FIGHTING FINRA – Allegations Are Not Always True

by:  Warren Forest

 Do you know what you would do if you were faced with allegations of regulatory misconduct? Do you immediately admit wrong-doing and take your punishment? Do you ignore the regulators and do nothing? Do you defend yourself against them and fight back?

If you are ever faced with these choices, I can show you how to successfully defend yourself because it happened to me and I won!

If you have been registered in the securities industry for any length of time, chances are good that you, or someone you know, have been charged with violating a securities rule, or law. After all, the securities industry is one of the most highly regulated industries in the world, and the Financial Industry Regulatory Authority, more commonly known as FINRA, is charged with enforcing the myriad of laws, rules and regulations Broker/Dealers and Registered Representatives must comply with. They are extremely vigilant in doing so.

Being a compliance consultant for over thirty years, I have advised numerous clients on how to both prevent adverse actions from occurring, as well as, how to mitigate enforcement allegations if FINRA elects to press charges. While there are many things you can do to defend yourself, when it happens to you, it becomes very esoteric.

Yes, FINRA charged me, an independent securities compliance consultant, with a series of securities rule and law violations. But, just because FINRA alleges you did something wrong, does not mean they are right. An in depth analysis of the situation, and the charges relating to it, must be done as soon as possible to ascertain the proper defense strategies that may be available to you.

My enforcement experience began in April of 2012. I was having lunch with my business partner, and answered a call from a FINRA Enforcement attorney. At first, I thought it was a prank call as he explained that he was contemplating charging me with a slew of securities law violations and infractions. I explained how I was an independent consultant not registered with any of my clients, and therefore, could not be charged by FINRA. However, he stated it did not matter; they were going forward with a formal action against me anyway.

The charges were related to the actions of one of my former clients. This particular firm voluntarily elected to close its doors in 2009 after having been in business for fifteen years. Two years after the firm voluntarily shut down and filed a Form BDW, FINRA took Enforcement action against them for a number of alleged securities law violations.

It all began when FINRA examiners appeared at my client’s office sometime in 2008 wanting to confiscate all of the computers in the company’s office, whether they were used in the brokerage operation, or not. My client called me asking if FINRA could do this. I advised them to give the examiners everything they requested that was related to the brokerage operation, however, FINRA did not have carte blanche to confiscate every single office computer.

Apparently FINRA did not care for that advice, and they soon came after me with a vengeance. Investigations began quickly thereafter, as they first tried to charge me with a “license parking” violation. When that didn’t pan out, they initiated an “On The Record Interview,” commonly referred to as an OTR, which I was forced to attend in Boca Raton, FL. The FINRA Enforcement attorney in charge of the case, questioned me for 6 hours, and either asked a lot of personal non-related questions, or repeated the same questions over and over, ad infinitum, even after I had repeatedly answered them.

Individuals remain under FINRA’s jurisdiction for two years after their association with a Broker/Dealer ends. My FINRA licenses expired voluntarily, almost two years before the events against my former client transpired. Two days before my two year period was up, FINRA came up with a novel charge, never before used by FINRA, alleging I was a “de facto” Financial and Operations Principal (FINOP), meaning I acted as a FINOP without being registered as one, at my former client. They then charged me with acting in a principal capacity in lieu of registration, and with a number of net capital and books and records violations.

A FINRA Enforcement attorney explained I could easily put this behind me by signing an Acceptance, Waiver and Consent Agreement, commonly referred to as an AWC. Similar to a plea of nolo contender, I would not admit, or deny wrong doing, but simply accept any fine, sanction, or penalty FINRA assessed against me. The FINRA Enforcement attorney also informed me if I did not want to sign an AWC, and tried to defend myself and lost, the fines, sanctions and penalties would be much higher than what they were prepared to offer me prior to a hearing.

This brings us to the first major decision when faced with an enforcement action. Do you fight, or surrender, or do nothing? The worst thing you can do is to do nothing. FINRA Rule 8210, a bedrock rule of Enforcement, allows the regulator to fine, suspend and even expel firms, and individuals, if they do not respond to official information requests in a timely manner.

However, when responding to an official request for information, you should never admit wrong doing immediately. Even if it appears that you were not correct, you should take the time to fully investigate all charges, allegations and the rules as they relate to your specific actions before you admit guilt. Securities law and rule can be quite complex, and it may turn out no actual rule was violated.

In my case, there was no question whether I was innocent of all charges. The definition of a FINOP is precisely spelled out in the FINRA manual. None of my actions as an independent consultant fit the definition of a FINOP’s duties and responsibilities. So I decided to fight. Feeling quite certain of my innocence, I decided to represent myself at the ensuing hearing. I learned quickly it is one thing to know you are innocent; however, it is an entirely different matter proving it.

The initial hearing was presided over by a FINRA Chief Hearing Officer who is a FINRA employee, which at the very least, gives the perception of a conflict of interest. At the very worst, as it was in my case, you get a very influential panel member who is biased against you. The other two panelists were owners of Broker/Dealers who have served on FINRA committees in the past.

The Chief Hearing Officer ruled against almost all of our motions. One important motion involved the composition of the hearing panel. Since several charges against me involved sophisticated trading issues, under the rules I had the right to request a panel with at least one panelist being a current or former member of the Market Regulation Committee. Yet the Chief Hearing Officer denied this, and almost all of my other motions.

The actual hearing turned out to be a grueling two day process. Although the Enforcement attorney and I agreed, in advance, on the time needed to present our respective cases, he ended up monopolizing almost all of it. So much time was taken by the FINRA attorneys; we didn’t finish on the second hearing day, and had to schedule our closing arguments for a later date, to be held over the telephone. Now I’m at a distinct disadvantage without the benefit of face-to-face contact for my closing arguments. Since The Chief Hearing Officer was the only panelist who spoke during the telephonic closing argument hearing session, for all I know the other two panelists may have been asleep.

FINRA uses its own employees as their expert witnesses giving the appearance of a serious conflict of interest. The expert witness in my case was a career FINRA employee who had not served as a FINOP in over fifteen years, and who did not know how, or even when, to file a FOCUS report or any other regulatory report. All the expert witness did was repeat FINRA rules over and over again.

When the initial decision arrived, over a year later, I had lost and was censured with a rule violation. Majority rules in FINRA Enforcement decisions, and fortunately a majority of the panel did not impose a suspension or a fine against me. The Chief Hearing Officer, whose actions reaffirmed his prejudice against me, issued a dissenting statement, whereby he wanted to suspend me in all principal capacities for 60 days and impose a $5,000 fine.

I appealed this decision to the National Adjudicatory Council, also known as the NAC. The NAC appeal process was significantly shorter, and much more streamlined than the initial hearing process. At the appellate hearing, no new evidence is allowed to be introduced, and each side is limited to only 30 minutes to both present their case, and to offer rebuttal testimony.

My defense was straightforward. I presented the definition of a FINOP as described in detail in NASD Rule 1022, just as I did at the initial hearing. The NAC appeal hearing panel was made up of a seasoned wire house industry executive and a law school professor. Unlike the first hearing panel, they took the time to read the definition of a FINOP, and concluded, along with the rest of the entire NAC committee, that I was innocent of all the charges against me.

The entire process took over three long years, for events that occurred six years previous to that. Finally, in July, 2015, well over a year after the NAC appeal hearing, I received the following NAC decision, which is the final decision of FINRA regarding my case:

The Department of Enforcement failed to prove that respondent acted as the de facto financial and operations principal of a member firm while failing to register as a financial and operations principal, and it also failed to prove that respondent was responsible for the member firm’s financial books and records and calculations of net capital. Held, findings reversed and complaint dismissed.

If you ever find yourself charged by FINRA, or any other Regulator, it is imperative that you fully investigate the charges against you, and the underlying laws, rules and regulations behind them. After a full review, if one has violated them, then taking responsibility is imperative. On the other hand, if you are innocent, and can formulate a comprehensive defense, then you need to take a stand and fight back, and I would be happy to assist you. You can contact Warren Forest at 407-696-9600.

The full decision can be found at:


Posted by: editor May 19, 2016

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