Welcome to #finraFridays!
This Blog breaks down the mysteries of FINRA’s Conduct Rules, and its 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 rule or 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:
FINRA’s Disciplinary Hearings Disappearing Act
An analysis of FINRA’s disciplinary hearing process demonstrates that FINRA’s use of its Office of Hearing Officers (“OHO”) to adjudicate formal disciplinary disputes through a hearing process continues to decline significantly, despite the fact that OHO remains fully staffed. As discussed below, its decline in use is also consistent with the historic decline in formal disciplinary Complaints filed and settlements reached.
FINRA’s Office of Hearing Officers (“OHO”) is currently staffed by a Chief Hearing Officer, Deputy Chief Hearing Officer, and six additional Hearing Officers, along with a group of Case Managers. The current hearing officers are, based on all appearances and my own experiences, highly qualified attorneys who are ready and willing to do their jobs.
Unfortunately, it is apparent that the disciplinary hearing business is drying up at FINRA. In 2023, FINRA’s OHO issued a pathetically few – three – disciplinary hearing decisions. That comes from only 20 formal disciplinary Complaints being issued by FINRA Enforcement in 2023, according to FINRA’s publicly available database.[1]
The hearing decisions themselves were of appallingly little value. Also, typical of the decisions issued by OHO, all three have been appealed.
One of the three decisions dismissed the substantive charge and found only a failure to respond fully to a Rule 8210 Request for Information. The second was for providing false, misleading information and an altered document in response to a Rule 8210 Request for Information, and for failing to implement an anti-money laundering program. The final decision was for failing to amend and timely amend Forms U4 and U5 of reportable events. Notably, none directly involved either customers or improper trading.
How does this compare to prior years? Again, based on information available on FINRA’s website, it is by far the lowest number of disciplinary decisions issued by OHO in at least the last ten years, and probably the lowest ever.
Just 10 years ago, in 2013, with the same sized staff or smaller, OHO issued 31 Hearing Panel disciplinary decisions. Here are the number of OHO Hearing Panel disciplinary decisions issued in the past ten years:
Year OHO Disciplinary Decisions Issued
2013 31
2014 26
2015 38
2016 26
2017 29
2018 22
2019 16
2020 7
2021 10
2022 7
2023 3
The Hearing Officers also issued five Expedited Decisions in 2023. Of those, three were based on a broker failing to pay an arbitration award, one was against a firm for failing to pay FINRA dues, fees, or charges, and the final one was against a firm for failing to file an annual audit report.
Finally, in 2023, OHO issued three Orders Accepting Offer of Settlement. Those were cases brought against individual brokers that were settled after the issuance of the Complaint. What is significant to observe about each of those cases is that the respondent broker had been out of the industry for nearly two years at the time the Complaints were filed, and in two of the three cases, they were filed just a few days prior to FINRA losing jurisdiction over the respondents.
I dare say that bringing enforcement actions against people who left the securities industry years earlier may not be the highest, best use of FINRA’s resources.
The number of formal disciplinary complaints filed by FINRA Enforcement has also fallen precipitously over the last 10 years. In 2023, just 20 formal disciplinary complaints were filed with OHO. Just 10 years ago, that number was more than six times higher – with 123 complaints filed.[2] Each of the last 10 years, the number of complaints filed has fallen, according to FINRA’s own online database:
Year Formal Disciplinary Complaints filed by FINRA Enforcement
2014 123
2015 102
2016 97
2017 64
2018 43
2019 39
2020 35
2021 32
2022 24
2023 20
So where have all the hearings and Complaints gone? Indeed, where have all of the formal disciplinary actions gone? FINRA reports on its website that in 2023, it entered into 406 settlements, known as Letters of Acceptance, Waiver and Consent (“AWC”).[3] That is less than half the number of cases brought 10 years ago, at 987 AWCs, and the least number of cases brought in any year since then. Here are the numbers of AWC brought in each of the last ten years:
Year Number of AWCs Reported by FINRA
2013 987
2014 941
2015 1045
2016 948
2017 807
2018 514
2019 474
2020 504
2021 486
2022 428
It is not clear why the number of all of its formal disciplinary actions are declining. I applaud FINRA if the decline in formal actions is based on applying a more reasonable and realistic approach to what it perceives as actionable violative conduct. It is not clear why all of its disciplinary cases are declining.
This past year, I have seen FINRA appropriately close investigations with no action or with an informal Cautionary Action Letter after opening a formal investigation.
Conclusion
It is clear that the trend of FINRA bringing fewer formal disciplinary actions continued in 2023. With lower numbers across the board in terms of both settlements and formal hearing conducted, you might think that FINRA has decided, appropriately, to focus on the most egregious cases involving customer abuse and trading that disrupts market integrity.
Unfortunately, a review of the cases brought does not seem to bear that out, as a significant percentage of cases remain the cases with low hanging fruit – Form U4 and U5 cases, and those against brokers who long ago left the industry. Hopefully in 2024, FINRA Enforcement, with new, highly qualified leadership, will once again focus cases that address market integrity and customer protection.
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:
* Finding Your Way Back from Statutory Disqualification
https://carletonlaw.net/finding-your-way-back-from-statutory-disqualification/
* Guarding Against Excessive Trading in a Customer’s Account
https://carletonlaw.net/guarding-against-excessive-trading-in-a-customers-account/
* Keeping Stockbrokers Out of Trouble by Updating Their FINRA Form U4 Filings
https://carletonlaw.net/keeping-stockbrokers-out-of-trouble-by-updating-their-finra-form-u4-filings/
* Why FINRA’s Disciplinary Decisions are so “Appealing”
https://carletonlaw.net/why-finras-disciplinary-decisions-are-so-appealing/
* 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
*Understanding the Significance of FINRA’s Limited Jurisdiction;
https://carletonlaw.net/315-2/ and
* 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
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.
[1] https://www.finra.org/rules-guidance/oversight-enforcement/finra-disciplinary-actions?search=&firms=&individuals=&field_fda_case_id_txt=&field_core_official_dt%5Bmin%5D=01/01/2023&field_core_official_dt%5Bmax%5D=12/31/2023&field_fda_document_type_tax=4611&token=lk_E799aBQJ2hW_AxJ68ms2dLiLFqXQIubPx3KIvRYg
[2] https://www.finra.org/rules-guidance/oversight-enforcement/finra-disciplinary-actions?search=&firms=&individuals=&field_fda_case_id_txt=&field_core_official_dt%5Bmin%5D=01%2F01%2F2014&field_core_official_dt%5Bmax%5D=12%2F31%2F2014&field_fda_document_type_tax=4611
[3] https://www.finra.org/rules-guidance/oversight-enforcement/finra-disciplinary-actions?search=&firms=&individuals=&field_fda_case_id_txt=&field_core_official_dt%5Bmin%5D=01%2F01%2F2023&field_core_official_dt%5Bmax%5D=12%2F31%2F2023&field_fda_document_type_tax=4610
Everyone loves what you guys are usually up too. This kind of
clever work and coverage! Keep up the good works guys I’ve added you guys to my own blogroll.