Here is a very interesting post from Michael Gross about what happens at the end of a FINRA exam.  One point that he omitted, but worth mentioning, is that in the event FINRA does issue a close-out letter stating that its exam is done and no disciplinary action will be taken, that letter cannot be used by the respondent in a parallel customer arbitration touching upon the same subject as the FINRA exam as evidence that no wrongdoing has taken place.  At least, not without potentially becoming the subject of a new disciplinary action.  See my blog post on this from a couple of years ago. – Alan 

Has FINRA completed its inquiry?[1] I have fielded this question from multiple registered reps. It is a fair question to ask. It is quite understandable that a rep who is the subject (but feels like the target) of an inquiry wants to know if he can sleep easier at night. Knowing that the results of an inquiry, over which a rep has no control, may adversely impact his professional reputation, current employment situation, and livelihood is undeniably a stressful event – even for the rep who has done nothing wrong. Not surprisingly, reps want to know when the inquiry is over.

Sometimes, but not always, FINRA issues a close-out letter to advise a rep that it has completed its inquiry, and that it will not be pursuing formal disciplinary action. As far as I can tell, there is no rhyme or reason why the letters are issued in some inquiries, but not in others. A recent close-out letter that I received on behalf of a rep advises that: “Based on our inquiry, we have determined to close our file pertaining to this matter.” Not surprisingly, the letter contains reservation of rights language: “This determination is based on the facts known to us at this time. In this regard, new or additional facts could lead to a new inquiry.” FINRA, of course, is not going to (nor should it) absolve a rep of liability if FINRA later learns of new facts that prove that the rep engaged in wrongdoing. Nonetheless, a close-out letter is a welcome and comforting communication for a rep who is the subject of an inquiry to receive.

Unfortunately, FINRA does not issue close-out letters in all inquiries that it is has decided to close, officially or unofficially. While an inquiry may be officially, or unofficially and effectively, closed in the eyes of FINRA, the inquiry is not closed in the eyes of the unknowing rep. Unlike in civil cases and certain SEC actions, there is no statute of limitations to which a rep can look to find peace of mind. Concrete statutes of limitations do not apply to FINRA regulatory inquiries and disciplinary actions, which can linger for years. Under the Hayden line of cases, FINRA disciplinary actions can be dismissed if after a certain, undefined period of time, it is unfair to require a rep to attempt to piece together a defense to old claims. However, the number of cases dismissed on Hayden grounds can be counted on one hand. One of the principal purposes of statutes of limitations is that litigation of a long-dormant matter may result in more cruelty than justice. A close-out letter serves a similar purpose.

A rep who has not heard from FINRA about an inquiry in three, six, or even 12 months may be tempted to ask FINRA whether or not it has concluded its inquiry. Unless the inquiry is impacting a rep’s health, he should not give into temptation. First, it is not unusual for an inquiry to sit dormant for months at a time, and then pick up again. Second, don’t poke the bear. A call asking about the status of an inquiry may just serve as a reminder to pick up the dusty file. The longer an inquiry lasts, the more likely it is to be closed for one reason or another.

In sum, it should be standard operating procedure for FINRA to issue close-out letters to reps and firms in all inquiries where FINRA has decided to close its inquiry, and not pursue formal action, especially in light of the reservation of rights language in its standard close-out letter. Simply put, this common courtesy should be extended to all of those who work under the umbrella of the membership organization.

[1] FINRA starts its examination process by conducting an “inquiry,” which is not a reportable event on a rep’s Form U4. If Enforcement issues a Wells notice in connection with an “inquiry,” then the “inquiry” becomes an “investigation,” which is a reportable event on Form U4.