Representing Brokers and Advisers Before FINRA, the SEC, and State Regulators

We are a Texas securities law firm that represents select brokers that become embroiled in the regulatory and enforcement process. The securities regulators are charged with enforcing the applicable rules against brokers and advisors, and do so through a variety of formal and informal processes, including informal inquiries, formal investigations, and formal complaints in enforcement proceedings. Investigation of potential violations and enforcement of the securities laws, rules, and regulations will pose significant threats of consequence to the individual, and hiring the right attorney at the right time will be critical to the individual. Many investigations and formal complaints closely resemble a full-blown arbitration or trial and will require the same level of commitment of time and resources. In many cases, you will be asked to provide numerous documents, and often an On the Record Interview (under oath and like a deposition). If there is any potential that the regulators will discover a violation, it is wise to have advice during the early stages of any regulatory inquiry. Having capable and experienced securities industry regulatory counsel is a must.

Unfortunately, there are times when a violation of FINRA rules necessitates agreeing to a fine and/or suspension, or even giving up your license, either temporarily or sometimes permanently. These decisions can be life-changing, and how you position your facts during the investigatory process will often determine what options you have settling the potential complaint so that your license is preserved, or in making a move away from the industry. Do not provide answers to the regulators or even to your firm on a serious issue (do you know whether it is serious?) without first getting advice from a competent securities attorney experienced in the regulatory arena.

In 2023, for example, FINRA conducted more than 4,100 regulatory examinations. Out of the 628,392 registered representatives licensed with FINRA, FINRA instituted 11,613 regulatory actions, levied $88.4 Million in fines, suspended 257 individuals, and permanently barred 178 individuals. Similarly, in 2022, state securities regulators conducted 8.538 investigations and took 1,163 enforcement actions, resulting in $702 Million in restitution to investors, $223 Million in fines, and criminal sentences totaling 5,337 months in prison and 9,520 months of supervised release. Clearly, state securities regulators have increased their efforts of bringing actions against registered individuals than the non-registered persons violating securities laws. State securities regulators are more likely, in our opinion, to work with State, Local, and Federal criminal authorities (think FBI, Attorney Generals, U. S. Attorneys, and District Attorneys). Thus, many brokers and advisors will at some time in their career become involved in a regulatory inquiry, investigation, or enforcement proceeding. In those instances, having competent counsel will be critical, and may mean the difference between having a clean disciplinary record, or being statutorily disqualified so that continuing to work in the securities industry becomes extremely difficult, if not impossible. From a regulatory perspective, the Financial Industry Regulatory Authority (FINRA) and the Texas State Securities Board (and other regulators) regularly conduct sweeps of the public databases and the Central Registration Depository to find brokers and advisers to investigate for potential violation of applicable rules. Additionally, routine audits and exams often trigger individual investigations and/or formal disciplinary proceedings.

FINRA, allegedly to help firms in their compliance programs, publishes a summary of the targeted examination program (what we call “sweeps”), and from this list it is possible to glean the scope of the future enforcement actions. However, FINRA describes this list as only “certain” of its sweep letters, and there are certainly other targets of enforcement sweeps, which should encourage brokers and dually registered advisors to be ever vigilant about compliance.

Many of the common violations that often result in a broker’s discipline include the following:

• Failure to timely update Form U-4 Disclosures, including the required Disclosure Reporting Pages
• Inaccurately reporting events on the Form U-4.
• Advertising and sales literature violations
• Outside Business Activity Disclosures
• Social media violations
• Failure to provide information to the regulators when requested
• Sales practice misconduct
• Borrowing money from or loaning money to customers
• The list goes on…

Regulatory investigations can have permanent consequences for a broker’s or advisor’s registration and ability to continue to work in the highly regulated securities industry. Frequently, brokerage firms will hire the firm’s attorneys to represent the firm and the individual broker in a regulatory investigation, but the attorneys’ true loyalties will run to the firm, and not the individual broker. In some instances, the firm will cover the broker’s legal fees. While this may seem like, and sometimes is, a benefit, it is important to consider whether the firm’s counsel will zealously represent your interest as a broker or advisor. It is wise for any broker facing a regulatory inquiry, investigation, or formal complaint to engage counsel personally to get un-conflicted advice solely in your interest, which will avoid the conflict of interest between the firm and the broker. Additionally, many brokers have purchased, or have been required to purchase, Errors & Omissions Insurance. As an insured, the broker or advisor may have different rights and obligations than the firm.

FINRA also publishes its Sanction Guidelines and Fines Policy wherein it describes various considerations that it presumably considers in determining whether to initiate a complaint, propose a formal or informal sanction, and why FINRA believes fines deter misconduct, and how you should pay them, if assessed. Reading the Sanction Guidelines, one might surmise that FINRA routinely offers leniency based on mitigating circumstances. While FINRA does, indeed, closely examine the circumstances underlying every investigation or case, you should remember that FINRA’s mission is to provide market integrity and investor protection through enforcement of its rules.

When faced with any regulatory inquiry, the time to engage a securities lawyer is before you provide answers to the regulators and before you blindly rely on the firm’s counsel to protect your license and your livelihood. Do not leave your future in the hands of someone whose job is to enforce a rule that jeopardizes you livelihood. Contact us today at 1-866-597-2221 for a confidential consultation. In these cases, it is better to be safe early, than sorry later.