I have been waiting for a while to write about this issue, since it arose in an Enforcement case I handled for a client, and I wanted the matter to run its full course at FINRA before I started throwing stones. Sadly, there are so many things I could complain about here. The fact that the entire case derived from my client’s supposed failure to abide by interim restrictions that FINRA imposed in connection with a pending CMA, even though there was no basis for FINRA to have imposed the restrictions in the first place. The fact that, apparently, it matters not how badly a witness called by FINRA performs at the hearing: they will always be deemed credible. The fact that – pursuant to rule – FINRA invites witnesses who appear for OTRs to go in and review their testimony afterwards, but, if someone actually avails himself of the right to do so and corrects his testimony, that fact will be held against him in gauging his credibility. The fact that FINRA dishes out permanent bars like Halloween candy, almost irrespective of the allegations.

But, there was something worse than all of that. And it involves a subject on which I have written repeatedly, and that’s FINRA’s abuse of its 8210 power. This case may have included not just the worst abuse I have ever witnessed, but, even worse, a threat made not by the examiner but, rather, by the Hearing Officer that underscores the nearly limitless scope of FINRA’s ability to compel an associated person to produce documents, no matter how personal, no matter how clearly unrelated to the exam those documents may be.

Here is what happened. My client was “requested” by FINRA pursuant to Rule 8210 to appear and provide sworn testimony at an OTR. One of the subjects of interest to FINRA was a laptop my client testified was the only computer that he recalled using for BD-related business. He wouldn’t unequivocally say he never used another, but, if he did, he lacked a specific recall. In the middle of the OTR, FINRA whipped out another 8210 letter that required my client to produce the laptop immediately. FINRA had some forensic computer guy standing by, ready to image the hard drive. The only thing that FINRA said it would not copy from the hard drive was the email folder, so as not to obtain any attorney-client privileged communication. But, everything else on the hard drive was fair game. No matter how personal. Wedding photos. Documents relating to businesses other than the BD. Didn’t matter.

We expressed concern, naturally, but FINRA threatened to bring an immediate 8210 Enforcement action. So, like everyone else with an 8210 gun to their head, we produced the computer, and FINRA copied the hard drive, wedding photos and all, everything but the email folder.

At the Enforcement hearing a couple of years later, I objected to the search of the hard drive, calling it illegal, complaining that FINRA had absolutely no right to see anything on the hard drive except documents relating to the BD.

Two things happened. First, the Hearing Officer concluded that we had waived any objection because we capitulated to FINRA’s threat at the OTR that if we didn’t produce the laptop then and there my client would have been named as a respondent in an Enforcement action immediately. Not sure exactly what the HO thought we should have done, to be honest. But, I will tell you this: next time I get a request like this for a laptop, FINRA is going to have to pry it out of my hands. I mean, my client ended up getting charged with an 8210 violation anyway, so why not fight about the scope of the request upfront?

Second – and these are the words that I have been stewing about for two years – the HO said this when I pointed out that 8210 gives FINRA no right to compel my client to produce the many personal documents he maintained on the hard drive: “A firm or an associated person who nevertheless elects to commingle personal or unrelated business materials with member firm materials, whether stored electronically or in hard copy, does so at its own risk.” If you wanted clearer evidence that FINRA considers Rule 8210 to be equivalent of a search warrant, you couldn’t find it. For what is the “risk” that HO is referring to if not the risk that your personal materials are going to be grabbed by the FINRA examiner due to their mere proximity to business materials?

But, that’s NOT how 8210 works. It does not provide FINRA the right to play storm trooper and seize whatever it wants under penalty of being barred. Rule 8210 does not give FINRA the right to rifle through your desk drawers, your file cabinets, or your computer hard drive It merely gives FINRA the right to compel BDs and individuals associated with BDs to produce documents and information that are related to an exam. But, under the HO’s interpretation of Rule 8210, FINRA can literally grab whatever it wants, whether it’s on your hard drive or in your desk, if it happens to be near some business document.

This sad case underscores the need for the rule to be amended to add a process by which the recipient of an 8210 request can challenge the request without having to worry that the consequence of not prevailing is a permanent bar. As I have noted before, a subpoena recipient can go to court to argue about the scope of a subpoena. If he loses, the result is that he must obey the subpoena, and that’s it. There is no other sanction. Under FINRA’s ridiculous rule, however, the only way to challenge an 8210 request is to be named as a respondent in an Enforcement action, an action that will result in a permanent bar if FINRA wins.

FINRA examiners all too frequently misunderstand the scope of their permissible 8210 requests, making life difficult for member firms who have little choice but to knuckle under to overly broad, overly numerous requests; but, when empowered with language like this from OHO, not only it is easy to see why examiners act the way they do, it is clear that they will simply continue to treat their 8210 request as search warrants. This cannot continue. The industry members of the District Committees, of the NAC, of the Board: they must speak as one to rein FINRA in. Otherwise, there is no check, no balance on FINRA’s extraordinary power under Rule 8210.

 

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Alan Wolper

Alan focuses his practice exclusively on defending regulatory investigations and enforcement actions brought by the Financial Industry Regulatory Authority (FINRA), the United States Securities & Exchange Commission (SEC), and state securities commissioners against brokers, broker-dealers, and investment auditors. He was previously Director of the National Association of Securities Dealers (NASD) Atlanta District Office, where he oversaw nearly 600 member firms and thousands of branch offices. Alan also served as a member of the NASD’s Department of Enforcement, where he had the primary responsibility for prosecuting hundreds of formal disciplinary actions.