You recently left your broker-dealer firm under a cloud with a Form U-5 reflecting that you were terminated for purportedly "violating firm policy with respect to the exercise of discretion in a client's account." Now, out of a job and having to contend with damaging language on your Form U-5, to make matters worse you just received a letter from FINRA pursuant to FINRA Rule 8210 requesting a detailed, written explanation of the circumstances surrounding your termination, along with relevant documents. What should you do?
First step: take a deep breath. FINRA 8210 Requests are a normal -- although very important -- investigatory tool utilized by FINRA to obtain relevant information when carrying out its investigative functions. FINRA Rule 8210 confers on FINRA staff the authority to compel a member, person associated with a member, or other person over whom FINRA has jurisdiction, to produce documents, provide testimony, or supply written responses or electronic data in connection with an investigation, complaint, examination or adjudicatory proceeding. This rule covers all members, associated persons and - importantly -- former associated persons who are still under FINRA's jurisdiction (typically two years from the date of leaving the industry). Failure to timely respond may lead to a permanent bar from the securities industry. Thus, the mere fact that you received an 8210 Request does not necessarily mean that FINRA has concluded that you have done anything wrong, or that it even has a reasonable suspicion that you may have violated FINRA Rules or the securities laws. Rather, it should be properly viewed for what it is: the first step of an investigative inquiry by FINRA to determine if you have committed certain violations.
Second step: consult an experienced FINRA lawyer or FINRA attorney who understands the substantive FINRA Rules and the process by which FINRA investigates and prosecutes its cases. In other words, don't go at it alone. On many occasions, I have spoken with registered representatives who are hesitant to incur the expense of hiring legal counsel at this stage thinking that it is "just a letter" and thus something they can handle on their own. Quite often they later realize, typically after it is too late, that their attempt to represent themselves was a big mistake. When I am retained after the client has already responded to the 8210 Request, I have less flexibility and it is thus much more difficult for me to protect their interests.
The bottom line is that your response to FINRA's 8210 Request is an extremely important document that will often determine whether FINRA ends and closes its inquiry, or takes the next step and refers it to the Department of Enforcement for further review and possible enforcement action. What you say, how you say it and, in certain circumstances, what you determine not to say are all critical decisions that must be weighed (both in terms of the facts and applicable law) when formulating your truthful response. The decision on how to respond will lay the foundation for any future defense if the case is prosecuted. If not handled prudently and strategically upfront at this early stage, you may be permanently prejudiced by your own words, no matter how well-intentioned and honest they may be.
In sum, a FINRA 8210 Request should not be cause for panic. Rather, it should be viewed as clear indication that it is the appropriate time to secure seasoned FINRA legal counsel to assist in the process to ensure that your legal rights and securities license are aggressively protected.
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SEC'S REWARD FOR INDIVIDUAL COOPERATION: JURY IS STILL OUT
While historically the Securities and Exchange Commission has formally recognized and rewarded corporations for their cooperation in its investigations, that has not been true for individuals -- until recently.
Early last year (January 2010), the SEC announced a series of measures designed to further strengthen its enforcement program by encouraging greater cooperation from individuals. Robert Khuzami, Director of the SEC's Division of Enforcement, was quoted as follows about the new initiatives: "This is a potential game-changer for the Division of Enforcement. There is no substitute for the insiders' view into fraud and misconduct that only cooperating witnesses can provide."
As part of its new arsenal, the Division of Enforcement has authorized its staff to use various tools - historically successfully used by the Justice Department -- to encourage an individual's cooperation. These include:
-Cooperation Agreements - formal written agreements in which the Enforcement Division agrees to recommend to the Commission that a cooperator receive credit if substantial assistance is provided in the course of an investigation or filed enforcement actions.
-Deferred Prosecution Agreements - formal written agreements to forego an enforcement action against a cooperator if the individual fully and truthfully cooperates and complies with express prohibitions and undertakings during a period of deferred prosecution.
-Non-Prosecution Agreements - formal written agreements, usually entered into under limited circumstances, in which the Commission agrees not to take action against the individual cooperator assuming full and complete cooperation and compliance with express undertakings.
In addition to these new tools, the SEC has streamlined the process for submitting
witness immunity requests to the Justice Department for those individuals who may have the ability to assist the SEC.
The SEC has also articulated criteria for assessing how it evaluates whether, how much, and in what manner, to credit an individual's cooperation. The following four general considerations are to be taken into account:
- the assistance provided by the cooperating individual,
- the importance of the underlying matter in which the individual cooperated,
- the societal interest in ensuring the individual is held accountable for his or her misconduct, and
- the appropriateness of cooperation credit based upon the risk profile of the cooperating individual.
As with all well-intentioned initiatives by securities regulators, the effectiveness
and impact of the new rules will only be as good as its application by the Enforcement Division's staff members, many of whom do not have prior Justice Department or criminal prosecutorial experience. While the SEC's recent formalization of its process by which it rewards an individual's cooperation is long overdue and will no doubt materially assist the Commission in its efforts to proactively regulate the financial markets and aggressively enforce the federal securities laws, the Enforcement Division will need time to become familiar with its new tools and how to fairly and effectively utilize them. In turn, defense counsel will also need to be proactive in "cooperating" those clients that can benefit the SEC (and more importantly themselves), and aggressive in seeking the maximum credit for their cooperation. While the SEC's initiatives are certainly a good start, the true test will be in their application by the SEC's Enforcement Division -- how consistent and fair will the Staff be from office to office in rewarding those who truly cooperate and provide substantial assistance. As to that answer, the jury is still out.
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