iFor registered brokers and brokerage firms in the securities industry, a Financial Industry Regulatory Authority (FINRA) investigation can present substantial risks. Not only are FINRA investigations made public—which can potentially lead to negative publicity and investor arbitration filings—but they also present risks for fines, suspension or revocation of registration, and additional scrutiny from the U.S. Securities and Exchange Commission (SEC).
As a result, when facing a FINRA investigation, it is imperative to execute a strategic defense. FINRA investigations can involve a wide range of allegations, and they can present varying opportunities to assert defenses depending on the circumstances involved. Formulating and executing a strategic defense requires a clear understanding of the relevant facts, laws, and FINRA Rules, and it requires a proactive approach focused on achieving a specific favorable result in light of the facts at hand.
What constitutes a “favorable” result can vary from case to case. In some cases, it will be possible to fully demonstrate compliance and resolve FINRA’s investigation quietly without further consequences. In others, the best approach may be to negotiate a settlement that protects the broker’s or brokerage firm’s registration. In others still, FINRA’s actions can leave little choice but to litigate, and avoiding unnecessary consequences will involve fighting FINRA’s allegations by all means available.
10 Key Strategic Considerations During FINRA Investigations
But, as long as the investigation is still underway, the best approach for FINRA defense lawyers in most cases will be to execute a defense focused on achieving a favorable result without litigation. When taking this approach, some key strategic considerations during a FINRA investigation include:
1. Understanding FINRA’s Enforcement Priorities
As the target of a FINRA investigation, it is important to understand FINRA’s enforcement priorities. Generally, the more an investigation implicates these priorities, the greater the risk of the investigation leading to enforcement action.
As identified by FINRA, its current enforcement priorities include:
- “Obtaining restitution for harmed investors;
- “Ridding the industry of brokers engaged in fraud or other egregious misconduct—especially brokers with a history of violations;
- “Protecting seniors and vulnerable investors; and
- “Ensuring the integrity of the markets.”
While these priorities are quite broad, they do not cover the full scope of FINRA’s enforcement authority—not even close. Many recordkeeping, supervisory, and other more-technical violations will fall outside of these priorities; and, in cases involving these types of federal securities laws violations, targeted brokers and brokerage firms will often be able to work with their FINRA defense attorney to substantially mitigate the consequences of any past mistakes.
2. Understanding FINRA’s Investigative Authority, Tools, and Strategies
Along with understanding FINRA’s enforcement priorities, it is also essential to have an understanding of FINRA’s investigative authority, tools, and strategies. While FINRA’s investigative authority is broad, it is not absolute; and, while FINRA has many investigative tools at its disposal, there are limits on what FINRA can do to obtain information from targeted brokers and brokerage firms during its investigations. By understanding how FINRA investigates—and what it can (and can’t) do during its investigations—targeted brokers and brokerage firms can formulate their own strategies accordingly.
3. Identifying the Specific Allegations at Issue
As mentioned above, FINRA investigations can target an extremely wide range of allegations. Given that this is the case, formulating an effective defense strategy starts with identifying the specific allegations at issue. In some cases this will be easier than others, but in all cases it is vitally important. Until you know what you need to defend against, you have no way of strategizing, and you could very easily end up making statements or sharing information that FINRA is able to use against you or your firm.
Most broker dealers and brokerage firms will learn that they are facing a FINRA investigation when they receive an On-the-Record (OTR) Notice, also known as a FINRA rule 8210 Letter. This notice will typically provide some insights into the focus of the investigation (while also requesting voluminous records and testimony), though in many cases proactive steps will be necessary to determine exactly why a broker or brokerage firm is facing scrutiny.
4. Conducting an Attorney-Client Privileged Risk Assessment
After identifying the specific allegations at issue, the next step toward developing an effective FINRA investigation defense strategy is to conduct an attorney-client privileged risk assessment. Based on FINRA’s allegations, what are your (or your firm’s) options for responding?
Can you use documentation that you have on hand to show that the investigation is misguided? Is working with FINRA to find a mutually agreeable path forward the best approach? Or, do you need to be prepared not only for the possibility of FINRA enforcement action, but perhaps civil or criminal federal enforcement action as well? All of these are critical questions, and the only way to answer them is by gaining a clear and comprehensive understanding of the facts at hand.
5. Evaluating All Potential Defenses
Regardless of the allegations and facts at issue, brokers and brokerage firms targeted in FINRA investigations will have defense strategies available. Determining how to proceed involves evaluating all potential defenses, determining which ones are viable and which ones are not, and conducting cost-benefit analyses to determine whether individual defenses are worth putting forward.
In some cases, avoiding charges during a FINRA investigation will involve affirmatively demonstrating compliance. As FINRA notes, “[n]ot all investigations result in formal disciplinary action.” If a broker or brokerage firm can safely provide evidence of compliance to FINRA without exposing itself to further scrutiny, then doing so could be the best option. Like the SEC and other law enforcement agencies, FINRA often initiates investigations based on incomplete information, and filling in the gaps (when warranted) can be an effective means of defense.
6. Formulating a Comprehensive and Cohesive Defense Strategy
While demonstrating compliance is an option in some cases, it isn’t an option in others. When a broker or brokerage firm is at risk of facing fines, loss of registration, or other penalties, the broker or firm must work with its defense counsel to formulate a comprehensive and cohesive defense strategy.
Crucially, this often means not taking a “kitchen sink” approach. Rather than asserting all available defenses, asserting a select few defenses will often be best. If a few defenses can be used together to call the allegations at issue into question, then a focused strategy may facilitate the most favorable and most cost-effective outcome.
7. Considering Ancillary Risks (i.e., Customer Arbitration and SEC Enforcement)
When facing a FINRA investigation, it is important not to focus solely on the investigation itself. In many cases, FINRA investigations will give rise to other risks as well. For example, if publicized, the allegations at issue could lead to a wave of customer complaints in FINRA arbitration; or, if the allegations are serious enough, FINRA may interface with the SEC regarding the possibility of the Commission pursuing federal enforcement action as well.
8. Considering Potential Means of Resolution
Based on the circumstances at hand, brokers and brokerage firm executives facing FINRA investigations should work with their counsel to assess potential means of resolution. Does it make sense to focus on affirmatively demonstrating compliance? Or, is cooperating with FINRA and targeting a settlement the best approach? Does FINRA seem prepared to initiate enforcement action; and, if so, how does this factor into the decision-making process? These are all critical questions that require careful consideration.
9. Engaging Proactively with FINRA Staff As Warranted
Regardless of the best approach, it will often make sense to proactively engage with FINRA staff when working toward favorably resolving an investigation. There are several scenarios in which engaging with FINRA staff may make sense, from dealing with issues related to the OTR Notice to explaining relevant facts and opening settlement negotiations.
However, engaging with FINRA staff does not necessarily mean cooperating with the investigation. While cooperating will make sense in some circumstances, the decision to cooperate (and, if so, to what extent) is one that needs to be made very carefully based on the advice of counsel. In many cases, brokers and brokerage firms will need to rely on their counsel to strike a careful balance between asserting a forceful defense and maintaining a good relationship with FINRA going forward.
10. Addressing Any Compliance Failures to Mitigate Ongoing and Future Risk
Finally, if there are compliance failures that need to be addressed, brokers and brokerage firms targeted in FINRA investigations should work with their counsel to address these failures as quickly as possible. Not only can this help with the investigation, but it can also help to mitigate the broker’s or firm’s ongoing and future risk. FINRA expects all brokers and brokerage firms to prioritize compliance; and, once a compliance failure has been identified, the clock starts ticking for a remedial response.
