This year I'm going to expand on an older series of posts about the basics of a FINRA examination in new posts that will cover the types of activities that occur in the course of an examination, and then move into the disciplinary process, addressing both informal and disciplinary action taken by the regulator against individuals and firms. Today's post covers some of the basic elements of a FINRA exam.
In routine exams, firms will typically receive a document request either prior to, or at the time of, the examiners arrival at the firm. The firm is then obligated, under Rule 8210, to provide the requested documents or information to the examiners.
The examiners will review this information as they seek to determine whether the firm is operating in compliance with industry rules. As they develop questions, they may informally ask those to representatives of the firm, or they may request that the firm provide its answers in writing.
In cause exams, the examiners typically begin the exam process by sending a letter to the firm and representative (if applicable), seeking a general response to information contained in a customer complaint, disclosed on a Form U5, or otherwise brought to the attention of FINRA. From there, once the examiners get a
basic understanding of the possible issues involved, a more detailed request for information and the production of relevant documents is likely forthcoming.
If examiners believe that there may be violations that may warrant disciplinary action against a firm or representative (or both), additional investigative steps are often taken. The examiners may contact customers and interview them, and may seek to obtain written statements, including declarations or affidavits from them. The examiners may also conduct telephone or in-person interviews with the representatives and supervisors involved. They may also seek written statements in response to specific questions from the firm (such as the compliance department) as well as from any involved supervisors or representatives.
Oftentimes before an examination is concluded, the examiners may request to take an "on-the-record" interview of an associated or registered person. These OTRS (on-the-record interviews) are very similar to a deposition: they are done under oath and taken down by a court reporter. The purpose of an OTR it to lock-down the story of the person being interviewed. It is a good bet that, if an OTR is taken, the FINRA staff believe that they have uncovered rule violations for which they believe that formal disciplinary action is appropriate. As such, many persons being interviewed OTR are represented by counsel. I believe that's a wise move.
Taking OTRs are typically one of the last steps taken by the examiner staff before they complete the exam. In future posts, we'll look at the types of enforcement actions taken by FINRA, and then provide an overview of the disciplinary process.
