Beware of the Potential Effect of FINRA Sanctions on a Securities Salesperson’s State License

FINRA—the acronym for the Financial Industry Regulatory Authority—is a self-regulatory authority authorized by the Securities and Exchange Commission to, among other things, bring disciplinary proceedings against securities registered representatives for violation of the federal securities laws, FINRA Rules, and rules of the registered representative’s broker dealer.

Disciplinary proceedings normally begin with a FINRA request to the registered representative for information, which may include personal financial documents, electronic communications, and correspondence. The request typically comes from a non-attorney FINRA investigator, and the specified response time is often quite short—frequently two weeks—although the investigator routinely grants reasonable extensions. The request does not state the reason for the examination, although this can sometimes be discerned from the information requested, especially if the request follows the filing of a reportable event such as a customer complaint or settlement of a claim reported on the registered representative’s U4.

After submitting the initial requested information, the registered representative may receive a request for further information, and at some point may be required to provide testimony to FINRA at an “On the Record” hearing (“OTR”), which is similar to a deposition and requires the registered representative to provide testimony under oath. Responding to all of these FINRA “requests” is essentially mandatory in that FINRA can and will bar a registered representative from the industry if the registered representative does not fully cooperate or fails to provide the requested information or attend the OTR.

After FINRA concludes its investigation it will assess whether it believes that the registered representative violated one or more provisions of the federal securities laws, FINRA rules, or an internal compliance rule of the broker dealer with whom the registered representative is employed, and one of three things happens:

• FINRA concludes that there were no violations and terminates the investigation. In most cases FINRA will advise the registered representative that the investigation is closed without action.
• FINRA concludes that there may have been violations but if so that they were minor (such as a good faith mistake and no customers were harmed). FINRA will issue a letter of caution, which is not reportable on the registered representative’s U4 and this is the best possible outcome other than closing the examination without any action.
• FINRA concludes that there were one or more material violations and decides to initiate disciplinary proceedings.

In the latter case, FINRA will notify the registered representative of the claimed violation(s) and proposed sanction. It will provide the registered representative with an opportunity for a hearing before a panel from FINRA’s Office of Hearing Officers (which will consist of one FINRA hearing officer and two industry representatives). Frequently, FINRA will offer the registered representative the opportunity to submit a statement of mitigating circumstances, or even an outright refutation of the proposed charges—a so-called Wells Submission—and in many cases it is highly advisable to do so.

Relatedly, FINRA will afford the registered representative the opportunity to settle the proposed charges by entering into an Acceptance, Waiver and Consent (“AWC”), which contains a statement of facts, acceptance of the charge(s), agreed-to sanction, and waiver of the right to a hearing. The terms of the AWC, including the recitation of facts and the proposed sanction(s), are negotiable—within limits.

Where the violation is relatively minor, FINRA proposes a sanction on the low end of the scale. At a minimum, this can include a fine of $2500 and a brief suspension. For major violations, the sanctions can be severe: a hefty fine and in the worst case a lifetime bar from the industry. FINRA publishes its list of sanctions here.

Critically, a registered representative must be aware that entering into an AWC does not necessarily end the matter. The registered representative must disclose the AWC on his or her U4 and the presence of an AWC can be grounds for license suspension by one or more state securities departments. For example, Ohio Revised Code Section 1707.19(A)(1)(a) states that a securities salesperson’s license may be denied or suspended if the salesperson “Is not of good business repute.” Rule 1301:6-3-19(D)(7) of the Ohio Division of Securities provides that in determining good business repute the Division shall consider among many other factors, whether the salesperson “Has been the subject of any suspension, expulsion, revocation, fine, censure, or any other disciplinary action…by any professional association granted disciplinary or regulatory authority by state or federal law….” The “shall consider” language requires the Division of Securities to review the AWC, and the suspension or denial provision confers upon the Division broad discretion to invoke the not of good business repute standard in light of the AWC and facts underlying it.

Even a relatively minor FINRA sanction—a minimal fine or short-term suspension imposed through an AWC—can therefore result in the loss of the registered representative’s state license, especially if combined with other factors such as a prior AWC or a history of customer complaints. Even worse, if one state denies or revokes a registered representative’s license because of an AWC, other states can and often will follow suit.

Bottom line: an AWC can have severe adverse consequences for the registered representative’s state-issued securities license. The text of the AWC itself—in addition to the sanction—is critically important. A registered representative who is considering entering into an AWC should consult with legal counsel—who is independent from the firm with whom the representative is employed—to not only assist in negotiating the AWC, but also to review the licensure laws of the states in which the registered representative is licensed to assess the implications of the AWC at the state level. Counsel should also research previous FINRA sanctions for similar violations in negotiating the AWC and seek to avoid references to intentional misconduct and customer harm in the AWC (unless indisputable facts do not allow avoidance of such references). The goal is to structure the AWC provisions in such manner as to minimize the likelihood that a state agency will initiate license suspension or denial proceedings based upon the AWC—such that the AWC does not ultimately end the registered representative’s career.

If you have any questions about this ruling, please contact Karl E. May or any member of the Frantz Ward Litigation practice group.