Regulatory Investigations

The receipt of a subpoena from the Securities Exchange Commission ("SEC") or a Rule 8210 request from the Financial Industry Regulatory Authority ("FINRA") can sometimes be expected; other times, it can come as a complete surprise. In either situation, a response must be prepared. A firm or individual receiving a document request or a subpoena from a regulator should understand that the request is not going away. Failure to respond could lead to serious sanctions.

If a firm recently filed an amended U-4 reporting the receipt of a customer arbitration claim, the firm and the broker handling that client's account will likely receive a Rule 8210 request from a FINRA investigator seeking copies of the pleadings, customer account records, records of other complaints against the broker, etc. This is fairly routine and many larger firms have a staff of paralegals who respond to such requests.

On the other hand, if a customer makes a complaint directly to a regulator without notifying the firm, the firm and the broker who is the subject of the complaint may not know the reason for the document request. For instance, the SEC maintains a Tips, Complaints and Referrals Portal for the filing of complaints. FINRA's website has an Investor Complaint Center that encourages investors to make complaints directly to FINRA. The regulator issuing the document request may not immediately (or ever) reveal the reason for the document request.

While initial routine document requests, such as the one described above, can be easily responded to, more complex requests require the services of experienced and knowledgeable securities regulatory attorneys. If, as the result of an audit, a trading desk becomes the subject of an inquiry, the first document request may seek a large volume of trading records, several months of email and phone records of individual traders, those traders' personnel and registration files and expense reports. Similarly, FINRA frequently conducts targeted inquiries directed at complex securities such as exchange-traded funds ("ETFs"). FINRA auditors will "swoop down" on a branch and demand the production of records detailing all ETF trades in a specified time period, commission records showing which brokers earned the most money trading ETFs, records for the accounts that purchased the greatest quantities of ETFs, etc. The auditors may then want to interview some of the branch personnel.

In those circumstances, the best course for the firm is to retain experienced securities regulatory lawyers like those at Lubiner, Schmidt & Palumbo to coordinate the collection, review and production of the documents sought.

After the production of documents, if the investigation continues, the next step would be an on the record interview. If a person gets a letter from FINRA requesting they appear at a designated FINRA office at a specified date and time, now is the time to retain a knowledgeable securities regulatory attorney, if it hasn't been done already. The on the record interview is a formal interview conducted before a stenographer who records the session. FINRA is typically represented by the lead investigator and one or more staff attorneys, all of whom may ask the witness questions. The witness is permitted to have an attorney present during the interview.

IT IS IMPERATIVE that an experienced securities regulatory attorney represents any person who is to be questioned in an on-the-record interview. The witness will need assistance in reviewing the documents that have been produced to date. The attorney can help the witness anticipate the questions he will be asked. Most importantly, the attorney can prepare the witness to provide truthful, accurate and concise answers to the examiner's questions.

At some point, an individual involved in the investigation may get a letter from the regulator advising that person that they are the subject of the investigation. That person, if a registered representative, is now obligated to amend his U-4 to reflect that he is the subject of an investigation (the receipt of an initial document request does not usually trigger the reporting obligation).

At the conclusion of the investigation, the regulator will typically approach the attorneys representing the firm and any individual employees to advise that 1) the investigation is being concluded with no action being taken against the firm or any individuals or 2) the regulator is considering filing charges against the firm and/or certain individuals. If they are considering filing charges, they inform the firm by way of a "Wells notice" in which they briefly outline their findings and the charges they are considering bringing.

If, however, you and your attorney recognize that there is potential regulatory exposure, your attorney can approach the regulator to request an informal meeting to discuss potential charges and early resolution. This avoids the issuance of a Wells notice, which is discoverable.

Currently, many securities regulatory attorneys advise their clients to forgo responding to the Wells notice (referred to as a "Wells submission"). In the view of many, it would extremely difficult to change the minds of the investigators once they have completed their investigation and issued a Wells notice, absent some egregious misreading of a rule or regulation or the misinterpretation of the facts presented.

Moreover, by filing a Wells submission, the person or firm being investigated is necessarily providing a roadmap to the regulator detailing his defense strategy. In addition, a Wells submission is not a privileged document and can be used in the future by another regulator or third party in a civil action or arbitration.

If the matter has not been discontinued, the regulator will most likely entertain settlement negotiations. Here again, the need for an experienced securities regulatory attorney becomes evident In a FINRA matter, FINRA's Sanction Guidelines on its website can be reviewed. SEC and FINRA enforcement actions are available on the Internet to be researched. An experienced securities regulatory attorney can tell the regulator why YOUR case is different from the reported decisions and why you should get a better deal.

If a case cannot be settled, and a hearing is conducted, an experienced securities regulatory lawyer can present the most advantageous defense for you. An experienced regulatory attorney will be needed to analyze relevant documents, prepare to present and cross examine witnesses and prepare you for your testimony before a hearing panel.

As can be seen from above, the need for experienced counsel to assist in defending a regulatory investigation is unquestioned. If you are to be a witness in, or you or your firm is a target of, a regulatory investigation, call us now.