Broker Investigation Defense Strategies
For brokers targeted by the Financial Industry Regulatory Authority (FINRA) or the U.S. Securities and Exchange Commission (SEC), executing a strategic defense needs to be their top priority. FINRA and SEC investigations can present substantial risks—with fines, loss of registration, and even prison time potentially being on the table depending on the circumstances involved.
But, executing a strategic defense isn’t easy. To defend themselves effectively, brokers need to have a clear understanding of the specific allegations at issue, and they need to know all pertinent facts. They also need to know what to expect during the investigation process, how to deal with FINRA’s investigators or the SEC’s agents effectively, and how to steer the investigation toward a favorable resolution.
“FINRA and SEC investigations can present substantial risks for brokers. For brokers targeted in these investigations, executing a strategic defense is key, and this starts with gaining a clear and comprehensive understanding of the situation at hand.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
With this in mind, while there are several potential broker investigation defense strategies, brokers targeted by FINRA or the SEC must work with their counsel to identify the specific strategies that are most likely to work in their individual case. This, too, is easier said than done. But, with an informed, structured, and proactive approach, targeted brokers can put themselves in the best position possible to avoid unnecessary consequences.
10 Strategic Considerations for Defending Against FINRA and SEC Broker Investigations
So, what does it take to effectively defend against a FINRA or SEC broker investigation? Here are 10 strategic considerations:
1. Intervene and Open a Dialogue with FINRA or the SEC
Upon learning of a FINRA or SEC investigation, one of the first steps a targeted broker should take is to engage experienced defense counsel. Broker investigations are serious and often high-risk matters, and they require the involvement of experienced counsel who can take control of the process and steer it toward a favorable result.
Once engaged, one of the first steps a broker’s counsel will (or should) take is to intervene in the investigative process. Defense counsel should inform FINRA’s investigators or the SEC’s agents that the broker is represented, and defense counsel should open a dialogue with the investigators or agents. Opening a dialogue serves several important purposes; and, regardless of the level to which it makes sense for the broker to cooperate (as discussed below), establishing a good working rapport at the outset of the investigation can pay dividends down the line.
2. Identify the Specific Allegations at Issue
After establishing a dialogue with FINRA’s investigators or the SEC’s agents, one of defense counsel’s next steps should be to identify the specific allegations at issue in the investigation. Broker investigations can target an extremely wide range of statutory, regulatory, and administrative issues, and the specific issues underlying an investigation won’t always be clear from FINRA’s or the SEC’s initial contact.
The importance of identifying the specific allegations at issue is twofold: First, it ensures that the broker’s defense strategy will focus on the relevant facts and circumstances—and that the broker will not overlook the need to assert any specific defenses. Second, it ensures that the broker does not waste time and resources “defending” against—and potentially exposing—issues that are not currently under scrutiny.
3. Investigate the Relevant Facts (with Privilege Protection)
Contemporaneously with seeking to discern the focus of the investigation, defense counsel should also begin the process of investigating the relevant facts. This process starts with instituting a legal hold and assembling the internal investigation team—and these steps can be taken even if the focus of the investigation hasn’t yet been determined. Once the scope of the investigation is clear, then counsel can lead an internal investigation focused on uncovering the relevant facts, both favorable and unfavorable, under the protection of the attorney-client privilege.
During this internal investigation, it is imperative that the broker is an open book. To build an effective defense strategy, defense counsel must know all of the facts—including any facts that the broker may want to hide (but which FINRA or the SEC is ultimately likely to discover). A comprehensive internal investigation will help ensure that there are no unhappy surprises, and that defense counsel is prepared to confront challenging issues head-on as they arise.
4. Focus on Achieving a Favorable Pre-Charge Result
Generally, brokers targeted in FINRA and SEC investigations will want to focus on achieving a pre-charge result. Not only does this avoid the inherent risk (and additional cost) of defending against formal charges, but it can also avoid negative publicity. FINRA and the SEC both regularly issue press releases announcing charges stemming from their investigations—and this negative publicity alone can have significant financial and reputational consequences.
Achieving a favorable pre-charge result is a realistic outcome in many cases. But, to keep this outcome on the table, brokers and their counsel must work effectively with FINRA’s investigators or the SEC’s agents, and they must build and execute a defense strategy focused on securing a specific outcome. Whether this outcome involves terminating the investigation without further consequences or something else will depend entirely on the specific facts and circumstances involved.
5. Determine Whether a Settlement is Warranted
If resolving the investigation without further consequences is unlikely, then the next best approach may be to target a settlement. FINRA and the SEC will both settle enforcement cases when doing so sufficiently achieves their enforcement goals while also preserving their resources for future matters.
When settling makes sense, then the next strategic consideration involves determining what type of settlement the broker should be willing to consider. Settlements flowing from broker investigations are often financial in nature, though FINRA and the SEC will also seek to impose temporary suspensions, compliance program overhauls, and other requirements in many cases as well. This is another area where defense counsel’s experience comes into play, as knowing what FINRA and the SEC have been willing to accept in the past can prove invaluable when evaluating settlement proposals.
6. Determine the Degree to Which Cooperation is Warranted
Regardless of whether settling makes sense, some degree of cooperation will often (though not always) be warranted. Once a FINRA or SEC investigation becomes adversarial, the likelihood of achieving a favorable pre-charge result drops significantly.
Cooperating with a broker investigation can mean different things in different circumstances, but one thing it never means is being an open book. Under no circumstances should brokers simply open their doors and allow FINRA’s investigators or the SEC’s agents to gather information at their will in the hopes that doing so will gain favor and lead to a less undesirable result. Even when brokers are cooperating during the investigative process, FINRA and the SEC still expect brokers to take reasonable steps to protect themselves. Failing to do so can be extremely costly, and it is both unwarranted and unnecessary.
7. Critically Evaluate and Carefully Respond to All Document Requests
From FINRA 8210 Letters to SEC subpoenas, brokers targeted in investigations may receive various types of document requests. Upon receiving these requests, brokers should review them carefully with their defense counsel. While responding is necessary, it may be in brokers’ best interests to challenge (or negotiate) the scope of these requests as they begin preparing their responses. In any case, a thorough and structured approach is key, as both inadvertently withholding documents and inadvertently waiving the attorney-client privilege can have dire consequences for the broker’s defense.
8. Thoroughly Prepare for OTR Interviews and SEC Depositions
Along with document requests, targeted brokers may also receive requests for on-the-record (OTR) interviews or testimony. Before sitting for an interview or deposition, it is imperative that brokers thoroughly prepare with their counsel. Based on the focus and scope of the investigation, counsel should be able to anticipate potential questions, and brokers should practice their answers so that they know exactly what to say—and what not to say—when they sit down with FINRA investigators or SEC agents.
9. Consider the Benefits (and Risks) of a Wells Submission
In the latter stages of the investigation, FINRA or the SEC may decide to issue a Wells Notice. This is a formal letter that outlines FINRA’s or the SEC’s preliminary charging determination and provides the targeted broker with an opportunity to submit a written response. In some cases, FINRA or the SEC may schedule a Wells Call to discuss its findings as well.
Responding to a Wells Notice is optional; and, while a strategic response can be beneficial, responding also presents various risks. Upon receiving a Wells Notice, a targeted broker should immediately engage with his or her counsel to begin charting their next steps.
10. Avoid Common Mistakes that Lead to Unnecessary Problems
Finally, when facing a FINRA or SEC investigation, there are several common mistakes that targeted brokers need to avoid. These include everything from failing to preserve relevant records to voluntarily sharing too much information. Mistakes made during broker investigations can prove incredibly costly, and in many cases they cannot be undone. To avoid mistakes that have the potential to jeopardize their finances, their careers, and perhaps even their freedom, brokers targeted in FINRA and SEC investigations must work closely with experienced defense counsel throughout the process.
Dr. Nick Oberheiden, founder of Oberheiden P.C., focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation.