I hope that you have had the chance to enjoy Jessica Hopper’s paean to Rule 8210 in her recent blog posted on FINRA’s website.  Very disturbing, and for all the old reasons.

First, once again, she starts by patting herself – well, not just herself, I guess, but Enforcement generally – on the back for having “barred more than 730 brokers and associated persons” in just the last two years!  That statistic sounded familiar, for some reason.  A little research revealed that, sure enough, FINRA had touted that very same number in another self-congratulatory blog it posted back in April (which, given pandemic-driven quarantining, admittedly feels like a lifetime ago), a post that caused me to write a piece called “FINRA Claims To Be Reasonable When It Comes To Sanctions, But It Is Clear That Permanent Bars Are What It’s All About.”    The point of my blog – that FINRA is more interested in barring people than simply doing what’s right – is borne out here, again.

Second, there is the everlasting oddity surrounding the fact that FINRA continues to refer to its 8210 letters as mere “requests,” as if the recipient of such had a choice whether to respond or not.  Jessica writes, “What is FINRA Rule 8210?  Simply put, the rule allows FINRA to request documents, information, and testimony from member firms and their associated persons in connection with an examination or investigation.”   As phrased, frankly, it doesn’t sound so bad.  But, just a couple of sentences further into her post, she concedes the ugly truth about Rule 8210, that “FINRA relies on [it] to protect investors and the market by requiring individuals under FINRA’s jurisdiction to provide information when requested.”  Truly, FINRA should start calling 8210 letters what they are: demands, even edicts, but certainly nothing as tepid as a request.

Third, I am more than a little troubled by the way that 8210 letters have morphed from a fact-finding tool, i.e., something designed to help FINRA figure out what happened, into a means of proving a suspicion of wrongdoing.  No good auditor presumes the outcome of the audit; you do the work, you ask the questions, you review the documents, and you see where you end up.  FINRA examiners, sadly, too often give the undeniable impression that they already believe you did something wrong, and it’s only a matter of time until they prove it.  That has the unfortunate consequence of coloring the entire exam, as the examiner may unknowingly (or, worse, knowingly) look for facts corroborating their preconception of the eventual outcome, i.e., a finding of wrongdoing, rather than merely following evidence trails to wherever they may lead.

Regrettably, it appears that Jessica may have fallen into this same trap.  Consider this from her blog post:  “Perhaps a bar for violating Rule 8210 – a seemingly administrative rule – may seem severe.  But in reality, the underlying wrongdoing that led to the Rule 8210 request is often quite serious; in many cases, there are suspicions of fraud, conversion of customer funds or other egregious misconduct.”  Perhaps I am parsing her language too closely, but it really, really troubles me how she phrased this, specifically, how she omitted the word “possible” before “underlying wrongdoing.”  Even if this was simply an unfortunate drafting or editing mistake, I find it rather telling that FINRA seems to base its decision to issue an 8210 letter on a conclusion that, in fact, there has been some wrongdoing.  That is wrong.  Even in the quasi-governmental world that FINRA occupies, where due process and Fifth Amendment rights don’t exist, brokers and broker-dealers are still presumed to be innocent until proven otherwise.

Fourth, and most important, there is simply a problem with the way that FINRA wields its 8210 power.  And by that I mean, in its supposed zeal “to protect investors and the markets,” FINRA tosses off 8210 requests like someone riding a float in the Mardi Gras parade tosses beads, that is, indiscriminately and with a notable degree of glee and vigor.  As my partner Michael Gross – like me, another former FINRA Enforcement lawyer – accurately observed in this blog some time ago, “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.”  He noted – with some degree of horror – that there is no limit on:

  • the number of document and information requests that FINRA can issue
  • the scope of document and information requests that FINRA can issue
  • the length of time for FINRA to complete its exam
  • how far back in time FINRA can go for its “requests”[1]

I don’t harbor any real hope of ever seeing things change, but, for what it’s worth, I will renew my regular plea for some change in the FINRA rules that provides the recipient of an 8210 letter to ability to challenge it without having to risk a permanent bar for not responding.  A document subpoena issued in a court case can be challenged, and if the challenge is unsuccessful, the result is merely that the document at issue must be produced.  If such subpoenas were handled like FINRA 8210 letters, the unsuccessful challenger would be deemed to have lost the entire case.  That makes zero sense, and it makes no better sense in the context of FINRA exams.  Yet, that’s how it works under FINRA rules.  And THAT is why, as Jessica observes, a whole lot of people who receive 8210 letters decide that they won’t bother to respond to respond, and begrudgingly sign AWCs imposing permanent bars.  It doesn’t necessarily mean, as Jessica concludes, that all these people are bad, or caused any customer harm; it simply means, in many cases, that it is easier, way cheaper, and certainly faster just to tell FINRA to buzz off, rather than fight what is, in essence, an unwinnable fight.

[1] Just this week, FINRA issued an AWC involving Citadel Securities that included findings that the firm had deficient supervisory procedures going back to 2012, over eight years ago!