I apologize for not posting anything recently, but, sadly, I was embroiled in a two-week arbitration that occupied most of my recent attention.  I am home, however, and back in the saddle.  In the meantime, here’s a post from Blaine Doyle, author of the classiest post ever in this blog, something about ancient Greece.  I think.  Or maybe it was King Arthur.  Something memorable.  Anyway, here is Blaine passing along comments from some FINRA lawyers about how nice they’ve become and how they won’t be filing Enforcement actions willy nilly.  Another piece of classic fiction, perhaps?  –  Alan

I recently sat in on a panel of senior attorneys from FINRA Enforcement and while they did not actually discuss wardrobe selection, they did give some insight into the OTR process and Enforcement cases in general.  Here is a taste of what they had to say.

With limited staff and resources, the attorneys emphasized that the number of Enforcement cases being brought is actually down over the last few years.  Part of that is a function of a strong economy, but they also bluntly said that certain issues that in the past would have prompted an Enforcement action are now being let go by FINRA.  An example would be a firm that is dually registered as an RIA and broker-dealer.  If the issue is with the supervision of the I/A accounts and not the brokerage accounts, FINRA is less likely to bring a case now than it was just a few years back.  This is partly based on jurisdictional issues (FINRA does not have it on IAs; either the SEC does or the state) and partly based on allocation of resources.   Another example where FINRA is, today, less likely to institute an action would be failure to review broker emails where the action was corrected and no customers were harmed.

So what kind of actions will lead to an Enforcement case?   Basically, the opposite of what it is (supposedly) willing to let go, i.e., cases that feature 1) customer harm 2) ongoing violations and 3) recidivism.   Odds are if you have any of these issues, you are getting an Enforcement action from FINRA filed against you.  In an interesting note, one of the attorneys who used to be a partner at a big firm opined that there is too much review prior to the initiation of an Enforcement action.  In other words, the person/firm is brought up for votes before all kinds of committees and groups and the process can be a bit of a bureaucratic nightmare even in instances where it is readily apparent that violations were committed.

This is all putting the cart before the horse however, as an OTR will occur prior to the initiation of an Enforcement case.  Before filing an Enforcement case, FINRA will try to conduct complete discovery, so it can gather facts.  Part of this is requesting documents through 8210 requests and part of this is interviewing people “On The Record” during an OTR.  The FINRA staff didn’t say anything earth shattering about OTRs and lots of some of their comments, like “tell the truth,” seemed obvious enough that a third grader would know it.  But these comments had a little bit more nuance once they explained what they meant.  In this instance, what they meant was that you are not doing anyone any favors if you keep a defense hidden or don’t disclose it during your OTR.  They said this actually happens quite frequently and that in certain instances, they have decided to bring an Enforcement action only to have a cogent explanation/defense brought to their attention subsequent to the filing of the Enforcement action.  It was pretty clear that this really annoys FINRA, and since agitating FINRA is usually bad for business, it is best to put your cards on the table early on and to try to avoid the Enforcement action altogether.

This leads to another point, which I swear they actually said, namely, that a person facing an OTR needs to hire a lawyer.  A firm might have a great CCO and great staff but those individuals might not know what the FINRA attorneys are looking for or how to ease their concerns.  They emphasized that communication is greatly improved when there are attorneys involved as they tend to look at things with a more clinical view.  Some lawyers, including our own Alan Wolper and Michael Gross, used to be NASD/FINRA attorneys and they have even further insight as they used to sit on the other side of the table and speak fluent regulator.  The bottom line is that nobody likes to pay for lawyers but the FINRA attorneys made clear that the expense can help resolve issues early on and probably save money in the long term.

On the flip side, FINRA does not like when people plead the 5th Amendment in an attempt to avoid testimony.  As you are likely aware, because it is not part of the government, FINRA does not recognize the 5th Amendment; thus, attempts to hide behind it will likely lead to a permanent bar (for violating Rule 8210).  That said, if a person has a legitimate fear that their testimony could lead to criminal sanctions, they encouraged the interviewee’s attorney to reach out to the Staff beforehand so that they can evaluate the pleadings on a case by case basis.  In other words, don’t just show up and plead the 5th or try to hide behind it if you don’t have a legitimate criminal issue, unless you plan on getting barred.

Once a case concludes (whether it be through dismissal, settlement or administrative action), they mentioned that there will be a much larger focus on getting restitution for aggrieved investors instead of collecting fines for FINRA.  There has also been a greater emphasis on putting details of violations into consent decrees/AWCs, so that people who care to look can actually figure out what went on and why FINRA fined the firm in the first place.  Perhaps more importantly to industry folk, it appears that FINRA is actually going to let people know when and if an investigation is closed.  For many years FINRA staff had no obligation to let an individual know if an investigation was formally closed without an Enforcement case being brought.  At times, staff would let an attorney know, informally, that they probably would not be hearing from them on the issue again, but, in other instances, it was prolonged and deafening silence.  This albatross was tough on the business of the brokerage houses, not to mention the collective blood pressures of those running the firms.  According to the FINRA attorneys, the new policy is to let firms and individuals know if their investigation has concluded, especially in those instances where the CRD/ Form U-4 of the target was marked as a result of the investigation (like occurs after a Wells Notice).  This is a welcome change and should help clear the names of innocent firms/brokers.

That about sums it up, but since we did promise you fashion advice for an OTR, here goes: dress down but in a respectful manner. For instance, if you have a $5,000 suit and a $200 suit, go with the cheaper one.  Regulators don’t love flashy investment professionals but do like people that show respect for the investigatory process.