Alert March 31, 2009

FINRA Provides Guidance on its Enforcement Process

FINRA issued Regulatory Notice 09-17 (the “Notice”) to provide member firms with additional information regarding its investigative and enforcement process and related procedural safeguards.  The Notice is available on the FINRA website at  Key aspects of the Notice are discussed below. 

  • Roles of Enforcement and Market Regulation Departments.  Both FINRA’s Enforcement Department and Market Regulation Department (collectively, “Enforcement”) have responsibility for investigating and bringing formal disciplinary actions against firms and their associated persons.  The Enforcement Department focuses its efforts across a broad range of investigations and cases, while the Market Regulation Department more narrowly focuses mainly on issues surrounding trading and quality of markets. 
  • Basis for Investigations.  FINRA investigations may be prompted by information from a variety of sources, including automated surveillance reports, examination findings, filings made with FINRA, customer complaints, anonymous tips, referrals from other regulators or other FINRA departments, and press reports.  FINRA investigations are non-public and confidential.  Information is requested from firms and their associated persons pursuant to FINRA Rule 8210.  Firms must respond to a request made pursuant to Rule 8210.  Failure to do so may result in a fine, suspension or bar from the industry.  Information acquired during an investigation may be disclosed in connection with an investigation or disciplinary proceeding, in response to requests from the SEC or other governmental agencies and pursuant to a lawfully issued subpoena and/or information-sharing agreements entered into between FINRA and other regulators.
  • Sufficiency of Evidence Process.  The Notice discusses FINRA’s Sufficiency of Evidence process, in which senior Enforcement staff analyze the information and evidence gathered at the conclusion of an investigation and determine whether a violation appears to have occurred.  The senior staff then determine whether to recommend formal disciplinary action.  If the violation is of a minor nature and there is an absence of customer harm or detrimental market impact, the matter may be resolved through an informal disciplinary action, e.g., by issuing a Cautionary Action.  Cautionary Actions do not constitute formal discipline and are not reportable on FINRA’s Central Registration Depository (CRD) system or Form BD, but are considered by FINRA staff in any future disciplinary matter.
  • Wells Calls and Wells Submissions.  Should the Sufficiency of Evidence process result in a recommendation for formal disciplinary action, the staff will generally conduct a Wells Call with the potential respondent.  The process is discretionary and there may be instances where senior Enforcement staff determine to move forward without providing this opportunity, such as when customer funds are at risk.  The potential respondent has the opportunity to respond to the Wells Call by submitting a written Wells Submission discussing the facts and applicable law associated with the formal charges and explaining why those charges may not be appropriate.  An associated person who receives a written Wells Notice is required to report that event on his or her Form U4.  Firms also may have disclosure obligations depending on the circumstances.  A closing letter is sent to each individual who has received a Wells Notice if the matter is closed without formal disciplinary action.
  • Office of Disciplinary Affairs.  FINRA’s Office of Disciplinary Affairs (“ODA”) reviews each proposed settlement or complaint, including all Wells Submissions, and provides an independent review of the legal and evidentiary sufficiency of the charges proposed by the staff.  ODA’s main function is to ensure consistency with FINRA’s Sanction Guidelines as well as applicable precedent.  (The Sanction Guidelines are available on the FINRA website at
  • Disciplinary Advisory Committee.  When FINRA determines a particular case is significant, or particular matters pose novel legal or factual issues, the Disciplinary Advisory Committee (“DAC”) reviews those cases or matters to ensure consistency and proportionality in FINRA’s charging decisions and sanction recommendations.  The DAC also considers whether credit for “extraordinary cooperation” in the investigative and enforcement process is appropriate.  (For a discussion of recent FINRA guidance regarding extraordinary cooperation, see the December 23, 2008 Alert.)
  • Litigation Group Consultation.  FINRA explains that while most cases are settled prior to litigation with an Acceptance, Waiver and Consent letter, Enforcement staff are still required to hold a consultation with the Litigation Group in any case in which a complaint will be filed to determine whether sufficient evidence exists to support the proposed charges. 
  • Hearings/Appeals.  FINRA’s hearing process is governed by FINRA’s Code of Procedures and administered by FINRA’s independent Office of Hearing Officers.  Following the conclusion of a hearing, appeals may be made first to FINRA’s National Adjudicatory Council, then to the SEC and further to a United States Court of Appeals.