FINRA's Investigative Authority and Disciplinary Sanctions

A complaint or a routine exam can turn into a formal investigation at any point, and FINRA's power to gather facts, and to sanction what it finds, is broader than many representatives expect.

What Power Does FINRA Have to Investigate a Member or Associated Person?

• For an investigation, complaint, examination, or proceeding, FINRA's information-and-testimony rule lets FINRA staff, or an adjudicator deciding a FINRA proceeding, require a member, an associated person, or any other person subject to FINRA's jurisdiction to provide information, and to testify under oath or affirmation, at a location FINRA staff specifies, about any matter involved.
• The information can be required orally, in writing, or electronically. The electronic branch is conditional. FINRA can demand electronic form only where the information is, or must be, kept that way.
• The same two holders have the right to inspect and copy the books, records, and accounts of that member or person. This right is not FINRA staff's alone.
• Its reach is wider than the word "investigation" suggests. It covers records relating to any matter involved in the investigation, the complaint, the examination, or the proceeding, that are in that member's or person's possession, custody, or control.
• No member or person may fail to provide the requested information or testimony, or fail to permit an inspection. The duty is broken by an incomplete or late response, not only by an outright refusal.

What Happens If a Member or Person Does Not Comply?

• Failing to comply with an information-and-testimony request is itself a violation, separate from whatever the underlying complaint or investigation concerned.
• Under FINRA's Sanction Guidelines, a respondent who does not respond in any manner faces a bar as the standard sanction.
• A partial but incomplete response is also treated as warranting a bar, unless the respondent can show the response substantially complied with all aspects of the request. Where mitigation exists, the guidelines call for a suspension in all capacities of up to two years instead.
• Answering late is its own category in the guidelines, separate from answering incompletely. It calls for considering a suspension in all capacities of three months to two years, not a bar. The guidelines attach no completeness condition to that lateness range.
• Read every one of these figures as a recommendation, not a ceiling. The guidelines say so themselves, and FINRA's sanctions rule lets an adjudicator suspend for a definite period that exceeds two years, or for an indefinite period ending only when the person completes a required act.

Exam Tip: Gotchas

• Ignoring an information-and-testimony request, rather than contesting the underlying complaint, is the riskier choice. Non-response draws a standard sanction of a bar, which can be harsher than the sanction for many of the complaints the rule is used to investigate.

Is Settling a Customer Complaint Directly, Without the Firm, Automatically a Violation?

• An associated person who settles a customer complaint directly, without involving the firm, invites scrutiny. The guidelines name two questions in particular: whether the firm knew of and agreed to the settlement, or was deceived, and whether the settlement delayed or prevented a required Form U4, Form U5, or event-reporting filing.
• Those two are not the whole list. The guidelines say an adjudicator may weigh aggravating and mitigating factors beyond the ones they print.

Exam Tip: Gotchas

• The guidelines give settling away from the firm its own heading, and what they set out under it are the considerations that shape the sanction, not the elements of the violation. Two are named: whether the firm knew and agreed or was deceived, and whether the settlement delayed a required U4, U5, or event-reporting filing.

What Sanctions Can FINRA Impose for a Violation?

• FINRA's sanctions rule lets FINRA impose one or more of the sanctions below on a member or associated person, for each violation of the federal securities laws and the rules under them, the Municipal Securities Rulemaking Board's rules, or FINRA's own rules, or for any neglect or refusal to comply with a FINRA order, direction, or decision.

Exam Tip: Gotchas

• A suspension and a bar are not the same sanction. A suspension runs for a definite period, or until a condition is met. A bar removes the person from the industry with no defined end.

What Should You Check on Exam Day?

• Confirm the request came under the information-and-testimony rule before assuming a refusal is sanctionable some other way.
• Treat non-response, or an incomplete response the respondent cannot show was substantial, as drawing a bar. Lateness is a separate category and draws a suspension.
• Do not assume settling a complaint away from the firm is automatically a violation; look for concealment or a delayed filing.
• Distinguish a suspension, which ends, from a bar, which does not, and from expulsion or cancellation, which end a membership or registration outright.