Financial Industry Regulatory Authority (FINRA) investigations present significant risks for broker-dealers. Not only can FINRA take enforcement action—including the imposition of penalties and barring broker-dealers from the securities industry—but enforcement actions will also frequently lead to claims from individual investors. These claims can result in substantial liability in FINRA arbitration; and, in many cases, once one investor’s claim is successful, more investors will feel emboldened to file claims as well.

With this in mind, when facing FINRA investigations, broker-dealers need to know what to expect. They also need to know what to do—and what not to do—to preserve the full battery of defenses they have available.

“FINRA uses the full weight of its enforcement authority to protect retail investors and investigate broker-dealers suspected of fraud. Facing a FINRA investigation is a serious matter with potentially serious consequences, and broker-dealers targeted in these investigations need to protect themselves by all means available. ” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.

What To Expect During a FINRA Investigation

Financial Industry Regulatory Authority (FINRA) investigations follow a well-defined process in most cases. By understanding this process, broker-dealers targeted for violations of FINRA’s rules and federal securities laws can make informed and strategic decisions focused on resolving FINRA’s inquiry as efficiently, favorably, and confidentially as possible. Generally, the steps involved in a FINRA investigation include:

1. Request for Documents Pursuant to FINRA Rule 8210(a)(2)

FINRA Rule 8210 serves as the primary source of the quasi-governmental entity’s investigative authority. Under FINRA Rule 8210(a)(2), FINRA has the authority to, “inspect and copy the books, records, and accounts of [a broker-dealer] concerning any matter involved in [an] investigation, complaint, examination, or proceeding that is in such member's or person's possession, custody or control.”

To conduct this inspection, the FINRA examiner will generally issue a written request for a targeted broker-dealer to produce relevant documents. Broadly speaking, this is similar to a request for production in discovery or an SEC subpoena, although there are various practical and procedural differences.

In many cases, upon receiving a request for documents pursuant to FINRA Rule 8210(a)(2), a broker-dealer should engage defense counsel promptly. An experienced FINRA investigation lawyer will be able to examine the request and immediately begin the process of crafting a response—whether this involves communicating with FINRA Enforcement staff, compiling and redacting responsive documents, or (as is often the case) taking a hybrid approach.

2. On-the-Record (OTR) Interview

After reviewing the documents submitted in response to its request under FINRA Rule 8210(a)(2), FINRA Enforcement staff or FINRA staff will often seek to schedule an on-the-record (OTR) interview pursuant to FINRA Rule 8210(a)(1). This is an interview conducted under oath at FINRA’s offices.

FINRA’s Rules allow OTR interview subjects to have a FINRA investigation attorney present; however, the Rules prohibit objections during the interview process. This makes it vitally important that targeted broker-dealers work closely with their attorneys to anticipate questions and craft an interview strategy in advance. Since OTR interviews are taken under oath, FINRA Enforcement staff or FINRA staff can use broker-dealers’ statements in subsequent enforcement proceedings.

During OTR interviews, FINRA Enforcement staff or FINRA staff will typically ask questions about the documents submitted, but their questioning will go far beyond clarifying or verifying the contents of records. They will ask about broker-dealers’ personal conduct and relationships, communications with customers, personal knowledge of FINRA rules and federal securities laws, and any other matters they deem relevant to FINRA's investigation.

3. Meeting with FINRA Enforcement Staff

After this initial fact-finding process, it will often make sense to schedule a meeting with FINRA Enforcement staff or FINRA staff to discuss the status of the investigation and begin steering the investigation toward a favorable result. This process requires the in-depth knowledge and insights of an experienced FINRA investigation lawyer. At this stage, broker-dealers should have conducted an attorney-client privileged internal compliance assessment, and they should have a clear understanding of both (i) their risk exposure in the investigation, and (ii) the defenses they have at their disposal.

4. Scheduling a Wells Call

If discussions with FINRA Enforcement staff do not lead directly to a favorable resolution, FINRA Enforcement staff may decide to schedule a Wells Call. As FINRA explains:

“During the Wells Call the staff informs the potential respondent of the proposed charges and the primary evidence supporting the charges. The purpose of a Wells Call is to give the potential respondent an opportunity to submit a writing, called a Wells Submission, which discusses the facts and applicable law and explains why formal charges are not appropriate.”

Making a Wells Submission is optional. Following a Wells Call, a targeted broker-dealer will need to work with its counsel to determine the best path forward. While making a Wells Submission can be beneficial in some cases, voluntarily providing information to FINRA Enforcement staff at this stage can be risky, and broker-dealers need to make strategic decisions about how and when they put forth their strongest defenses.

5. Conclusion of the Investigation (and Determination of Next Steps)

As the final stage in the investigative process, FINRA’s Office of Disciplinary Affairs will decide whether to approve a settlement or authorize FINRA Enforcement Staff to move forward with issuing a formal complaint. If a formal complaint gets issued, this starts an entirely separate process during which broker-dealers (now termed “respondents”) must fight to protect themselves against disciplinary action.

What To Do During a FINRA Investigation

With this process in mind, there are several steps broker-dealers need to take when facing a FINRA investigation. These steps include:

• Engage a FINRA Investigation Lawyer – Upon being contacted by FINRA Enforcement staff, broker-dealers should engage a FINRA investigation lawyer immediately. This is true regardless of the means of contact (i.e., whether in the form of an informal letter or a request under Rule 8210). In most cases, taking a proactive approach early in the process will afford the greatest opportunity to achieve a favorable and confidential resolution.
• Identify All Sources of Relevant Information – Regardless of whether FINRA has issued a request for records under FINRA Rule 8210(a)(2), targeted broker-dealers should begin working with their counsel to identify all sources of relevant information. This is important for three reasons: (i) for purposes of initiating a legal hold; (ii) to prepare for the issuance of a request for documents; and, (iii) to determine what defenses the broker-dealer has available.
• Institute a Legal Hold – Similar to federal investigations and private civil litigation, when facing a FINRA investigation, broker-dealers should initiate a legal hold. This ensures that all relevant documents remain available and that FINRA cannot lodge accusations of attempting to conceal, withhold, or destroy evidence of wrongdoing.
• Conduct an Internal Compliance Assessment – To formulate effective defense strategies, broker-dealers targeted in FINRA investigations should conduct internal compliance assessments under the protection of the attorney-client privilege. This involves reviewing all relevant records, communicating with internal staff (as appropriate), and then using the information gained from these processes to determine what charges—if any—FINRA Enforcement staff may be able to substantiate.
• Develop a Defense Strategy and Chart Next Steps – After taking these preliminary steps, targeted broker-dealers can then shift their efforts to developing a defense strategy. Working with their defense counsel, targeted broker-dealers should chart a strategic path forward while maintaining the flexibility needed to adapt as the investigation progresses.

What NOT To Do During a FINRA Investigation

In addition to initiating these steps, broker-dealers targeted in FINRA investigations need to ensure that they avoid several common pitfalls as well. Some examples of mistakes broker-dealers should avoid when facing a FINRA investigation include:

• Continue Violating FINRA Rules or Federal Securities Laws – If a FINRA investigation is likely to uncover regulatory or statutory violations, the targeted broker-dealer must take appropriate steps to remedy any ongoing compliance issues. Continuing to violate FINRA Rules or federal securities laws can significantly increase the challenges of executing an effective defense.
• Voluntarily Disclose Privileged Information – While it will often be beneficial to develop a working relationship with FINRA Enforcement staff, targeted broker-dealers need to be careful to avoid voluntarily disclosing too much information. This is particularly true with regard to information that is protected by the attorney-client privilege.
• Ignore Requests for Documents or OTR Interviews – When facing a FINRA investigation, ignoring requests for documents or OTR interviews is not the right approach. FINRA has the authority to take disciplinary action against broker-dealers that do not engage in the investigative process.
• Attempt to Explain Away Concerns Without Documentation – Similarly, attempting to explain away FINRA’s concerns without supporting documentation will almost always lead to additional scrutiny. Favorably resolving a FINRA investigation requires a strategic approach informed by a clear understanding of the relevant facts, the relevant legal authority, and the evidence that is available.
• Allow the Investigation to Proceed Unchecked – The longer broker-dealer delays in engaging defense counsel to intervene in a FINRA investigation, the more difficult it can become to catch up and ultimately get out in front of the investigative process. Broker-dealers should not allow FINRA investigations to proceed unchecked, but rather do everything they can to take control of the process.