7 Tips For Handling A FINRA Investigation Of A Financial Advisor

by Burr & Forman
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Facing an examination or investigation by the Financial Industry and Regulatory Authority (FINRA) can be a stressful and intimidating experience for even the most seasoned financial advisor.  Understanding the oversight role FINRA plays and the process can help you to properly prepare and reduce the risk of adverse consequences.  If you find yourself the subject of a FINRA inquiry, here are some tips to help you navigate the process:

  1. Determine The Subject Of The Inquiry – If you find yourself involved in an inquiry, FINRA usually will send you a letter requesting information and describing the potential rules violations they are investigating.  This will give you a general idea of the subject matter of the inquiry.  Have your attorney call the FINRA regulator to gain further information about the subject areas to determine the scope of the investigation.  As FINRA’s primary goal is protect the public and integrity of the markets, you can expect a FINRA investigation to deal with subject areas of unauthorized trading, suitability, theft, non-disclosures, unfair industry practices and compliance with FINRA rules.  A FINRA investigation may be triggered by a customer complaint, a Form U-4 or U-5 disclosure or information obtained by other sources, such as a government agency, another industry organization or third-party.  Typically, FINRA is not going to invest its time and resources to investigate you unless they have reason to believe you have engaged in misconduct or you can provide facts to support another investigation.
  2. Identify Whether You Are A Target Or A Witness -- Following your review of the initial FINRA letter and any follow-up communications with the FINRA regulator, you should have some indication whether you are a target of rules violation or merely a witness to someone else’s rules violations.  While your status as a target or witness can change, knowing it early in the process will help you prepare in complying with FINRA’s request and in evaluating potential sanctions for the rules violations being investigated.
  3. Cooperate – When you register with FINRA, you agree to comply with its rules and regulations.  Unless you have no desire to ever work in the securities industry again, you must cooperate with FINRA.  FINRA Rule 8210 requires industry members to cooperate in an investigation when FINRA believes a rules violation may have occurred.  Even if you have not engaged in misconduct, your failure to cooperate in an investigation alone may subject you to sanctions, including loss of your license.  FINRA’s powers under Rule 8210 are broad.  FINRA can require you to provide information in writing, electronically or even orally through an on the record (OTR) interview.  Often, FINRA will request documents or verified responses to written requests for information.  It is not unusual for a FINRA examiner to request an informal telephone interview.
  4. Understand Your Entire Industry Record Is Under Review — Even if the main subject areas of the inquiry have been provided to you, realize that the FINRA regulator will likely have reviewed your entire record in the industry and can investigate past rules violations you or others may have committed.  For example, if the principal subject of the investigation is related to a current customer or intra-industry dispute, the FINRA regulator may explore past instances of similar conduct.  Fully expect that the regulator has obtained a copy of your employment file from not only your current employer, but every other employer you have had in the securities industry.  Just as you have a duty to cooperate in these investigations, so do member firms.  FINRA regulators may also have requested and received documents from your customers and other third-parties.  Because FINRA is not under an obligation to provide you with a copy of the documents you will be asked about prior to your OTR, it is critical that you obtain as much information about the subject of your OTR prior to it and thoroughly review the subject area with your attorney.
  5. Prepare – If the investigation requires an informal telephone interview or formal OTR interview, you should take sufficient time to prepare with your attorney.  Review key documents and your involvement to the conduct at issue in the investigation.  An OTR interview is quite similar to giving deposition testimony.  Be truthful and respectful.  Your testimony is under oath; there is a court reporter present and the FINRA regulator will ask questions in a deposition format.  You can have your attorney present.  Although your attorney’s presence can keep a regulator from abusing you, the traditional rules of procedure and evidence do not apply.  There are no objections to relevancy or hearsay.  However, you can object to any questions that would require you to divulge attorney-client communications.
  6. Remember Your Fifth Amendment Privilege -- Although FINRA has no criminal jurisdiction, if you believe that your actions may subject you to criminal allegations by the SEC or other governmental authority, you have every right to invoke your Fifth Amendment privilege against self-incrimination during an informal telephone interview, an OTR or disciplinary hearing testimony.  Invoking the Fifth Amendment is not without consequence.  Refusing to testify for any reason, including taking the Fifth Amendment, amounts to being uncooperative and you will be faced with losing your securities license.  If criminal conduct is not at issue, it is in your best interest to fully cooperate with the regulator and be candid in your responses in an effort to avoid or reduce any penalties you may face.
  7. Consider a Concluding Statement – At the end of an OTR, you have an opportunity to make a statement.  If the investigation is one involving potential sanctions against you, the OTR is the best opportunity to avoid being subject to a full disciplinary proceeding.  This is your chance to tell your story or to clarify any responses you have made to questions in order for the regulator to have the complete story of the relevant facts made subject of the inquiry.  Perhaps the investigator did not ask you about some key facts.  Remember, your goal is to avoid or lessen any penalties against you.  OTR testimony can be a key factor that FINRA will use to determine whether to institute a formal disciplinary proceeding and/or offer a settlement.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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