In previous posts in this series, I've discussed the role of FINRA as a private, non-government self-regulatory organization, as well as the basic types of examinations that is conducts (routine and cause). Today, as promised, I'll address the consequences of not cooperating with a FINRA examination.
As mentioned earlier, FINRA is not a part of the government. That means that it cannot subpoena you or your records, it cannot criminally prosecute a broker or firm and cannot put you in jail or impose other criminal punishment. Nevertheless, it possess significant powers and can impose significant civil penalties against brokers and firms through its disciplinary process.
Chief among FINRA's powers is its ability to regulate broker-dealer firms, and its employees, including those who are "registered representatives" as well as non-registered employees. When a firm becomes a FINRA member, it agrees to abide by the rules and regulations of the securities industry, and agrees to be subject to the jurisdiction of the regulators, including FINRA. Likewise, when a broker enters the industry, and completes a Form U-4, the broker makes those same agreements including agreeing to be subject to FINRA's jurisdiction. That jurisdiction extends, in many cases, for two years following the termination of the broker's registration from the firm. In certain cases, that period can be extended as well. The retention of jurisdiction by FINRA is contained in the NASD Bylaws.
One of the main differences between a FINRA examination and that of a government agency in the criminal context, is that of a requirement to cooperate. Under FINRA rules, firms and associated persons are obligated to cooperate with the regulators by talking to the regulators in informal and formal on-the-record interviews when requested, by providing copies of books and records, etc. This power comes from Rule 8210 (NASD Rule 8210) and a long line of cases that have interpreted and enforced this rule. When asked to provide testimony pursuant to Rule 8210, a broker and firm lose certain rights that they would have under a criminal investigation, including the 5th amendment right against self-incrimination. Before FINRA, folks are obligated to appear and answer questions truthfully, and to cooperate with the regulators by providing information and documents. The court cases interpreting this Rule point to the facts that the firms and brokers agree to cooperate, and that FINRA (NASD and NYSE Regulation) are not government agencies so this constitutional protection does not apply. Many arguments have been made to the contrary, but they have yet to carry the day before a court.
So what happens if you respond, and if you don't respond? If you respond as obligated, and cooperate with the examination, the information you provide may be used against you in a FINRA disciplinary proceeding. Moreover, it may also be shared with other regulatory agencies, such as state regulatory agencies, the SEC, and it may also be subpoenaed by others, including by claimant's lawyers in arbitration proceedings and lawsuits (that doesn't always mean they'll get the information, but they may try). Importantly, the information may also be shared with criminal investigators and prosecutors (think the FBI, district attorneys, other law enforcement agencies). On the other hand, you may elect to not cooperate in providing documents and testimony. FINRA will then likely initiate a disciplinary proceeding of some sort, seeking to bar you from working in the industry due to this rule violation. Alternatively, if you are out of the industry, and they do not have evidence to prove other rule violations, they may initiate a non-summary suspension proceeding pursuant to Rule 9552. If you don't provide the information within a specified period, your registration (or ability to be registered) becomes suspended. Then, if you have not taken action to lift the suspension within another defined period, the suspension converts to a permanent bar from the industry.
Ultimately, the decision of whether to cooperate or not cooperate in a FINRA examination must be made be each individual broker and firm, and must take into consideration a number of factors including: a firm or broker's desire to remain in the securities industry, the likelihood of criminal investigations into the same matter and likely outcome of such investigation, the exposure the firm or broker faces in other related civil matters including lawsuits and arbitration claims, among other things. When faced with a examination involving a significant matter, a firm or broker should always engage experienced legal counsel early on in the exam process to help guide them through the matter, including wrestling with significant issues of cooperation. Failure to cooperate with a regulatory exam has significant consequences and such a decision should not be made lightly.
Fantastic series of articles and very helpful in my practice. Many thanks
Posted by: Brian | July 16, 2009 at 09:10 PM