Back in the old days, back when it was still NASD and it bore some reasonable semblance of a true self-regulatory organization, the important decisions relating to the Enforcement process – the decision to issue a complaint, the decision to settle a case, and the decision in litigated matters that actually went to hearing – all resided with the District Business Conduct Committee, or DBCC (n/k/a the District Committee) and, for, trading cases, the Market Surveillance Committee (n/k/a the Market Regulation Committee). The DBCC and MSC were comprised exclusively of industry members who were voted into their roles by their peers.  That’s where the “self” in self-regulation came from, since it was actually brokers making decisions about other brokers.

That changed, of course, in 1996, when NASD got sanctioned by the SEC in the infamous 21(a) Report that disclosed that the relationship between NASD staff in the New York District and the members of the DBCC, as well as the relationship between the Market Surveillance staff and members of the MSC, was a bit too cozy, resulting in those committee members sometimes using the NASD to bring Enforcement actions (relating to market making activities) against their business competitors.  As a result of that Report, NASD dramatically altered it processes, carving out the DBCC and MSC from any decisions relating to filing or settling complaints, and vesting those decisions with NASD Enforcement staff.  Thus, many argue, began the elimination of “self” from self-regulation.

To prevent Enforcement from running amok, NASD also created the Office of Disciplinary Affairs, or ODA. ODA is a completely separate group, not associated with Enforcement, designed as a check to ensure that Enforcement’s decisions were reasonable.  Specifically, before Enforcement could file a complaint, it first had to apply for and obtain approval from ODA.  Additionally, ODA needed to approve all settlements, even though the actual settlement negotiations were conducted with Enforcement staff.  Clearly, in light of these critical activities, ODA was established to play a very, very powerful role in the Enforcement process.  And today, nothing has changed.

But, here’s the thing, and the point of this post: Who, exactly, is ODA?  Who is actually making its decisions?  On what basis does it makes its decisions?  And why is it that only Enforcement gets to communicate with ODA?

Look at the FINRA website, and I challenge you to figure out what exactly the ODA is, what it does, of whom it is comprised, how it functions, etc. I mean, you can easily see the old Notice to Members from 1999 that announced the formation of the ODA, and you can see the rules – 9211, 9216, and 9270 – that state that the ODA must authorize complaints and approve settlements.  There is also Reg Notice 09-17, which did not create anything new, but merely reiterates the current Enforcement process.  It provides the following completely unhelpful, unenlightening explanation about ODA:

FINRA’s Office of Disciplinary Affairs (ODA) is independent of Enforcement and is not involved in the investigation or litigation of cases. ODA is charged with reviewing each proposed settlement or complaint, including any Wells Submissions, to provide an independent review of the legal and evidentiary sufficiency of the charges proposed by the staff. ODA also reviews settlements for consistency with the Sanction Guidelines as well as applicable precedent. ODA approval is required before the issuance of a settlement or complaint.

Let’s take this incrementally. Let’s say Enforcement wants to file a complaint, and, in anticipation of that, it invites my client to submit a Wells letter.  I prepare the response and send it to Enforcement which, apparently, then sends it to ODA.  But, what else does Enforcement do?  Does it also submit a rebuttal to the Wells?  Does it get to converse with ODA?  Does it get to answer questions that ODA may have?  The answer to these is yes, of course.  All of those communications between Enforcement and ODA happen, yet I never get to see them, or respond, or comment, or participate.  ODA is “independent of Enforcement,” purportedly, yet it is entirely dependent on Enforcement for the information it needs to do its assigned job.  Why can’t a prospective respondent communicate directly with ODA?  Why does everything I submit have to get filtered by Enforcement first?  Why can’t I even know the name of the individual(s) who is (are) serving as the final arbiter of whether a complaint is mandated?  Indeed, I have no idea if ODA is one person, or a group (as it used to be), or if it is a group, who runs the place.  And if it is, truly, independent of Enforcement, to whom does ODA report?

Same thing with settlements. While it certainly helps to have the Enforcement lawyer agree that my offer is reasonable (because the Enforcement lawyer, in turn, will then try to sell it to ODA), ultimately it is only ODA’s opinion that matters.  The Enforcement lawyer is largely relegated to the role of ferrying offers and demands back and forth between ODA and me.  It would be way easier, and more sensible, if I could just talk directly to ODA, rather than having Enforcement serve as the conduit.

The point is, ODA is incredibly powerful in the FINRA Enforcement process, arguably more powerful than the Department of Enforcement itself, given that Enforcement can’t issue a complaint or settle a case unless ODA says so. Yet, ODA is nameless, faceless, accountable to no one, working entirely behind the scenes, away from public scrutiny, unavailable for a dialogue, able to issue decrees that both Enforcement and respondents must follow.  This sounds like the antithesis of what due process should be, but it is the norm for FINRA.  Members should demand that, as the SEC did when it issued the 21(a) Report against NASD, more sunshine be provided to remove the mysterious procedures that now shroud Enforcement actions.  Make ODA show itself, let respondents be able to communicate directly with ODA, require it to be accountable for its decisions.