If you are a regular reader of this blog, then you know that over my last few posts, I have been talking about an increasingly visible effort by FINRA to turn its regulatory eye from rogue brokers – who have been an irritant to FINRA and NASD for decades – to rogue firms (my term, not FINRA’s).  It started off with a the casual dropping of an odd phrase – “high-risk firms” – in an email, and quickly moved on to an agenda item at a FINRA Board meeting, where the determination was made to go forward and propose a rule.  Well, those Board meetings happen behind closed doors, so it is difficult to get a detailed understanding of FINRA’s intent beyond the few tidbits that are supplied after the fact.

This week, however, Robert Colby, FINRA’s Chief Legal Officer appeared on a regulatory panel at the SIFMA-CL conference in Arizona, and spoke – albeit briefly – on the subject.  SIFMA was kind enough to post the video of that panel discussion for the world to enjoy, so you can listen here to Bob’s own words about the upcoming proposal.  (The conversation starts at about 1:20:30, way towards the end of the panel.)  More importantly, you can hear for yourself the dangerous new territory into which FINRA is boldly moving.

Essentially, FINRA has concluded that it doesn’t like the fact that to get rid of firms that it deems to bad, it must first go through that troublesome Enforcement process.  Mr. Colby makes two particular complaints about that process.  The first perhaps, is not so troubling, and that is that it takes time, sometimes a long time, to get results.  He suggests that bad firms sometimes continue to do bad things even while they are the subject of an Enforcement action, thus creating even more customer harm even while FINRA is doing what it can to deal with them.

That may be true in some instances.  Of course, Mr. Colby seems to be unaware of the fact that FINRA already possesses the power under the Rule 9800 series in the Code of Procedure to institute an action to obtain a Temporary Cease and Desist Order, or TCDO, for certain serious rule violations.  This is a very powerful weapon, which allows FINRA to get the equivalent of an injunction to stop certain behaviors in their tracks while it seeks a final disposition.  It is not clear why this avenue of relief isn’t good enough for FINRA.  What I can tell you is that FINRA almost never uses it, for whatever reason.

Mr. Colby’s second complaint about the Enforcement process, the one that I think is incredibly scary, just sort of slipped out.  As he begins to describe the problems the Enforcement process presents to speedy action, he says (at 1:21:30), “As you know, Enforcement actions require proof . . . .”  As if the need for FINRA actually to demonstrate “proof” of wrongdoing is a bad thing for FINRA.  A thing that is, apparently, stymieing FINRA from promptly booting all those pesky “high-risk firms” from the membership roll.

So, what FINRA is looking to propose is, to use Bob’s words, a way for it to “lower the boom” on the firms that it considers to be bad (pursuant to a definition of bad that does not yet exist) without the need for it to put on the proof that may otherwise be required in an Enforcement action.  I don’t know about you, but that freaks me out.  It is no wonder that the moderator of the panel, Merri Jo Gillette, current Deputy GC at Edward Jones and former Director of the SEC’s Chicago Regional Office, expressed her interest in seeing how FINRA will manage to address the due process issues FINRA’s desired boom-lowering process triggers.  Add me to that list.  As things presently stand, there isn’t much of a system of checks and balances to keep FINRA in line.  To give FINRA even more power, the power to jettison firms that it identifies as “high-risk,” without having to meet the burden of proof it now must meet when it files an Enforcement complaint, runs contrary to the concept of fundamental fairness, no matter how you define that.  I hope the industry presses back hard on this onel

 

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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.