The Basics of a FINRA Exam – Part 1

I often represent individual brokers and firms that are involved in an examination or investigation (those words are often interchangeable) by FINRA, the Financial Industry Regulatory Authority. Many times, I find that brokers don’t understand the role that FINRA plays, what their own responsibilities and obligations are, and what can come about as a result of a FINRA examination. With a series of posts on the basics of a FINRA investigation, I hope to be able to provide some basic information for brokers and firms so that they can better understand the process, and the possible outcomes. In this first post, I’ll focus on the role of FINRA.

FINRA is not a part of the government, either federal or state, and FINRA examiners won’t throw you in jail from some type of violation of industry rules and regulations. FINRA is a “self-regulatory organization” to which all broker-dealers doing business with the public belong. Pursuant to their membership in the organization, brokerage firms and their representatives agree to abide by industry rules and regulations, including FINRA rules, and agree to be subjected to FINRA’s jurisdiction consistent with its Bylaws and rules. FINRA disciplinary actions are all civil in nature (as opposed to criminal). Note that there are federal and state law enforcement agencies that investigate securities violations and, if appropriate, criminally prosecute violators. As I’ll discuss in a later post, this distinction of FINRA not being a governmental regulator is important, because under the current state of the law you don’t have certain rights with FINRA that may exist with the SEC or a state regulator (think of the 5th Amendment right against self-incrimination).

FINRA conducts routine exams of broker-dealers to check for compliance with industry rules and regulations. In addition to these routine exams, FINRA also conducts examination “for cause” based on information that it receives that indicates that there might be a rule violation (such exams are often called cause exams or special exams). For example, an examination may be started based on a Form U4 or U5 disclosure, a FINRA Rule 4530 report (formerly known as a NASD Rule 3070 report), a customer complaint, an arbitration claim, a referral from an arbitration panel, or information received from another regulatory agency. Information that FINRA obtains in its exams is generally not publicly available, but brokers and firms should be aware that FINRA might share certain information with other regulators and law enforcement agencies. If FINRA finds evidence it believes demonstrates a securities industry rule or law violation, it may seek to take a disciplinary action against a firm or broker. Such an action may result in a fine, a censure, suspension from the industry or a limitation on business for a period of time, or being barred from the industry. For these reasons, proper handling of a FINRA exam is important.

In future posts in this series, we’ll provide an overview of the exam process and common investigative steps used by the examiners, a discussion of issues relating to Rule 8210, and an overview of the formal disciplinary action process.

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.