In this series of posts on the basics of FINRA examinations, we're providing an overview of the examination and formal action disciplinary processes. Today's post discusses the two main types of FINRA examinations.
FINRA examinations, or investigations, are generally characterized as either routine or cause exams. Routine exams are just that – they are routine examinations of broker-dealers conducted on a regular schedule. In a routine examination, examiners visit the firm on-site (including perhaps both the home office and branch offices) to review books and records, talk to managers and compliance officials, and evaluate how the firm is complying with various industry rules and regulations. All broker-dealers receive routine examinations based on FINRA's exam schedule. Sometimes, the examination is announced a few weeks prior to its commencement, and the firm is asked to prepare certain documents and books and records for the examiners in advance of the on-site part of the examination. Other times, the exam may be started without warning. Depending on the size of the firm and the scope of the exam, the on-site portion of the exam may be conducted by one to five or more examiners, and may last the better part of one week to three weeks (or more). Following that, the examiners may continue their exam back at their offices, and may later request additional information from the firm.
Cause examinations, sometimes called special exams, may be initiated based on a number of things. A customer complaint to FINRA that describes conduct that potentially violates industry rules may trigger an exam. Similarly, a broker being terminated for cause and having certain disclosures on his or her Form U5 may prompt the regulators to initiate an exam. Additionally, Rule 4530 disclosures, referrals from arbitration cases, referrals from other regulators, as well as information found in the media may prompt the regulators to commence a cause examination.
Generally speaking, whether it's a routine exam or a cause exam, the basic exam techniques are the same. Examiners will request the firm and/or representative to produce its books and records for inspection and copying, may conduct informal interviews with firm officials, supervisors and brokers, may contact and interview customers, and may request written statements from brokers. Further interviews, including “on-the-record interviews” (which are essentially depositions under oath taken down by a court reporter) may be conducted, as examiners seek to find evidence that will prove, or disprove, the existence of rule violations.
Once the examiners complete their gathering of information, their findings are reviewed by supervisors before any action is taken. And, it is important to note that the examiner staff cannot unilaterally impose sanctions against a firm or a broker for alleged misconduct. Sanctions are only assessed after a formal enforcement process has been initiated and completed, whether through settlement or litigation in FINRA's administrative forum. We'll cover more about the basic exam process in future posts in this topic.
Attorney Joel Beck of The Beck Law Firm, LLC represents firms and individuals involved in FINRA examinations and enforcement actions, and provides advice and counsel regarding compliance with securities industry rules and regulations for broker-dealers and registered representatives or associated persons. Prior to opening his firm, Joel worked for ten years for NASD where he served in a variety of roles, including as an attorney in the Enforcement Department. Now, the majority of his law practice focuses on broker defense. Find more articles here at our blog, and find short, informative videos concerning broker legal and compliance issues on our YouTube channel.