FINRA Investigations Under Rule 8210
By Shustak Reynolds & Partners, PC, California
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It is every registered person’s nightmare. You receive a letter from a FINRA office notifying you that you are the subject of a FINRA investigation.
The letter may, or may not come from the FINRA office in your district. In fact, most of them are sent from examiners in FINRA’s Washington or Maryland offices. Typically the letter identifies a large number of documents, and questions, that the FINRA examiner wants and gives you no more than a few days to respond. And, of yes, the letter typically advises you that your presence is required, also on very short notice, for an on-the-record interview at a FINRA office on the other side of the country. You panic, your heart rate doubles, sweat forms on your brow. What do you do?
First and foremost, you need to at least consult with counsel experienced with FINRA generally and FINRA investigations specifically. Your license is your and your family’s meal ticket. This is not a time to turn to your brother-in-law or your hairdresser’s best friend’s cousin once removed, neither of whom have ever dealt with FINRA let alone know what the acronym stands for. You need counsel right away who knows the ins and outs of FINRA investigations. You may only need a short consultation to understand your rights and obligations. Or you may need more substantial legal help. Either way, dealing with FINRA, which can pull your securities license or, worse, bar you from the securities industry for life, is not a time to rely on amateurs.
FINRA Rule 8210-
The first point to be made in connection with FINRA investigations, is that FINRA has a great deal of power when it decides to investigate brokers, firms, records or conduct. FINRA’s power derives from FINRA Rule 8210. That rule states, in relevant part, that FINRA staff, in connection with an investigation, complaint, examination or other proceeding, may:
(1) require a member, person associated with a member, or any other person subject to FINRA's jurisdiction to provide information orally, in writing, or electronically (if the requested information is, or is required to be, maintained in electronic form) and to testify at a location specified by FINRA staff, under oath or affirmation administered by a court reporter or a notary public if requested, with respect to any matter involved in the investigation, complaint, examination, or proceeding; and
(2) inspect and copy the books, records, and accounts of such member or person with respect to any matter involved in the investigation, complaint, examination, or proceeding that is in such member's or person's possession, custody or control.
Those are very broad rights. You can be compelled to appear for an on-the-record interview (sometimes known as a deposition) with a court reporter taking down everything you say. That examination can be anywhere in the country FINRA wants it to be, and getting to and from the examination, and the cost of travel and lodging, is at your expense. FINRA does not pay for those costs. FINRA also can inspect and copy any records it decides it want to inspect and copy. There is virtually no privilege and no grounds for objecting. This writer has been through many FINRA on-the-record interviews. For the most part, counsel is not allowed to ask questions; make objections or even obtain a copy of the transcript. FINRA has the ultimate discretion of whether it wants to allow, or deny, you or your counsel even a copy of the transcript. While we normally cooperate with FINRA and often have these interviews either at a local FINRA office, or via teleconference or videoconference, if you annoy the FINRA staff or you use counsel who rubs them the wrong way, they can insist you get on a plane and fly to wherever the investigative staff is located, all at your expense.
And the reason FINRA has such ultimate power is found in FINRA Rules 8210-C . Rule 8210-C simply states “No member or person shall fail to provide information or testimony or to permit an inspection and copying of books, records, or accounts pursuant to this Rule”. That’s it. Period. You are told you cannot refuse to provide information or testimony and you must permit FINRA to inspect and copy books, records or other documents. And to ensure that FINRA has the “strong-arm” power to compel testimony and obtain whatever documents it needs or requires, FINRA has the power to make non-compliance with a demand for testimony or documents an independent basis for suspending your from the securities business or barring you from the industry for life.
Unlike in court, where a party can “take it to the judge” if a subpoena is overbroad or unwarranted, in Finra-land, the only option is to refuse to produce, be sanctioned for violating Rule 8210 and then appeal to the Securities and Exchange Commission. The changes to Rule 8210 came about following the 2006 landmark enforcement case against Jay Alan Ochanpaugh, in which Finra's predecessor, NASD, barred a rep for violating the rule because he failed to produce checks written by a church that he founded. NASD argued that he had “possession and control” of the checks because he was the church's president and a signatory of the church's bank account. NASD then argued that the checks were his “book, records and accounts,” subject to its Rule 8210. Mr. Ochanpaugh said he wasn't required to produce the checks, because they belonged to a third party — the church — which wasn't a broker-dealer. The SEC overturned the bar, finding that Rule 8210 had limits. For example, the rule might not apply to third-party documents or documents containing confidential third-party information unrelated to securities transactions, even if the documents were in the possession or control of a broker-dealer or rep. The SEC saw the Ochanpaugh case as an opportunity to order NASD to make a “fuller exploration of the appropriate scope of Rule 8210.”
This led NASD, now FINRA, to issue several amendments which only further strengthened its power. FINRA now can demand documents in the “possession, custody or control” of a firm or a rep, including documents owned by third parties. Finra now can demand documents in the “possession, custody or control” of a firm or a rep, including documents owned by third parties.
When you find yourself on the receiving end of a FINRA investigation letter requesting an interview and documents, we strongly urge you to contact counsel who deals with FINRA on a regular basis. The consequences are too serious otherwise.
Shustak Reynolds & Partners, P.C. focuses its practice on the securities industry and matters affecting broker-dealers, registered representatives and the financial services sector. For more information, contact Erwin J. Shustak, managing partner, or call 800.496.5900 for a free consultation.
AUTHOR: Erwin J. Shustak
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.