FINRA Investigations and Disciplinary Actions

At the Law Offices of David S. Rich, LLC, we have substantial experience representing employees in the securities industry in investigations and formal disciplinary actions brought by The Financial Industry Regulatory Authority, Inc. (“FINRA”).

The Law Offices of David S. Rich, LLC represents brokers and financial advisors in all stages of the process: (1) drafting the required, signed statements in response to the allegations; (2) researching FINRA’s Sanction Guidelines, published decisions of FINRA’s Office of Hearing Officers (“OHO”), and published decisions of Administrative Law Judges in proceedings before the U.S. Securities and Exchange Commission (the “SEC”) to develop legal defenses and to identify mitigating circumstances; (3) preparing the brokers for on-the-record interviews and participating as the brokers’ counsel; (4) negotiating settlements through Letters of Acceptance, Waiver and Consent (“AWCs”); and (5) answering disciplinary complaints and litigating FINRA disciplinary hearings.

How FINRA Inquiry Letters Arise

A FINRA investigator prepares and sends a letter to the broker or financial advisor stating that FINRA is “conducting an inquiry” into some matter.

FINRA’s inquiry letter asks the broker or advisor to provide a signed, written statement about potential violations of securities laws or rules. Further, FINRA’s inquiry letter typically asks the broker to answer a list of particular questions and to provide copies of all correspondence or memoranda referring to the matter.

FINRA makes these requests under FINRA Rule 8210, which requires brokers and advisors to provide information and records. Rule 8210 also empowers FINRA, in an on-the-record interview, to make the broker testify under oath.

Flouting FINRA’s requests for information or books and records results in a significant penalty, such as a lifetime ban from the securities industry.

If you are an employee in the securities industry and have received an inquiry letter from FINRA, contact the Law Offices of David S. Rich, LLC.

Circumstances In Which FINRA Issues Inquiry Letters

FINRA issues inquiry letters in various circumstances. Three common scenarios are

• Form U-5s. Form U-5 (Uniform Termination Notice for Securities Industry Registration) is a document that brokerage firms must complete and file with securities regulators to report the cessation of a broker’s employment. On Form U-5, the brokerage firm must set forth the reason for the broker’s termination and whether the broker voluntarily left, was permitted to resign, or was fired. When the brokerage firm alleges on the Form U-5 that the broker quit, was fired, or was permitted to resign after being accused of (1) violating investment-related statutes, rules, or regulations, (2) fraud or wrongful taking of property, or (3) failure to supervise, FINRA dispatches an inquiry letter to the broker asking for a signed, written statement replying to the firm’s allegations.
• Customer Arbitration. Customer arbitrations are arbitrations, before FINRA, between investors and brokers and/or brokerage firms. In a customer arbitration, the investor may allege that his broker and/or his brokerage firm converted the customer’s monies, engaged in churning, made unsuitable investments, committed fraud, made misrepresentations, engaged in unauthorized trading, failed to execute the customer’s orders, or perpetrated other misconduct. When a broker is named as a respondent in a customer arbitration, FINRA may propound an inquiry letter to the broker.
• Failures to Disclose. When individuals enter the securities industry, they must complete, review, or sign Form U-4 (Uniform Application for Securities Industry Registration or Transfer). An individual must amend and update the information required by Form U-4 as changes occur. If a broker fails to make required disclosures to FINRA through a Form U-4 amendment, FINRA may issue an inquiry letter to that individual.

Brokers commonly fail to disclose reportable events via Form U-4 amendments, including criminal charges and convictions, bankruptcies and compromises with creditors; customer complaints or lawsuits, outside business activities; and regulatory actions.

The Law Offices of David S. Rich, LLC skillfully prepares written statements on behalf of brokers and financial advisors responding to FINRA’s inquiry letters. Even if the broker has committed the charged violations of securities laws or rules, the Law Offices of David S. Rich, LLC may be able to bring out extenuating circumstances and negotiate a favorable settlement.

FINRA Investigations

The FINRA investigator reviews the broker’s or financial advisor’s written statement responding to FINRA’s inquiry letter. Once the FINRA investigator has conducted this review, the investigator may elect to refer the matter to FINRA’s Enforcement Department.

FINRA’s Enforcement Department may issue additional requests for information and documents and may require the broker or advisor to appear and, in an on-the-record interview, to testify under oath.

If you are a securities industry professional and FINRA has called you to testify under oath in an on-the-record interview, contact the Law Offices of David S. Rich, LLC.

Informal Disciplinary Actions

At the close of FINRA’s investigation, FINRA’s staff analyzes the evidence and the law and determines whether a violation appears to have occurred. Suppose the violation is minor, and there is no customer harm or detrimental market impact. In that case, the matter may be resolved with an informal disciplinary action, such as issuing a Cautionary Action.

An informal disciplinary action is not reported on a brokerage firm’s Form BD (Uniform Application for Broker-Dealer Registration) or an individual’s Form U-4. Instead, an informal action is a private admonishment that FINRA believes the broker or advisor has violated securities laws or rules.

Formal Disciplinary Actions

In more severe cases, FINRA staff may recommend formal disciplinary action. Sanctions in formal cases may include, among other penalties, a censure, a monetary fine, suspension or expulsion from the securities industry, or an order to pay restitution to customers.

Most formal disciplinary actions settle before litigation through the issuance of a settlement agreement called a Letter of Acceptance, Waiver, and Consent. An AWC document sets forth FINRA’s findings of fact and the sanctions imposed.

If the broker or financial advisor cannot settle, with FINRA, the formal disciplinary action, then FINRA’s Enforcement Department or FINRA’s Market Regulation Department files, with FINRA’s Office of Hearing Officers, a complaint against the broker. The respondent broker files an answer to the complaint.

The broker and FINRA try the case, before a Hearing Officer and two industry panelists, at a disciplinary hearing. The hearing is not as formal as a trial in court, but it similarly takes place. The broker has certain rights to appeal any adverse decision of the hearing panel.

On behalf of brokers, the Law Offices of David S. Rich skillfully negotiate, with FINRA, settlements of formal disciplinary actions. When a settlement cannot be reached, the Law Offices of David S. Rich aggressively defend the brokers in disciplinary hearings before hearing panels.

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