In OHO Order 16-26, a Hearing Officer confirmed what those uninitiated to FINRA’s disciplinary process likely would not even suspect: an agreement to settle a FINRA regulatory matter on terms proposed by FINRA’s Department of Enforcement is not necessarily an enforceable agreement.
In this case, the respondent argued that FINRA should be estopped from seeking fines and sanctions higher than those previously agreed to by Enforcement in a settlement agreement that fell through. In striking the respondent’s estoppel defense, the Hearing Officer ruled that there was no settlement agreement because “[t]he argument that an Enforcement attorney may agree to settle a case on FINRA’s behalf acting under actual or apparent authority is ‘wrong.’”
To the uninitiated, this may seem, well, wrong. Settlements with FINRA, however, need to be approved by FINRA’s Department of Enforcement or FINRA’s Department of Market Regulation (depending on which Department is pursuing the matter) and FINRA’s Office of Disciplinary Affairs (“ODA”).[1] “ODA [] reviews settlements for consistency with the Sanction Guidelines as well as applicable precedent. ODA approval is required before the issuance of a settlement or complaint.” Regulatory Notice 09-17.
The lesson to be learned here is to ensure that any settlement demand or proposal from FINRA has been approved both by Enforcement or Market Regulation management and ODA. If not, the settlement proposal is not really a proposal at all, and you may just be bidding against yourself.
[1] ODA was created in the late 1990s, when, as a result of an adverse report from the SEC, the NASD made wholesale changes to the Code of Procedure and the disciplinary process. Among those changes, the decisions to file complaints and to accept settlements was away taken from the District Business Conduct Committees and given, instead, to the lawyers in the Department of Enforcement. But, as a safeguard, to keep Enforcement from acting too crazy, the NASD created the ODA, which must approve Enforcement’s recommendations to file complaints and to accept settlements.