FINRA Investigation Process - Federal Lawyer
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FINRA Investigation Process

The Financial Industry Regulatory Authority (FINRA) Investigates Broker-Dealers for a Broad Range of Violations. Here’s What You Need to Know When Facing a FINRA Investigation

Each year, the Financial Industry Regulatory Authority (FINRA) bars hundreds of broker-dealers and individual brokers from working with retail investors. In order to pursue enforcement proceedings, FINRA conducts investigations pursuant to Rule 8210. Notably, violations of Rule 8210 are also the most-common reason for individual brokers to face disciplinary action. According to FINRA, “in the last two years, more than a third of the enforcement cases that resulted in individuals being barred from the brokerage industry involved violations of Rule 8210.”

With this in mind, broker-dealers and individual brokers that are facing FINRA investigations must approach their circumstances very carefully. Not only must they take adequate steps to protect themselves during the investigation and defend against the allegations underlying FINRA’s inquiry, but they must also be extremely careful to avoid running afoul of Rule 8210.

Put our highly experienced team on your side

Dr. Nick Oberheiden
Dr. Nick Oberheiden

Founder

Attorney-at-Law

John W. Sellers
John W. Sellers

Former Senior Trial Attorney
U.S. Department of Justice

Local Counsel

Joanne Fine DeLena
Joanne Fine DeLena

Former Assistant U.S. Attorney

Local Counsel

Joe Brown
Joe Brown

Former U.S. Attorney & Former District Attorney

Local Trial & Defense Counsel

Amanda Marshall
Amanda Marshall

Former U.S. Attorney

Local Counsel

Aaron L. Wiley
Aaron L. Wiley

Former Federal Prosecutor

Local Counsel

Roger Bach
Roger Bach

Former Special Agent (OIG)

Michael Koslow
Michael Koslow

Former Supervisory Special Agent (FBI)

Chris Quick
Chris Quick

Former Special Agent (FBI & IRS-CI)

Kevin M. Sheridan
Kevin M. Sheridan

Former Special Agent (FBI)

Ray Yuen
Ray Yuen

Former Supervisory Special Agent (FBI)

Dennis A. Wichern
Dennis A. Wichern

Former Special Agent-in-Charge (DEA)

Experienced Defense Counsel for FINRA Investigations

At Oberheiden P.C., our senior defense attorneys bring centuries of combined experience to defending broker-dealers and individual brokers during FINRA investigations. Several of our attorneys have prior experience prosecuting securities law violations as trial attorneys at the U.S. Department of Justice (DOJ), and all of our attorneys have extensive experience working with firms and individuals in the private sector. Our attorneys are well-versed in federal securities law and FINRA’s complex body of rules and regulations, and they have a proven track record of helping firms and individuals avoid administrative, civil, and criminal penalties.

Defending against a FINRA investigation presents unique challenges—including many challenges related specifically to Rule 8210 compliance. When notified of an investigation, a prompt and proactive response is crucial, and efforts to both comply with Rule 8210 and build a substantive defense must begin immediately. Our senior FINRA investigation attorneys are available to provide representation on an emergency basis; and, if you or your firm is facing a FINRA investigation, we strongly encourage you to contact us right away.

Understanding FINRA Rule 8210

Understanding FINRA Rule 8210, its requirements, and its implications is fundamental to successfully defending against a FINRA investigation. The primary operative provisions of the Rule appear in sections (a) and (c). FINRA Rule 8210(a) provides that FINRA staff “shall have the right” to take testimony under oath and inspect targeted firms’ and individuals’ books, records, and accounts. FINRA Rule 8210(c) provides that, “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.”

All broker-dealers and individual brokers operating in the United States are subject to compliance with FINRA’s Rules. Compliance is a condition of registration; and, thus, non-compliance is grounds for being barred from practice. FINRA relies heavily on its authority under Rule 8210 to enforce broker-dealers’ and individual brokers’ obligations. It also readily acknowledges that the penalties for non-compliance with Rule 8210 “are severe,” as they “most often [entail] a bar from the securities industry . . . .”

The FINRA Investigation Process: An Overview

When facing a FINRA investigation, it is critical to know what to expect and to build a defense strategy focused on the specific substantive issues and procedures at hand. This begins with understanding the FINRA investigation process:

1. Requests for Documents and Records Pursuant to FINRA Rule 8210(a)(2)

Broker-dealers and individual brokers will often learn of a FINRA investigation through the receipt of a request for documents and records pursuant to FINRA Rule 8210(a)(2). It is at this stage that legal counsel should be engaged. Too often, entities and individuals targeted in FINRA investigations wait too long to engage defense counsel; and, once they do, their attorneys are limited in the assistance they can provide.

Requests issued pursuant to FINRA Rule 8210(a)(2) can seek voluminous records, and compliance can present a substantial burden. However, targeted entities and individuals must comply (unless they are able to negotiate a reduction in scope through their defense counsel), and this typically means that they must begin their response efforts immediately. 

2. Institution of a Legal Hold (Document Preservation Plan)

Upon receiving a request for documents and records from FINRA, one of the first steps that must be taken is to implement a “legal hold.” This is, essentially, a document preservation plan which ensures that documents and records that are relevant to FINRA’s investigation will not be deleted or destroyed—whether in the ordinary course of business or otherwise.

Instituting a legal hold is not simply a matter of form. In other words, a broker-dealer cannot circulate an internal memo instructing personnel to preserve documents and records and leave it at that. Instead, they must take affirmative steps to ensure that their internal personnel (and external vendors, as applicable), are in fact preserving materials and data that are responsive to FINRA’s request.

3. Internal Audit Protected by the Attorney-Client Privilege

After instituting a legal hold, the next critical step in a FINRA investigation is to conduct an internal audit. This audit should focus on identifying any issues which may lead to problems with FINRA, and it should take place under the umbrella of the attorney-client privilege. By learning what (if anything) FINRA’s investigators will uncover, targeted broker-dealers and brokers can put themselves in a position to make informed decisions and execute a focused defense strategy.

4. Requests for On the Record (OTR) Interviews Pursuant to FINRA Rule 8210(a)(1)

Not too long after issuing a request under Rule 8210(a)(2), FINRA investigators will begin issuing requests under Rule 8210(a)(1). These are requests for interviews—which are conducted under oath, on the record (OTR), and at FINRA’s offices. OTR interviews are not subject to time limitations, and they often take place over multiple days. While interviewees can have counsel present, FINRA’s Rules do not allow for objections during interviews. As a result, thorough preparation is crucial, and interviewees should have a clear understanding of how and when they can consult with counsel during the interview process.

5. Meeting with FINRA Enforcement Staff

Generally speaking, a FINRA investigation should be an interactive process during which the target’s defense attorneys regularly communicate with FINRA’s investigators and counsel. However, at a certain point in the investigation, it may make sense to request a formal meeting to discuss specific issues or possible resolutions.

For example, if it appears that the investigation is getting off course due to misinformation obtained from third parties or flawed assumptions about the circumstances at hand, a requesting meeting with FINRA staff may be an effective way to ensure that investigators do not go too far afield (thus increasing the costs of defending against the investigation and confusing the issues that require resolution). Or, if it becomes clear that a particular outcome is warranted, then requesting a meeting could facilitate either termination of the investigation or the institution of settlement negotiations.

6. Issuance of a Wells Notice

Absent termination or settlement, at the conclusion of their investigative efforts, FINRA enforcement staff may issue a Wells Notice. This is similar to a Wells Notice in a formal U.S. Securities and Exchange Commission (SEC) investigation. A Wells Notice summarizes FINRA’s conclusions and indicates the intent to initiate enforcement proceedings. Responding to a Wells Notice is optional, and responding in writing or in person at a meeting with enforcement staff can both have benefits and drawbacks under differing circumstances.

7. Termination of the Investigation, Settlement, or Enforcement Action

Finally, after completing the investigative process, FINRA will make a determination regarding resolution. At this stage, it has three primary options: (i) terminate the inquiry without further action, (ii) enter into (or continue) settlement negotiations, or (iii) take enforcement action. If FINRA takes enforcement action—whether based on a substantive violation or a violation of Rule 8210—then the firm’s or broker’s focus must shift immediately to avoiding sanctions.

FAQs: What Should You Do (and Not Do) During a FINRA Investigation?

When Should a Broker-Dealer Firm or Individual Broker Engage Defense Counsel for a FINRA Investigation?

 

Broker-dealer firms and individual brokers should both engage defense counsel immediately upon learning of a FINRA investigation. Facing a FINRA investigation presents several risks—and miscues during a FINRA investigation can lead to enforcement action even if the allegations that triggered the investigation are unsubstantiated.

Is Compliance with a Request for Documents or a Request for an OTR Interview Mandatory?

 

Yes, firms and brokers must comply with requests for documents and OTR interviews issued under FINRA Rule 8210. Compliance with both types of requests can present substantial burdens; and, as a result, it is important to begin preparation and response efforts immediately.

Is It Possible to Settle Allegations Targeted in a FINRA Investigation?

 

In many cases, yes, it is possible to settle allegations targeted in a FINRA investigation. However, before targeting settlement, it is imperative to determine whether any complete defenses are available. If no complete defenses are available to avoid sanctions entirely, then entering into settlement negotiations at the appropriate time can help to facilitate a favorable resolution.


Speak with a Senior FINRA Investigation Attorney at Oberheiden P.C.

Are you (or is your firm) facing a FINRA investigation? If so, we can help. To speak with a senior FINRA investigation attorney at Oberheiden P.C. in confidence, call 888-680-1745 or request a complimentary case assessment online now.

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