When registered brokers, their associates, or other financial advisors receive a FINRA 8210 letter, how they respond can make a big difference in the outcome of FINRA’s investigation. Ignoring FINRA’s request for documents can have serious professional repercussions, and disclosing more information than is required can needlessly expose brokers and others to penalties from FINRA regulations. Mistakes during FINRA investigations can lead to scrutiny from the U.S. Securities and Exchange Commission (SEC), and the SEC can pursue administrative, civil, or criminal penalties for brokers’ and others’ violations of federal securities laws.
“Receiving a FINRA 8210 letter is a serious matter. Brokers and other recipients must respond both carefully and strategically and realistically assess the risks involved with their response.” – Dr. Nick Oberheiden, Founding Attorney of Oberheiden P.C.
Understanding Your FINRA 8210 Letter
A FINRA 8210 letter demands documents or information pertinent to a potential or ongoing FINRA investigation. The Financial Industry Regulatory Authority (FINRA) is a private entity that Congress has authorized to regulate private securities transactions alongside the SEC, particularly enforcing broker and associate compliance. FINRA investigations can have serious legal and financial ramifications, and letter recipients who keep this in mind will put themselves in a better position to respond appropriately. Ignoring a FINRA 8210 letter is not an option, and failing to take FINRA inquiry seriously can prevent brokers and others from executing an effective defense.
Generally, FINRA 8210 letters will describe the documents and other information that FINRA demands from the recipient. They will also set a deadline for FINRA rule compliance. The letter will also tell the recipient if he or she is currently under investigation—which is critical. While all FINRA 8210 letter recipients must comply (or establish an appropriate basis for non-compliance, as discussed below), associated persons facing scrutiny from FINRA must defend themselves effectively. At the same time, those who are not must be careful to ensure this does not change.
5 Key Steps for Responding to a FINRA 8210 Letter
How a recipient responds to a FINRA 8210 letter is crucial. Doing nothing or disclosing too little can lead to professional sanctions from FINRA, including suspension or disbarment from registration. At the same time, over-disclosing can also lead to unnecessary consequences. As a result, an informed, strategic, and measured approach is critical.
Here are five key steps for responding to a FINRA 8210 letter:
1. Report the FINRA 8210 Letter in Compliance with Your Firm’s Internal Procedures
The first thing recipients should do is follow their brokerage firm’s rules for reporting FINRA letters internally. Generally, this means informing a supervisor or the firm’s chief compliance officer. This will allow for a coordinated response and ensure that the firm’s executives and legal counsel can take all the steps necessary to protect the firm and everyone involved.
2. Hire an Independent FINRA Defense Lawyer
After reporting the letter internally, FINRA 8210 letter recipients should consider consulting with an independent FINRA defense lawyer. Even if the firm’s legal counsel will be responding to the letter, at this point, your and your firm’s interests may or may not be fully aligned. A lawyer who has experience representing clients in FINRA and SEC enforcement matters will be able to assist in several ways.
First, in most cases, it will not immediately be clear why FINRA is investigating. It is often unclear whether the recipient is the target of an ongoing or potential investigation or is merely a witness in an investigation targeting another broker, associate, or firm. An experienced FINRA defense lawyer who has overseen numerous FINRA investigations will be able to read between the lines of the 8210 letter and determine what you need to know, whether you are personally at risk, and how you should approach your response.
Second, a FINRA defense lawyer can help you comply with the just and equitable principles of the 8210 letter. These letters often demand reams of documents that are difficult to access and provide very little time to do so. If necessary, your lawyer can also seek to negotiate the terms of the letter with a FINRA member attorney and either narrow the scope of the request or secure an extension for submitting a compliant response. The negotiation process and its outcome can also provide valuable information about FINRA rules. How FINRA members interact with the associated person and his or her counsel can reveal important details about the investigation.
Third, your defense lawyer can analyze your FINRA 8210 letter, determine what documents are subject to disclosure, and identify those that could reasonably fall outside the scope of the demand. Based on the circumstances of the investigation, your lawyer can then review the documentation that may not have to be disclosed to determine whether it would be wise to hand them over or keep them confidential.
Finally, and perhaps most importantly, hiring an independent FINRA defense lawyer ensures you receive advice and counsel based on your best interests. It is common for a member firm facing FINRA sanctions and SEC investigations to use their brokers or associates as scapegoats to avoid liability. Having independent legal representation in the securities industry is essential when this is the firm’s defense strategy.
3. Comply with Your FINRA 8210 Letter (to the Extent Required)
As noted above, FINRA 8210 letter recipients face serious professional sanctions if they fail to comply. As FINRA Rule 8210(c) clearly states, “no member or person shall fail to provide information or testimony” when requested. You will note that it does not state the failure has to be intentional. As a result, even inadvertent failures and oversights during the response process can potentially have serious adverse consequences.
With that said, brokers and others who receive FINRA 8210 letters do not necessarily need to comply in all cases fully. If your lawyer can negotiate the scope of your disclosure obligations, then you will only need to comply with the reduced scope—and you should only comply with the reduced scope to avoid inadvertently disclosing information that may lead to further scrutiny.
4. Determine Whether the Letter Must Be Disclosed on Form U4
Securities professionals must disclose certain “reportable events” on their Form U4. According to FINRA’s interpretive guidance, a reportable event includes receiving written notice that a registered professional is the subject of a FINRA investigation. While written notice of an investigation is often first in a Wells Notice, it may also come as a FINRA 8210 letter. If your letter states explicitly that you are under investigation, you will likely have to update your Form U4 to disclose the development.
5. Determine What Next Steps are Necessary
Once you have taken the steps necessary to comply with your FINRA 8210 letter and your other obligations as a registered securities professional, you should work with your counsel to determine the necessary next steps. These steps will depend on whether you are the subject of a FINRA investigation, whether your and your firm’s interests are aligned, and various other factors. Here, too, your lawyer should be able to help you make informed decisions with your best interests in mind. Then, your lawyer should be able to assist with taking any further action necessary for your protection.
Why is FINRA Investigating?
If you are the target of a FINRA investigation, another key step will be determining why FINRA is investigating. There are numerous possibilities, as FINRA investigations target violated FINRA rules and federal securities laws and regulations.
When facing scrutiny from FINRA, building and executing a sound defense strategy starts with understanding what you need to defend against. Some examples of common allegations leading to (and resulting from) FINRA investigations include:
- Charging excessive fees or commissions
- Disclosure violations
- Recordkeeping violations
- Registration violations
- Misappropriating investors’ securities or funds
- Providing unsuitable investment advice
- Engaging in other forms of fraud
Crucially, these allegations can lead to FINRA sanctions and SEC enforcement action. The SEC routinely takes action against brokers, associates, and firms of all sizes. It also investigates broker, dealer, and others suspected of regulatory and statutory violations, and the consequences of an SEC investigation can be even greater than those of facing scrutiny from FINRA.
Once you know why you are facing scrutiny, then you can work with your counsel to build an informed and strategic defense strategy. This starts with taking a strategic approach to your FINRA 8210 letter response. However, this may truly be just the beginning. Defending against a FINRA (or SEC) investigation can be long and intensive, and working closely with experienced defense counsel throughout the process in a timely manner can be essential for avoiding unnecessary consequences.
