3.3 FINRA Investigations, Disciplinary Proceedings, Sanctions, and Exemptions
Key Takeaways
Rule 8210 lets FINRA require members and associated persons to provide information, documents and on-the-record testimony; failure to comply can lead to an expedited suspension and, after three months, an automatic bar or expulsion under Rule 9552.
A respondent has 25 days to answer a FINRA complaint and 14 days after a second notice before a default decision may be entered (Rule 9215 and Rule 9269).
An appeal to the NAC must be filed within 25 days and stays the Hearing Panel decision, except for any permanent cease-and-desist order (Rule 9311).
A final FINRA action may be appealed to the SEC within 30 days, and an SEC order to a federal court of appeals within 60 days; neither appeal automatically stays sanctions.
FINRA retains jurisdiction to file a complaint against a former associated person for two years after termination, or after a Form U5 amendment disclosing possible misconduct.
Investigations Under Rule 8210
Rule 8210 authorizes FINRA staff to require any member, associated person or other person subject to FINRA's jurisdiction to:
- provide information orally, in writing or electronically;
- give testimony under oath, often called on-the-record (OTR) testimony; and
- make books, records and accounts available for inspection and copying.
FINRA is a private self-regulatory organization, not a government agency, so it does not use subpoenas. Its authority comes from membership and registration. Courts and the SEC have generally held that a person cannot refuse to cooperate with FINRA by invoking the Fifth Amendment without consequences. A refusal is treated as a failure to comply.
Non-cooperation. If a person fails to provide requested information, Rule 9552 lets FINRA serve a notice of suspension. A person who is suspended and does not request termination of the suspension within three months of the original notice is automatically barred. A member in the same position is expelled. A refusal to respond is also commonly charged as a Rule 8210 and Rule 2010 violation, typically resulting in a bar.
The Disciplinary Process (Rule 9000 Series)
| Stage | Key points |
|---|---|
| Investigation and resolution options | Matters may be resolved by a Letter of Acceptance, Waiver and Consent (AWC), by an offer of settlement, or, for minor rules, under the Minor Rule Violation Plan |
| Complaint (Rule 9211) | The Department of Enforcement files a complaint with the Office of Hearing Officers (OHO) |
| Answer (Rule 9215) | Due 25 days after service. If no answer is filed, a second notice allows 14 days. Continued failure permits a default decision under Rule 9269, with the allegations deemed admitted |
| Hearing | A Hearing Panel of a Hearing Officer (a FINRA attorney who chairs it) and two panelists drawn from the securities industry. Enforcement must prove violations by a preponderance of the evidence |
| Decision and sanctions (Rule 8310) | Censure, fine, suspension, expulsion of a member, bar of an associated person, restitution, requalification, or any other fitting sanction, guided by FINRA's Sanction Guidelines |
| Appeal to the NAC (Rule 9311) | Either party may appeal within 25 days. A timely appeal stays the decision until the NAC rules, except any permanent cease-and-desist order. Under Rule 9285, the Hearing Officer may impose conditions to protect customers, and the firm must adopt a heightened supervision plan (Section 1.4) |
| FINRA Board review (Rule 9351) | A Governor may call a NAC decision for review by the next Board meeting that is at least 15 days after the Board receives the proposed decision. Otherwise the NAC decision becomes FINRA's final action |
| SEC review | Under Exchange Act Section 19(d), an aggrieved person may apply within 30 days. The SEC reviews the record de novo and may affirm, modify, set aside or reduce sanctions. The application does not automatically stay sanctions |
| Court of appeals | Under Section 25, a petition for review of the SEC's order is due within 60 days |
Effect of a sanction (Rule 8311). A member may not let a suspended or barred person stay associated in any capacity inconsistent with the sanction, including clerical work in the case of a bar. It also may not pay the person remuneration from securities transactions accrued during the sanction period. Rule 8312 governs public BrokerCheck disclosure of disciplinary information.
Retention of Jurisdiction
Resigning does not end FINRA's authority:
- Associated persons (By-Laws Article V, Section 4). A former associated person remains subject to the filing of a FINRA complaint for conduct during the association, and to Rule 8210 requests, for two years after the effective date of termination. If the firm later files a Form U5 amendment disclosing that the person may have engaged in actionable conduct, the two years run from that amendment.
- Members (Article IV, Section 6). A resigned or cancelled member remains subject to a complaint for two years after the effective date.
The complaint must be filed within the window. Once filed, the proceeding can continue to a conclusion even after two years have passed.
Anti-Intimidation and Coordination (Rule 5240)
Rule 5240 prohibits a member or associated person from:
- coordinating prices, quotations, trades or trade reports with another member or person;
- directing or requesting another member to alter a price or quotation; or
- threatening, harassing, coercing or intimidating, or otherwise attempting to improperly influence, another member, associated person or any other person. Examples include pressuring a market maker to change a quote or refusing to trade in retaliation for competitive pricing.
Rule 5240 preserves a firm's freedom to set its own prices and spreads unilaterally and to negotiate bona fide transactions. Separately, FINRA treats attempts to discourage customers from reporting to regulators, such as confidentiality terms in settlement agreements, as inconsistent with Rule 2010.
Exemptions (Rule 9600 Series)
Many FINRA rules let staff grant exemptive relief for good cause. Examples include the principal approval requirement for retail communications (Rule 2210(b)(1)(E)), certain filing requirements (Rule 2210(c)(9)), the gifts rule (Rule 3220(d)), fidelity bond computations (Rule 4360(f)(2)) and account statements (Rule 2231(e)). A member applies in writing under the Rule 9600 Series, explaining the relief sought and the supporting facts. Staff decisions may be appealed to the NAC.
Supervisory Responsibilities
- Coordinate every Rule 8210 response with compliance and counsel, and meet the stated deadline or obtain an extension in writing.
- When an associated person is suspended or barred, remove the person from all prohibited functions and stop transaction-based compensation for the sanction period (Rule 8311).
- Preserve records of departed representatives under SEC Rule 17a-4 retention periods, because FINRA may still investigate them for two years or longer.
A FINRA Hearing Panel fines a representative $40,000 and imposes a nine-month suspension, and the representative files a timely appeal with the National Adjudicatory Council. What is the effect of the appeal under Rule 9311?
The fine doubles if the appeal is unsuccessful
The fine and the suspension are stayed until the NAC decides, though the Hearing Officer may impose conditions to protect customers
The suspension takes effect immediately, but the fine is stayed
Neither sanction is stayed, because only SEC appeals stay sanctions
A former representative ignores a Rule 8210 request for testimony sent 14 months after the Form U5 was filed. FINRA serves a Rule 9552 suspension notice, and the former representative never requests termination of the suspension. What happens?
The former representative is automatically barred three months after the original notice of suspension
Nothing, because FINRA lost jurisdiction when the Form U5 was filed
The former representative is suspended for two years, after which the registration may be restored
FINRA must refer the matter to the SEC, which alone can bar former associated persons
Which conduct violates FINRA Rule 5240?
A firm unilaterally lowering its own quotation in a security to attract customer orders
A firm deciding which market makers it will route orders to
A firm negotiating the price of a block purchase with another dealer
A trader threatening to stop doing business with another member unless it widens its quotations in a security
Sections you finish are checked off in the contents.