burton, is available here.

[2] I used the term “request” throughout this post, because that is the term that FINRA uses. As one of my colleagues has observed, “demand” is probably the more appropriate nomenclature given the consequence of non-compliance.

[3] The Federal Rules of Civil Procedure limit the number of interrogatories to 25 and the length of a deposition to one day of seven hours, without leave of the court. The Federal Rules of Civil Procedure limit the number and scope of document requests, as well as discovery in general, through relevancy, proportionality, and other requirements.

[4] FINRA usually recognizes common law and statutory privileges, such as the attorney-client privilege.

[5] The period for discovery in a civil proceeding is typically limited by court order. SEC enforcement actions seeking civil penalties are subject to a five-year statute of limitations.