FINRA Investigations and Sanctions
With reporting requirements covered, let's look at what happens after the Financial Industry Regulatory Authority (FINRA) receives a report or identifies potential misconduct. The FINRA 8000 Series rules govern the investigation and disciplinary process.
Investigations (Rule 8200 Series)
FINRA has broad authority to investigate any member firm or associated person for potential violations:
- Members and associated persons must cooperate with FINRA investigations; failure to cooperate is itself a violation that can result in a bar
- FINRA may require the production of books, records, and documents
- FINRA may require testimony under oath (on-the-record interviews, known as "OTRs")
- FINRA does not need a court order or subpoena to compel cooperation from its members
Exam Tip: Gotchas
Failure to cooperate with a FINRA investigation is itself grounds for a bar from the industry. If a question describes a rep who refuses to testify or produce records, the most likely outcome is a bar, not just a fine or suspension.
Sanctions (Rule 8300 Series)
FINRA may impose sanctions through formal disciplinary proceedings or settlements. The available sanctions, in order of increasing severity:
| Sanction | Description |
|---|---|
| Censure | Formal reprimand placed on the record |
| Fine | Monetary penalty |
| Restitution | Order to repay customers for losses caused by the violation |
| Suspension | Temporary bar from the industry (up to 2 years) |
| Bar | Permanent prohibition from associating with any FINRA member firm (individuals) |
| Expulsion | Termination of FINRA membership (firms) |
Important Thresholds
- If a fine is not paid within 7 days, FINRA can suspend, expel, or revoke the member's registration
- A suspension exceeding 2 years is generally not recommended; misconduct serious enough to warrant more than 2 years typically justifies a permanent bar instead
Think of it this way: FINRA's sanctions form a ladder. Minor violations get a censure or fine. Moderate violations lead to suspension. Serious violations (theft, forgery, fraud) result in a bar or expulsion.
Settlement vs. Formal Proceedings
When FINRA identifies a potential violation, the process can follow two paths:
Path 1: Settlement (AWC)
- Letter of Acceptance, Waiver and Consent (AWC): the respondent can settle early by accepting findings and sanctions without a formal hearing
- The respondent waives the right to a hearing and appeal
- AWCs are still made public and appear on BrokerCheck
Path 2: Formal Complaint
If no settlement is reached:
- FINRA issues a formal complaint to the Office of Hearing Officers (OHO)
- OHO conducts a hearing (similar to a trial, with testimony and evidence)
- The National Adjudicatory Council (NAC) reviews OHO decisions on appeal
- Further appeal is available to the Securities and Exchange Commission (SEC)
- Final appeal goes to federal courts
Exam Tip: Gotchas
A suspension of more than 2 years is effectively treated as warranting a bar. If a question describes extremely serious misconduct (theft of customer funds, forgery), the answer is most likely a bar or expulsion, not a suspension. Also remember the 7-day rule: unpaid fines can trigger suspension or expulsion.