I often represent individual brokers and firms that are involved in an investigation by FINRA, the Financial Industry Regulatory Authority. Many times, I find that brokers don't understand the role that FINRA plays, what their own responsibilities and obligations are, and what can come about as a result of a FINRA examination. With a series of posts on dealing with a FINRA investigation, I hope to be able to provide some basic information for brokers and firms so that they can better understand the process, and the possible outcomes. In today's post, I'll focus on the role of FINRA, and, in later posts, will discuss responding to regulatory requests pursuant to Rule 8210, including what can happen when a broker does not respond.
First of all, folks need to recognize that FINRA is not a part of the government, either federal or state, and FINRA examiners won't throw you in jail from some type of violation of industry rules and regulations. FINRA is a "self-regulatory organization" to which all broker-dealers doing business with the public belong. Pursuant to their membership in the organization, brokerage firms, and brokers, agree to abide by industry rules and regulations, including FINRA rules, and agree to be subjected to FINRA's jurisdiction in disciplinary actions. These disciplinary actions are all civil in nature (as opposed to criminal). Note that there are federal and state law enforcement agencies that investigate securities violations and, if appropriate, criminally prosecute violators. As I'll discuss in a later post, this distinction is important, because, under the current state of the law, you don't have certain rights with FINRA that may exist with the SEC or a state regulator (think of the 5th amendment right against self-incrimination).
FINRA conducts routine exams of broker-dealers to check for compliance with industry rules and regulations. In addition to these routine exams, FINRA also conducts examination "for cause" based on information that it receives that indicates that there might be a rule violation. For example, an examination may be started based on a Form U-4 or U-5 disclosure, a Rule 3070 report, a customer complaint, an arbitration claim, a referral from an arbitration panel, or information received from another regulator. Information that FINRA obtains in its exams is generally not publicly available, but brokers and firms should be aware that FINRA may share certain information with other regulators. If FINRA finds evidence it believes demonstrates a securities industry rule or law violation, it may seek to take a disciplinary action against a firm or broker. Such an action may result in a broker or firm being fined, censured, suspended from the industry or having its business limited or suspended for a period of time, or being barred from working in the industry. For these reasons, proper handling of a FINRA exam is important.