Getting called for FINRA on-the-record (OTR) testimony means one of two things: FINRA alleges securities industry violations against you and may be seeking formal proceedings to take disciplinary action against you; or you can provide facts to support an investigation against alleged misconduct by another broker or brokerage dealer. Either way, all brokers agreed to comply with FINRA’s rules and regulations during registration and must cooperate with FINRA’s requests if they want to continue working in the securities industry. OTRs can be intimidating and stressful, but there is no reason to panic. Here, we will mainly focus on steps brokers should take when facing an OTR as a target of securities industry rules violations.
A broker who is potentially the subject of a FINRA investigation is typically served a subpoena or receives a letter from FINRA staff requesting information and documentation relating to activities surrounding the alleged violations. Once the broker is aware that he/she is under investigation, the broker’s main focus is to take steps to keep the FINRA “inquiry,” which is not reportable on a Form U4, from escalating to a FINRA investigation run by FINRA Department of Enforcement or another similar department. If the inquiry leads to a FINRA investigation, FINRA staff typically orders the broker to appear for OTR.
Although FINRA OTR proceedings can vary slightly depending on the regulatory authority and type of allegations, it is important for brokers to have a basic understanding of OTRs and how to proceed in their best interest. Brokers facing FINRA OTRs are placed under oath and must answer questions truthfully or face severe consequences for committing perjury. The broker should assume that FINRA has obtained and reviewed not only his/her current employer file, but files from past employers as well. It is also likely that FINRA staff has subjected the broker’s colleagues, supervisors, and clients to OTRs. Note that information gathered in OTRs can be shared with government agencies and law enforcement authorities, such as the Securities Exchange Commission and federal prosecutors, who might be conducting their own investigation against a broker. FINRA allows attorneys to be present during OTR; however, the basis for objections to questions that are unfair, repetitive, or misleading are considerably narrower compared to a civil deposition.
If you are a broker under investigation by FINRA and are ordered to appear for OTR, it is in your best interest to hire a lawyer that is experienced in defending OTRs and understands the legal side of the securities industry. Be cautious if your associated firm offers a lawyer; this lawyer may be more concerned about the interests of the firm rather than you. To avoid this discrimination, hire an independent lawyer who is solely focused on your best interests, especially if the alleged misconduct could lead to your termination from the firm.
The letter or subpoena that you received from FINRA will reveal the subject of the investigation and may also describe the potential securities industry rules violations they are investigating. Your attorney should dive deeper to understand the scope of the investigation and contact FINRA staff to determine what “triggered” the investigation (e.g. customer complaints, allegations of misconduct made by your former firm on your Form U5 after being terminated, or inadvertently triggering a red flag during the course of a FINRA sweep of market activity). FINRA investigators are not required to provide copies of the documents you will be asked about during OTR, so it is crucial that your attorney fights for as much information as possible.
Once your attorney has gathered more information about the scope of the investigation, you can then decide the next course of action. If you are facing criminal prosecution, refusing to testify may be your best option, although it would result in a bar from the securities industry. If you decide to cooperate and proceed with the OTR, then your attorney will begin prepping you to answer difficult questions during OTR and practice good demeanor during what is oftentimes a lengthy OTR. Remember, it is likely that FINRA investigators have already interviewed your colleagues, supervisors and clients about the activities surrounding the alleged violations, so it is important that you do not lie or provide “half-truths” during the OTR. FINRA investigators will be comparing all OTRs or informal interviews for consistency. It is important to note that refusing to answer even one question would violate FINRA Rule 8210 which is punishable independent from the subject of the OTR. Finally, prepare to answer questions with more than just a “yes” or “no.” Although one-word answers are less intimidating, providing a detailed response to FINRA investigators’ questions gives you the opportunity to clarify, educate, and possibly persuade.
Lastly, FINRA OTRs end with the opportunity for brokers under investigation to make a closing statement. Do not gloss over your closing statement, as it is your chance to clarify your responses, add any key facts that the investigators missed and should consider, and explain why FINRA is misguided in their allegations.
If you are a broker under investigation by FINRA or another securities industry regulatory agency, call ChapmanAlbin to discuss your options and the best way to proceed to try to avoid potential penalties imposed by FINRA.
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