New FINRA Report Aims at Making Enforcement a Little Less Painful

Who says FINRA can’t take constructive criticism? 

The self-regulatory organization has already implemented a number of changes aligned with a June 30 report commissioned to help bring common-sense improvements to its enforcement program. Other major changes could be coming soon, according to Brian Rubin, former SEC enforcement counsel and current co-head at Eversheds Sutherland. The full report contains 24 additional proposals that touch on a broad set of governance, transparency, due process, coordination and operational efficiency issues identified within FINRA’s enforcement department. If all or most of them are implemented, it could make advisors’ lives significantly easier when it comes to navigating compliance issues. 

“My guess is that virtually all of the recommendations will be enacted to some degree,” Rubin told Advisor Upside. “The goal is to get procedural issues out of the way so that the parties involved in an investigation can really focus on whether there are violations happening and whether firms or individuals should be sanctioned for them.” 

What Has and Could Change 

FINRA’s executive vice president of enforcement Bill St. Louis first announced an initial set of reforms in March that set the stage for the new report. They established: 

• Introductory meetings at the time of initial referral for enforcement investigations. 
• Mandatory 90-day investigation status updates.
• Pre-enforcement investigative findings meetings and a new self-reporting pilot program, among other changes. 

These were all positive developments, according to Rubin, and the 24 new recommendations build on them from various directions. One recommendation, for example, discourages the involvement of identifiable enforcement staff during pre-referral investigations or routine examinations, which was found by investigators to frequently mislead those being reviewed into thinking they were in fact already being investigated. That perception, in turn, has made it more difficult to reach collaborative, non-enforcement resolutions. 

Another recommendation is that FINRA adopt a procedural mechanism allowing member firms to challenge Rule 8210 information requests perceived to be inappropriate in scope or unreasonably burdensome. Yet another highlights that the organization has not been constrained by a formal limitations period and has frequently brought cases involving conduct occurring more than five years earlier, which the report suggests as a self-imposed statute of limitations. 

“There have been cases where FINRA has looked back 10 years,” Rubin said. “It’s hard to accurately remember what happened five years ago, let alone 10. Virtually all other legal processes have some statute of limitations.”

The Bottom Line. Regardless of how many recommendations FINRA formally adopts, Rubin said, the report is still likely to influence FINRA investigations and enforcement matters in the near term. Firms that evaluate their enforcement preparedness in light of its findings may be better positioned to respond effectively throughout the enforcement process.