Welcome to #finraFridays!
This Blog breaks down the mysteries of FINRA’s investigative and disciplinary process so that those of you who are facing scrutiny by the regulator are better prepared to defend yourself. In each posting, we explore a small piece of the process and explain how it impacts FINRA and you. If you want a topic covered on #finraFridays, feel free to contact Gary Carleton at gary@carletonlaw.net.
This week…Why FINRA’s Disciplinary Decisions are so “Appealing”
I have been engaged in FINRA’s disciplinary hearing and appellate processes for more than 30 years, from the inside as a Senior Counsel in FINRA’s Enforcement Department, as a FINRA Hearing Officer, and now as a defense counsel. While initial disciplinary hearings play an important role in FINRA’s regulatory scheme, the appeal process has also taken on a growing and outsized role in final resolution of the majority of disciplinary proceedings in recent years.
Brokers who are subject to a FINRA disciplinary decision know or should know of the options and often clear advantages of appealing a hearing panel decision. Because the decision to appeal can have positive and negative consequences, brokers should review their options with a seasoned FINRA defense attorney before making those decisions.
Apparently, many brokers who weigh their options are choosing to appeal, based on the high percent of decisions issued by FINRA’s Office of Hearing Officers (OHO) that are appealed first to FINRA’s National Adjudicatory Council (NAC) and from there to the U.S. Securities and Exchange Commission (SEC).
I recently had the opportunity to review key statistical data compiled by FINRA regarding the appellate process for FINRA’s disciplinary hearings. (See https://www.finra.org/rules-guidance/adjudication-decisions.) The analysis included the percent of cases appealed not just once but twice, and the time it takes to work through the appellate process.
According to FINRA’s website of Adjudications and Decisions, since January 2016, two-thirds (76 of 113) of OHO disciplinary hearing panel decisions have been appealed to the NAC. The peak occurred in 2019, when 14 of 16 OHO hearing panel decisions, representing 88 percent of cases were appealed. In many of the cases not appealed since 2016, the respondents were not represented by counsel.
What are the reasons for appealing an OHO decision to the NAC? Obviously, if you believe that the case was decided wrongly on the facts or the law, you should consider an appeal. Perhaps there were procedural errors during the hearing process, such as Enforcement wrongfully withholding evidence.
Maybe you have compelling new evidence that for good cause was not available during the initial hearing. Each case is unique and so there could be as many reasons for appealing a decision as there are decisions.
Having a disciplinary mark on your public record often has a significant negative effect on your reputation and business. Also, wrongly ordered fines and calls for restitution can mean financial ruin for a broker. By appealing the OHO hearing panel decision, a broker gets another bite at the apple to erase the findings of violation or even to just explain why the sanction imposed by OHO should be reduced.
Brokers need to be careful, as the NAC can, and does at times, increase a sanction set by the OHO hearing panel. That also is an important consideration in determining whether to appeal. The NAC has been known to extend the length of suspensions or even convert suspensions into bars.
Historically, very few cases appealed to the NAC get reversed in their entirety. In 2019, for example, only one of the 14 NAC appeals resulted in a reversal. At times, the NAC will adjust the sanction, sometimes in ways that are immaterial to the broker, to better match FINRA’s sanction guidelines. So why do so many brokers appeal their OHO decisions?
A significant advantage for a broker is his or her right to delay the imposition of the sanction imposed by the OHO decision – pushing that sanction at least a year or more into the future.
According to FINRA Rule 9311, Appeal by Any Party; Cross Appeal, if a respondent (or Enforcement) files a written appeal of an OHO decision within 25 days after service of a decision, “[a]n appeal to the [NAC] from a [OHO hearing panel disciplinary] decision shall operate as a stay of that decision until the [NAC] issues a decision….”
A further appeal from the NAC to the SEC would once again stay the effectiveness of any sanction other than a bar or expulsion under FINRA Rule 9370. Not surprisingly, these appeals to the NAC and then to the SEC take years to reach resolution.
Carleton Law analyzed the timelines for the 14 OHO disciplinary hearing decisions issued in 2019 that, according to FINRA’s website for Adjudications and Decisions, were appealed to the NAC.
On average, the appeal of a decision of an OHO decision issued in 2019 took nearly 21 months before the NAC issued its decision! The shortest decision by the NAC took one year to issue, while the longest took two and a half years.
For each matter on appeal to the NAC, the sanction did not go into effect until at least the issuance of the decision. Following these matters further, 7 of the 13 remaining cases (one of the 14 was reversed) were appealed to the SEC. Again, an appeal to the SEC stays the effectiveness of the sanction imposed, other than a bar or expulsion.
According to the SEC’s website for Administrative Proceedings, to date, the SEC has not issued a single decision on any of the 7 cases appealed to it. (See https://www.sec.gov/litigation/apdocuments/ap-open-fileno-asc.xml) As a result, cases in which the OHO decision was issued as long ago as January 2019 remain on appeal.
Conclusion
Since 2016, two-thirds of OHO disciplinary hearing panel decisions have been appealed at least once. Brokers with adverse OHO decisions should carefully balance, with the advice of seasoned FINRA defense counsel, the advantages and disadvantages of appealing their disciplinary decisions.
In evaluating whether to appeal an OHO disciplinary decision, be sure consider all of the relevant factors. They include: the legal basis for the appeal; the stay of sanctions on appeal, at least through the first appeal to the NAC; the cost and timeline of the appeal; and the effect such an appeal on the broker’s career.
Gary Carleton focuses his practice representing individuals and firms facing FINRA investigations and disciplinary proceedings and appeals. He also serves as co-counsel with attorneys who have clients facing a FINRA investigation or disciplinary proceedings Contact Gary Carleton at 202.744.6297 or gary@carletonlaw.net to set up an initial consultation.
In Case You Missed It – You can find prior blogs on the FINRA investigative and disciplinary process at www.carletonlaw.net and go to the Blog tab. #finraFlashback blogs in which we discuss notorious FINRA disciplinary proceedings can also be found at www.carletonlaw.net.
The prior topics include:
*FINRA Flashback
FINRA’s Investigation Uncovers Stock Manipulation
https://carletonlaw.net/finra-flashback-finras-investigation-uncovers-stock-manipulation/
* FINRA Flashback to Stratton Oakmont
https://carletonlaw.net/finra-flashback-to-stratton-oakmont/
* Where have all the FINRA Members (and disciplinary actions) gone?
https://carletonlaw.net/where-have-all-the-finra-members-and-disciplinary-actions-gone/
* Special Considerations for Small Firms when Negotiating Settlements with FINRA https://carletonlaw.net/special-considerations-for-small-firms-when-negotiating-settlements-with-finra/
* Receiving that First Request for Information (a Rule 8210 Request) https://carletonlaw.net/receiving-that-first-request-for-information-a-rule-8210-request/
* Pre-Wells Notices – An Early Opportunity to Discover FINRA’s Evidence and Present Your Case
https://carletonlaw.net/pre-wells-notices-an-early-opportunity-to-discover-finras-evidence-and-present-your-case/
* Understanding the Significance of FINRA’s Limited Jurisdiction; https://carletonlaw.net/315-2/
* How Old is Too Old for a FINRA Disciplinary Action
https://carletonlaw.net/how-old-is-too-old-for-a-finra-disciplinary-action/
About Carleton Law PLLC
Getting a call from FINRA or SEC Enforcement telling you that your work as a securities broker is under investigation could be the worst day of your life. You have worked hard for years building your business. Now, with one wrongful allegation you can see it all swept away. But with expert counsel, it does not have to end that way.
For more than 30 years, Gary Carleton was the attorney conducting those investigations at FINRA and SEC and now his firm, Carleton Law PLLC, brings that savvy experience to bear to advocate for brokers and FINRA firms who find themselves in that dreaded position. Carleton Law focuses on the individual needs of each client to guide them through the maze of the investigative and disciplinary process.
Carleton Law PLLC | 2001 Massachusetts Avenue NW, Washington, DC 20036 | info@carletonlaw.net
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The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information is for general informational purposes only. Readers of this article should contact their attorney to obtain advice with respect to any particular legal matter. No reader should act or refrain from acting on the basis of information contained herein without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this article does not create an attorney-client relationship between the reader or user and the article author or law firm.
Attorney Advertising – Gary Carleton, Principal of Carleton Law, is admitted to practice law in the State of New York and the District of Columbia. This article may be considered attorney advertising.