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. FINRA's investigative and disciplinary rules govern the process from initial inquiry through final sanction.

What Authority Does FINRA Have to Investigate?

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.

What Sanctions Can FINRA Impose?

FINRA may impose sanctions through formal disciplinary proceedings or settlements. The available sanctions, in order of increasing severity:

Important Thresholds

• After seven days' written notice, if a fine, monetary sanction, or cost is finally due and payable and not paid promptly, FINRA may summarily suspend or expel a member, or revoke an associated person's registration
• The Sanction Guidelines generally recommend a bar or expulsion, absent extraordinary circumstances, when misconduct would otherwise call for a suspension of more than 2 years; this is a guideline, not an absolute rule, so FINRA may still impose a longer definite or indefinite suspension

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.

How Does a Case Get Resolved?

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:

1. FINRA issues a formal complaint to the Office of Hearing Officers (OHO)
2. OHO conducts a hearing (similar to a trial, with testimony and evidence)
3. The National Adjudicatory Council (NAC) reviews OHO decisions on appeal
4. Further appeal is available to the Securities and Exchange Commission (SEC)
5. Final appeal goes to federal courts

Exam Tip: Gotchas

A suspension of more than 2 years is a guideline threshold, not an absolute cap: the Sanction Guidelines generally point toward a bar or expulsion past that mark, but FINRA may still impose a longer suspension in the right circumstances. 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.

What Should You Check on Exam Day?

• Failure to cooperate with a FINRA investigation is itself grounds for a bar, separate from whatever the underlying misconduct was.
• Sanction ladder, in increasing severity: censure, fine, restitution, suspension, bar (individuals), expulsion (firms).
• An AWC settles without a hearing; a contested case goes OHO → NAC → SEC → federal courts.
• Unpaid fines trigger suspension or expulsion of a member, or registration revocation for an associated person, after 7 days' written notice; a suspension over 2 years is a guideline trigger toward a bar, not an automatic one.