Category: FINRA Rules

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FINRA Rules

Should I Tell the Regulators?

One question that comes up in the world of broker-dealer consulting is when and what to tell a regulator. This issue can arise in the context of a regulatory examination, responding to a regulatory inquiry, determining whether to self-report, or even in a FINRA OTR.

It is important to understand the context of the request in determining how to properly respond to a FINRA inquiry. First and foremost, a broker-dealer or registered representative should understand that FINRA’s Rule 8210 requires that its members and associated persons of members provide responses that are truthful and complete. And failure to do so can result in serious sanctions, including a lifetime from the securities industry. It is also important to understand that certain items require reporting whether or not FINRA has specifically asked for the information. For example, Rule 4530 requires reporting of certain complaint information and information about internal conclusions that broker-dealers may have made.

FINRA has also said that it will provide credit to firms who self-report or otherwise demonstrate extraordinary cooperation. For more information on this, see Regulatory Notice 08-70.

There are many things that are required by FINRA Rules to be reported. There are other things that are not specifically required to be reported, but probably should be. And then there are times when a response should simply answer the direct questions being asked by a regulator. Knowing the proper approach to preparing a regulatory response is critically important on many levels. If you have received a FINRA Rule 8210 letter, a request to appear for a FINRA OTR, or if you just have an issue that may need to be reported, make sure you contact a professional with extensive experience in addressing FINRA reporting requirements.

Mitch Atkins, FINRA’s former SVP and Regional Director is experienced in assessing FINRA regulatory inquiries and “FINRA Rule 8210 letters.” For help with your regulatory responses or a regulatory investigation, contact Mr. Atkins who is now Principal at FirstMark Regulatory Solutions in Boca Raton, Florida at 561-948-6511. Mr. Atkins is not an attorney and FirstMark Regulatory Solutions is not a law firm. Neither Mr. Atkins nor FirstMark Regulatory Solutions provide legal services.

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FINRA Rules

A New Approach to Branch Office Inspections

There has been quite a bit of recent news about FINRA’s revisions to its Supervision Rule. The details are spelled out in FINRA Regulatory Notice 14-10. Updates to the rule became effective on December 1, 2014. Since there are numerous articles already written on the FINRA Notice, the key focus of this discussion is the requirement to inspect branch offices. This requirement remains largely unchanged, other than the elimination of the producing branch manager requirements (replaced with identifying and managing conflicts). Taking a look back over the last several years, it is clear that the direction FINRA is moving on its expectations of its members’ branch inspection programs is similar to what it is doing with its own examination program – going risk-based.

If your firm is still conducting branch office examinations based simply on the time since the last review and whether or not the location is an OSJ, it may be time to revisit the design of the program. Simply put, a risk-based program employs the use of data to essentially risk-rank the branch offices (and representatives working in them). This may involve assigning a risk score to the representative and/or the branch office. To develop this risk score, firms consider all available data on the branch and its representatives including: complaints, disclosures, regulatory inquiries, production, outside business, and product mix to name just a few. Once a firm has identified its risk factors and compiled risk scores for each office/representative it may then tailor its branch program to those risks.

An effective risk-based branch inspection program will use the risk scores to drive both the frequency and intensity of the inspection. For example, a higher risk score may result in a more frequent (or even unannounced) visit to the branch. A risk score heavily weighted by outside business activities may drive in-depth reviews from the home office or by outside due diligence providers. And clearly, there are some risks that do not lend themselves to scoring – many have seen events that the information the firm maintains did not predict. For those, an element of randomness in the reviews is warranted as well.

A risk-based approach can yield benefits in terms of maximizing the yield of the branch inspection program. Broker-dealers will want to direct their limited resources to the places where they are most needed. Effective use of data can accomplish this. And both FINRA and the SEC have stated that they expect firms to conduct risk assessments to drive the frequency, intensity and focus of branch examinations. For more information on their views, see Joint SEC/FINRA National Examination Risk Alert – November 30, 2011 and FINRA Regulatory Notice 11-54

If you have questions about developing a risk-based branch inspection program, Mitch Atkins, FINRA’s former South Region Director has extensive experience in this area. Mitch Atkins, Principal at FirstMark Regulatory Solutions, can be reached by calling 561-948-6511.

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FINRA Rules

On-the-Record Testimony

FINRA’s Rule 8210 is one of its most powerful investigative tools. It permits FINRA, in connection with an examination or investigation, to request documents and information. Sometimes, instead of a letter requesting information, FINRA asks for an appearance before a court reporter. If you have received a notice from FINRA requesting that you appear for on-the-record testimony (or an “OTR”), this is one letter you must take seriously. FINRA uses the OTR to conduct investigative testimony. Rule 8210 gives FINRA the authority to compel persons subject to its jurisdiction (generally persons associated with a FINRA registered broker-dealer) to appear before a court reporter and provide sworn testimony.

Most of the time, these OTRs are conducted at a FINRA district office. However, FINRA sometimes makes exceptions, depending on the circumstances of the proposed witness. One of the common exceptions occurs when a witness who is not near a FINRA district office requests that FINRA travel to his or her location due to a medical or financial hardship. FINRA does not always grant these requests, but if this is your situation, it is worth a try. Remember, FINRA may request evidence of your hardship. FINRA may also be flexible about the specific date of the OTR, depending on the urgency of the investigation. Either way, make sure you act promptly upon receiving a notice. Failure to appear for an OTR, absent exceptional circumstances, will likely result in a bar from the industry.

FINRA usually has several participants in an OTR. Generally, a FINRA attorney is present along with one or more staff members. As a witness you are permitted to bring an attorney as well. However, FINRA does not permit the participation of others (such as a compliance officer, a friend or a coworker). FINRA requires that anyone participating in an OTR with a witness be an attorney representing that witness.

Generally, an OTR lasts one or two days, depending on the complexity and volume of issues being discussed. FINRA may or may not give a witness much detail about what will be discussed, but they will usually give a very general outline.

An OTR starts with a court reporter swearing in the witness. Then FINRA reads a statement of instructions and begins asking a series of questions about whatever issue they are investigating. FINRA’s authority under Rule 8210 grants them the ability to specify the conditions under which the OTR will be taken, and that includes the prohibition of the use of recording devices by the witness. FINRA will generally make the transcript of the OTR available to the witness, either for review at the FINRA district office, or for purchase directly from the court reporting service.

FINRA’s OTRs are often utilized when the nature of the inquiry does not lend itself to a standard inquiry letter. For example, during an OTR, FINRA may present an exhibit to the witness and ask the witness questions about the exhibit. Document intensive questioning generally is not well suited to letter writing.

If you have been notified by FINRA that you are being requested to appear for an OTR, it is important that you take the request seriously and that you act immediately. Your first step should be to consider hiring an attorney who is experienced in representing clients in FINRA OTRs. Further, depending on the issues at hand, you may want to hire an experienced consultant to assist with the issues surrounding the investigation.

Mitch Atkins, FINRA’s former SVP and Regional Director has extensive experience as a consultant working with complex FINRA investigations. Contact him at FirstMark Regulatory Solutions in Boca Raton, Florida at 561-948-6511.

Mr. Atkins is not an attorney and does not provide legal services.