Published by Herskovits PLLC

FINRA Disciplinary Proceedings – Inside FINRA’s Complaint and Hearing Process

FINRA Disciplinary Proceedings – Inside FINRA’s Complaint and Hearing Process

FINRA’s enforcement program is big business.

In 2008, FINRA levied fines totaling $28 million. By 2016, that number jumped to $176 million. In 2008, FINRA ordered restitution payments to investors totaling $6 million. By 2015, that number jumped to $96 million.

Each year, FINRA initiates approximately 1,500 disciplinary actions against member firms and employees. FINRA’s Office of Hearing Officers resolves approximately 400 proceedings per year.

Although FINRA’s enforcement program is expansive, insufficient guidance is given to industry participants who choose to contest FINRA’s charges. This post sheds light on the nuts and bolts of FINRA’s disciplinary hearing process. Obviously, many enforcement matters involve complex issues of fact and law and require the assistance of a lawyer so be aware that this is basic information and no substitute for legal advice.

It is imperative that you consult an experienced FINRA-defense attorney to assess your exposure, if any and decide on the best strategy for your unique circumstance.

Overview

The lifecycle of a FINRA disciplinary proceeding follows a predictable path:

Pre-Complaint Investigation

This topic was covered in an earlier post.

Complaint – The Disciplinary Proceeding Officially Begins

A disciplinary proceeding officially begins when FINRA serves the Complaint. FINRA’s complaint is supposed to specify “in reasonable detail” the conduct which caused the rule violation. Once the Complaint is issued, the respondent has 25 days to file an Answer, which must admit, deny, or disclaim knowledge responsive to, each allegation in the Complaint (FINRA Rule 9215).

The Answer

Common issues with the answer relate to a Hearing Request, Insufficient Details in the Complaint and Default.

Hearing Request – FINRA Rule 9221

When filing the Answer, the responding party has the right to a demand a hearing (FINRA Rule 9221). Failing to request a hearing when filing your Answer may waive your right to demand a hearing.

Insufficient Details in the Complaint

You are permitted to file a “motion for a more definite statement.” A motion is simply a written request to obtain a ruling from the Hearing Officer. A motion of this type may be appropriate if the Complaint fails to provide enough detail for you to understand the charge against you and plan your defense.

Default

Failing to answer the complaint permits the Hearing Officer to issue a default decision.

Hearing Officer and Panel are Appointed

Soon after the Complaint is filed, FINRA’s Chief Hearing Officer appoints the Hearing Officer who will preside over your case. The Hearing Officer is employed by FINRA but strives to be impartial and conflict-free.

Hearing Officers play no role in the pre-complaint investigation and maintain independence from FINRA’s enforcement program. Biographies of FINRA’s Hearing Officers are available at finra.org. The function of the Hearing Officer is to resolve all motions and ensure that the proceeding is conducted fairly and efficiently.

Hearings are typically heard before a 3-person Hearing Panel. The panel is chaired by the Hearing Officer and includes 2 industry panelists who typically are drawn from FINRA’s District Committees.

Settlement Process (Prior to Complaint v After Complaint Issued)

The settlement process shifts once a Complaint has been issued. Prior to the issuance of a Complaint, settlement is documented with a Letter of Acceptance, Waiver and Consent.

After the Complaint has been issued, settlement occurs only through a written Offer of Settlement (FINRA Rule 9270).

An Offer of Settlement is presented to the Hearing Officer and must contain the following:

  • A signature by the respondent
  • Identification of the origin the disciplinary action
  • Specification of the rules which were allegedly violated
  • Specification of the facts or practices that the respondent engaged in to cause the rule violation
  • A statement consenting to findings of fact and violations consistent with the terms of the Offer of Settlement
  • A proposed sanction

The decision to submit an Offer of Settlement is a difficult one. If the Offer of Settlement is rejected, the Hearing Panel may assume that the person who submitted the Offer is guilty of the rule violation.

Offers of Settlement can be contested or uncontested. It is uncontested if Enforcement or Market Regulation agrees in advance to the terms of the Offer and is contested if they do not. Clearly, the odds of acceptance of the settlement offer increase greatly if the Offer is uncontested.

Settlement terms may also be reached by mediation through FINRA’s Office of Hearing Officers mediation program. If mediation is agreed to, the Chief Hearing Officer appoints a Hearing Officer (other than the Hearing Officer assigned to the case) to conduct the mediation.

Mediation is confidential, voluntary and non-binding, meaning that any party can choose to discontinue the mediation at any time. The mediation is typically conducted by telephone.

Initial Pre-Hearing Conference

At various points during the pre-hearing phase, the Hearing Officer may order the parties to attend a pre-hearing conference by telephone.

The initial pre-hearing conference is important because it sets a case management and scheduling order. Generally, the Hearing Officer will expect the parties to strictly adhere to each deadline in the scheduling order.

Deadlines typically set during the initial pre-hearing would include:

  • Dates and location of the final hearing
  • Deadline for parties to file motions for leave to permit expert testimony
  • Deadline for parties to file motions for summary disposition pursuant to FINRA Rule 9264
  • Deadline for the respondent to file a motion related to Enforcement’s production of documents under FINRA Rules 9251 and 9253
  • Deadline for respondent to file a motion seeking to compel Enforcement to invoke FINRA Rule 8210 to obtain documents or hearing testimony from non-parties
  • Deadline for parties to exchange proposed stipulations concerning relevant undisputed facts
  • Deadline for parties to file pre-hearing submissions, including briefs, witness lists, exhibits lists, and proposed exhibits
  • Deadline for parties to file objections to proposed witnesses or exhibits

Discovery

Discovery is the term used to describe the exchange of documents or information before trial. Litigants use discovery as a means to obtain documents or information needed to support their claims or defenses.

Discovery in the context of a FINRA disciplinary proceeding will likely feel decidedly one-sided.

Enforcement has vast powers to conduct an expansive investigation. In so doing, Enforcement obtains all the discovery it deems necessary before starting the disciplinary proceeding. They can obtain documents and testimony from any member firm or employee without your knowledge and without any practical limitation.

Once Enforcement or Market Regulation deems its investigation complete (meaning, once they obtain the documents and information they deem necessary to support its charges), the Complaint is filed.

Nevertheless, when defending a disciplinary action, you are not afforded anywhere near the same latitude to obtain documents or information which may support your defenses.

FINRA’s rules do require automatic disclosure by Enforcement or Market Regulation of the following categories of documents, provided the documents “relate to” the investigation which led to the disciplinary proceeding:

  • Requests for documents or information issued pursuant to FINRA Rule 8210 and all responses
  • Requests for documents or testimony not issued pursuant to FINRA Rule 8210 and all responses
  • All transcripts and transcript exhibits
  • Documents obtained from non-parties
  • Documents containing “material exculpatory evidence,” meaning documents which may rebut FINRA’s charges of wrongdoing

Common Discovery Issues

The common issues in discovery, some quite different from traditional litigation, include those set out below.

Absence of Subpoena Power

In traditional litigation, you have the ability to subpoena documents or testimony from third-parties which may be critical to support your defense. However, in a FINRA disciplinary proceeding, you have no right to issue subpoenas for documents or testimony.

You can file a motion asking the Hearing Officer to order Enforcement to issue a Rule 8210 request to a member firm or its employees, but you should not assume the Hearing Officer will grant the request.

The motion must describe the documents, state why these documents are material, identify the efforts made to obtain the documents by other means, and state whether FINRA has jurisdiction over the custodian of the documents (FINRA Rule 9252).

Generally, the Hearing Officer will need to be convinced that, (1) the information sought is relevant, material, and noncumulative; (2) the requesting Party has previously attempted in good faith to obtain the desired documents and testimony through other means but has been unsuccessful in such efforts; and (3) each of the persons from whom the documents and testimony are sought is subject to FINRA’s jurisdiction.

Disputes Concerning Whether a Document “Relates to” Your Proceeding

Enforcement or Market Regulation is only required to produce documents obtained by FINRA “in connection with the investigation that led to the institution of proceedings.” This standard may invite abuse on the part of Enforcement because it is easy to claim that documents in FINRA’s possession were not obtained “in connection with” your investigation.

Generally, you will need something more than assumption to convince a Hearing Officer that documents withheld by Enforcement or Market Regulation were obtained “in connection with” your investigation.

Disputes Concerning Witness Interview Notes

A respondent is entitled to file a motion seeking “witness statements” (generally, a transcript of an “on-the-record” interview) for each witness that Enforcement or Market Regulation may call to testify.

A respondent may also file a motion seeking witness interview notes transcribed by a FINRA investigator.

For technical reasons, it is uncommon to obtain witness interview notes taken by a FINRA investigator.

Pre-Hearing Motions

Pre-hearing motions will generally concern:

  • Motions for summary disposition (FINRA Rule 9264)
  • Motions to obtain documents or testimony from members firm or employees (FINRA Rule 9252)
  • Motions concerning the use of expert witnesses
  • Motions concerning proposed witnesses, exhibits or areas of testimony

Pre-Hearing Submissions

Prior to the hearing parties must exchange Witness Lists, Exhibit Lists and file a Prehearing Brief. Below are some details on each.

Witness List

The parties are required to exchange witness lists. The list must disclose the name, address, telephone number, and current occupation of each prospective witness. The list must also briefly describe the substance and scope of the anticipated testimony.

Once the witness list is exchanged, either side can object to witnesses proposed by the opposing party.

Exhibit List

The parties are required to exchange proposed exhibits. The list must include a description of each exhibit and a brief statement indicating the purpose for which the document will be offered at the hearing.

The determination of which documents to use is labor intensive because Enforcement often produces thousands of pages of documents during discovery.

Once the exhibit list is exchanged, either side can object to exhibits proposed by the opposing party.

Pre-Hearing Briefs

Pre-hearing briefs are critically important. You are expected to provide a cogent narrative of the facts and apply the facts to the rules at issue.

This is often the first opportunity for the respondent to educate the Hearing Panel on your “view of the world.” Prior to this point, the Hearing Panel has only seen a one-sided presentation – the Complaint.

Drafting a persuasive pre-hearing brief requires skill and a great deal of effort. It is difficult to extract nuggets of information from thousands of pages of documents and weave that information into a persuasive fact pattern.

The Hearing

The hearing is conducted in a manner very similar to traditional litigation. The parties can make opening remarks. Then Enforcement or Market Regulation has its witnesses testify. Then the respondent has his witnesses testify.

The hearing will conclude with closing statements by the parties.

Trial strategy is well beyond the scope of this post. Suffice it to say, it requires a highly skilled lawyer to effectively question witnesses and elicit favorable testimony at a disciplinary hearing.

Post-Hearing Submissions

Hearing Officers may direct the parties to file proposed findings of fact and conclusions of law, or post-hearing briefs, or both. These, too, are labor intensive endeavors. A persuasive post-hearing brief provides a cogent narrative of the record (the record is comprised of witness testimony and documents received in evidence).

Conclusion

After the hearing concludes, the Hearing Panel typically issues the decision within 60-days. The parties do have certain rights to appeal an adverse decision, first to the National Adjudicatory Council, then to the SEC, and finally to a Federal Court of Appeals.

Disclaimer

This post is for general informational purposes only and is neither intended as, nor should it be considered, legal advice. Every fact situation is different and there is no substitute for qualified legal counsel which you should seek at the earliest possible moment as there are strict timelines in all areas of Securities Law.

Questions Concerning FINRA’s Disciplinary Process? Call Us. FINRA Defense and Securities Litigation is all We Do: 212 897 5410 or Email Us

Related topics: FINRA rulings (29)


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