Coordinating Responses to Parallel FINRA and SEC Inquiries.

Yes. When one course of conduct triggers multiple inquiries, your defense needs to address the risks and requirements presented by each agency. Each agency’s request for a response constitutes its own set of obligations and deadlines. Your obligations to one agency are independent of those to the other; for instance, an unfavorable response to a FINRA inquiry can lead to sanctions that affect your standing with the SEC, and a settlement with FINRA will not otherwise necessarily relieve you of your liability for a separate SEC enforcement action.

The U.S. Securities and Exchange Commission (SEC) is a federal agency responsible for enforcing the federal securities laws. While the SEC is the superior entity, FINRA is a self-regulatory organization that receives oversight authority from the SEC. The SEC, however, possesses jurisdiction that extends beyond FINRA-registered broker-dealers and their registered persons.

FINRA is primarily concerned with enforcing securities laws in conjunction with the other relevant authorities by regulating broker-dealers and their associated persons. FINRA Rules have broad scope, and FINRA investigates suspected violations of the securities laws, FINRA Rules, and others. FINRA Rule 8210(b) provides access for domestic federal agencies to information obtained in FINRA’s enforcement inquiries. Access agreements are permissible, and FINRA can also initiate proceedings on the behalf of another agency that has deemed it necessary for it to act.

When you need to address these parallel inquiries, each needs to be handled carefully with an eye toward both the scope and requirements of that agency as well as the scope and requirements of any other agency. At Spodek Law Group, we bring specific experience on both sides of the regulatory landscape to all our SEC and FINRA defense matters.

How do I coordinate overlapping requests and response deadlines?

Producing records in response to a FINRA inquiry does not necessarily satisfy your obligations in response to a parallel SEC inquiry. A cross-agency production log records exactly what has been produced to each regulator (and when) for each request so that you can easily confirm compliance across both jurisdictions.

A centralized document review also helps prevent inconsistent productions across parallel inquiries.

While parallel requests from the SEC and FINRA may overlap, they can still diverge with respect to:

• Relevant custodians;
• Relevant date ranges;
• Relevant categories of documents;
• Search terms and other definitions;
• Electronically stored information formats; and,
• Deadlines.

To manage this, we track scope, deadlines, objections, custodians, and production status in a master request matrix.

A regulator contact log is another essential tool for tracking all oral representations, commitments, follow-up deadlines, and other significant developments with the SEC and FINRA.

These logs and matrices provide critical, up-to-the-minute insight into your defense. We combine our technical knowledge of the regulatory landscape with a focused and detailed approach to ensuring compliance, which helps avoid costly mistakes.

Deadline management is one of the more challenging aspects of parallel inquiries. When the SEC and FINRA issue requests with overlapping but different deadlines, counsel can request extensions, sequencing accommodations, or negotiate more reasonable timelines without refusing FINRA’s demand.

FINRA Rule 9552 generally provides for 21 days’ notice prior to a noncooperation suspension. While this is a relatively long time, our lawyers are proactive about requesting and securing necessary extensions, and we will never allow an unnecessary suspension.

Which records must I preserve and collect immediately?

Receiving either inquiry will ordinarily trigger your duty to preserve all electronic records that may be relevant to the inquiry or inquiries at issue. This duty includes all documents, emails, logs, social media posts, text messages, and instant messages, and encompasses both formal and informal communications. It does not only apply to all records within your sole possession, but also includes records maintained by your employees, former employees, agents, contractors, representatives, subsidiaries, and other related third parties.

Generally, preserving and retaining records at the time of receipt of notice from one or more regulators is essential to avoid unnecessary spoliation or obstruction exposures. Many of the issues associated with record preservation and retention (including those discussed below) will have direct bearing on the SEC’s determination of whether, when, and how it will pursue enforcement action.

Preservation obligations are wide-reaching, extending to all communications that may be responsive to the relevant inquiry or inquiries. This includes communications sent and received on personal devices and through messaging applications (e.g., iMessage, WhatsApp, Telegram, Signal) that are employed for business purposes. When communications cross borders, cross-border collection must also account for all applicable privacy, secrecy, and data-transfer laws and restrictions.

Responsiveness to the SEC’s or FINRA’s requests may be broad, and identifying responsive records can create significant challenges. Responsive records may reside with third parties such as cloud storage vendors, messaging providers, former employees, and others. As discussed below, determining when a third party has custody or control of potentially responsive records can affect your obligation to produce documents to the SEC or FINRA.

Responsive records may be located at several different locations, each with its own set of recordkeeping procedures and practices, and you will need to ensure that your personnel in charge of collecting and preserving records are aware of these requirements and have experience in the area.

What are the SEC and FINRA’s rights to access records in a respondent’s possession, custody, or control?

If you have received a demand for documents and/or testimony from the SEC or FINRA, then whether records in your possession, custody, or control must be produced in response to the demand will be important. The definition of what constitutes “custody or control” in each regulatory context includes:

• Records that the respondent has the legal right to obtain through the appropriate means (i.e., by contracting with the third party for such records),
• Records for which the respondent has a contractual relationship that requires the third party to maintain such records, and,
• Records for which the respondent has some other relationship with the third party that requires (or would be reasonable to assume involves) the storage and retention of such records on the respondent’s behalf.

Can I challenge SEC subpoenas or FINRA information demands?

What is the nature and scope of FINRA’s authority to demand information in the context of an inquiry?

The authority of FINRA to demand information under Rule 8210 is substantial. As stated above, this authority is granted to FINRA as a self-regulatory organization (SRO) by the SEC, and it is delegated to FINRA by the parties that subject themselves to FINRA’s jurisdiction. This authority to demand information is broad and is substantially similar in nature and scope to the subpoena power of a federal agency in a federal investigation. It may be broadly characterized as authority under the Securities Exchange Act of 1934 for FINRA to seek and obtain all information that is pertinent to an inquiry in which it may eventually recommend a sanction. With respect to this authority, FINRA Rule 8210 includes broad discretion to demand information and documents (including both written and electronic documents), oral testimony, written testimony, and written responses to demands for information.

This is broad authority. However, the enforcement of this authority is different from that of the SEC. The SEC is a federal agency and it has the power to seek, through federal district court subpoena enforcement proceedings, the issuance of orders compelling the production of records and the provision of testimony. Conversely, FINRA does not have judicial subpoena power. If a party refuses to comply with a FINRA demand, FINRA can only enforce this demand by initiating disciplinary proceedings in response to the underlying suspected rule violations. FINRA Rule 9552(a) provides that when a member or person subject to FINRA's jurisdiction fails to provide information required under FINRA's By-Laws or rules, FINRA staff may serve written notice specifying the nature of the failure and stating that failure to take corrective action within 21 days after service of the notice will result in suspension of membership or of association with any member.

Accordingly, if you receive an information demand from FINRA, the information demand is not a subpoena and you are not subject to judicial enforcement if you fail to comply. However, you can suffer FINRA disciplinary action for failure to comply with a Rule 8210 demand, and that liability for non-compliance with a Rule 8210 demand can be a fully independent liability from any potential liability for any alleged underlying misconduct at issue in the underlying inquiry.

While you are at a disadvantage in FINRA proceedings if you refuse to provide potentially responsive documents and/or testimony, refusing to comply with a Rule 8210 demand is potentially appropriate. Many Rule 8210 demands from FINRA are overbroad, seek information in violation of applicable privilege law, or seek or intend to seek information that will not be produced by any means in any proceeding. In many cases, the best approach when faced with a potentially improper Rule 8210 demand will be to work out a resolution with FINRA’s enforcement personnel. If this does not resolve the matter, then you can simply refuse the demand. However, you should be aware that you do so at your own risk. Once a party is targeted for non-cooperation sanctions by FINRA, the relevant disciplinary officer then has the discretion to suspend the party’s membership or associated person status.

When faced with a Rule 8210 demand, the obligation to respond is unqualified, and FINRA bears no burden of justifying its need for the records, documents, or oral or written testimony it seeks. A recipient who withholds responsive material on the ground that the request is unjustified risks an independent failure-to-cooperate violation. As discussed above, while Rule 8210 is a powerful tool, its enforcement mechanisms are limited. Unlike the SEC, which has a powerful role as both investigator and prosecutors (that are delegated to the DOJ), FINRA does not have a powerful role as investigator and prosecutors.

Spodek Law Group, led by managing partner Todd Spodek, defends clients in federal criminal and white collar matters.

Can I sequence testimony without violating FINRA cooperation duties?

Does the Fifth Amendment protect against SEC investigations and inquiries?

The Fifth Amendment protects individuals against compelled self-incrimination in criminal matters. Although the SEC and DOJ do not share the same resources as criminal prosecutors, the Fifth Amendment protects individuals against compelled self-incrimination during testimony at SEC investigations as well. This, of course, only applies to individuals, and in cases where the individual in question would otherwise be compelled to testify. In civil proceedings, the factfinder may draw an adverse inference when the Fifth Amendment is invoked in response to pertinent questions.

Does the Fifth Amendment protect against FINRA investigations and inquiries?

Generally no. While the Fifth Amendment protects you from compelled self-incrimination by the federal government, this does not apply to FINRA’s authority to demand information, records, testimony, or written responses to its demands. Accordingly, complying with demands that may expose you to federal criminal, civil, or administrative enforcement can be your only option in a FINRA investigation or inquiry.

Can my testimony or production of records to FINRA reach the SEC or DOJ?

Generally yes. As FINRA has the authority to share the results of its investigations and enforcement proceedings with various regulators, including the SEC and DOJ, you should assume that any information you provide to FINRA will end up with the SEC or DOJ. This risk can present additional issues that must be carefully managed when facing parallel inquiries from FINRA and the SEC.

What are the risks associated with providing false information during SEC and FINRA investigations?

Regardless of the circumstances, providing false information during a federal or SEC/FINRA investigation is seriously wrong and can result in facing criminal charges under 18 U.S.C. § 1001 (and other federal criminal statutes). While most cases’ enforcement proceedings with the SEC only result in civil liability, knowingly providing false information in an SEC inquiry can give the DOJ the grounds to criminally prosecute you.

Providing false information in response to a FINRA inquiry is equally serious and is an independent violation of FINRA Rules 8210 and 2010. Again, and importantly, providing false information to FINRA can potentially trigger federal criminal prosecution as well.

What are the risks associated with providing false information during FINRA investigations and inquiries?

Can I obtain immunity for SEC or FINRA investigations or inquiries?

Generally no. In order to obtain immunity from federal criminal prosecution, you will typically need to deal with a United States Attorney’s Office or the DOJ. SEC staff do not have the authority to independently grant immunity. FINRA likewise has no authority to grant immunity, and a hearing officer's findings in one disciplinary proceeding do not shield a member or associated person from liability for separate, unrelated rule violations.

Can I get a stay of SEC or FINRA proceedings pending DOJ criminal charges?

There is no definitive answer to this question. While the courts allow for a stay of proceedings when it is deemed necessary to protect a party’s Fifth Amendment right against self-incrimination in a criminal matter, this is not a mandatory requirement for courts. Courts weigh all competing factors and interests in civil cases, and the outcome of any motion for a stay will depend upon the circumstances at hand. Similarly, while the DOJ can request a stay of proceedings during civil investigations, it is not obligated to do so and the courts are not obligated to grant the request.

How do conflicts and privilege affect a coordinated defense?

What happens if you voluntarily provide privileged information to the SEC and FINRA?

Voluntarily disclosing information and/or documents to the SEC or FINRA during a civil or administrative investigation can waive all applicable protections over such information and/or documents and similarly situated communications. If an investigation/enforcement proceeding is open with either the SEC or FINRA, then providing any documents to the SEC or FINRA should be done with extreme caution, and you need to make an informed decision about whether you are willing to risk waiving all of your potential privileges.

Do the attorneys who represent the corporate entity also represent the individuals that are involved in the corporate entity?

No, not automatically. While employees and executives who are involved in the day-to-day business operations and administration of a corporation are also employed by the corporation and subject to the corporation’s policies and procedures, they are not automatically represented by the corporation’s counsel. The attorneys who represent your company’s business and commercial interests (and the attorneys who have conducted the internal defense for you during the inquiry) are not necessarily the attorneys who can best protect you in a SEC inquiry.

Will the SEC, DOJ, and FINRA grant confidentiality or an “agreement not to disclose” with respect to privileged information and/or documents in response to a federal subpoena or FINRA’s Rule 8210 demand?

No. While the SEC, FINRA, and DOJ have policies to protect sensitive or personal information, this does not amount to a confidentiality or “agreement not to disclose” when the information is shared within the agency, between the agencies, or when these agencies obtain a court order compelling the production of an individual’s or corporation’s records and information. Furthermore, any confidentiality or “agreement not to disclose” to provide privileged information to an agency or regulator does not bind any private third parties and would not preclude a private party from filing a private enforcement action in civil court.

How do common interest agreements differ from attorney-client privilege and work product protections?

A common interest agreement is a contractual provision allowing for the sharing of the results of internal investigations and any other communications or documents for the purposes of litigation defense. This type of agreement is intended to preserve the attorney-client privilege and work product protection of both parties when they share information with each other. However, as an agreement, the common interest agreement does not independently establish the attorney-client privilege or work product protection.

When are separate attorneys required to represent a corporate entity and its employees or executives?

When employees or executives present a potentially waivable conflict, which occurs when they are involved in the matter giving rise to the inquiry and need to protect themselves against individual liability. In the SEC case, the company must first determine which employees or executives have a conflict and then determine whether you are able to waive that conflict. Under ABA Model Rule 1.7 and the New York and California Rules of Professional Conduct, this conflict must be waivable under the rules, the company’s counsel must determine whether the conflict is waivable, and then if it is waivable, informed consent from all parties to the conflict must be obtained.

What is an Upjohn Warning?

The “Upjohn warning” was introduced in an appellate case involving the U.S. Securities and Exchange Commission (United States v. Upjohn Company), and it describes when the SEC (or any other entity) has the right to provide documents and information obtained by a company’s attorney during internal investigations. According to the “Upjohn warning,” an attorney that is paid by the company for providing services on the company’s behalf is providing such services to the company and the company is entitled to all applicable privilege. An attorney is not providing these services to a specific employee or executive, and the company’s employees or executives must understand that the attorney represents the company and is not their personal attorney. This includes ensuring that the employee understands that the company, not the employee, has the unilateral right to waive the privilege.

Will settling one inquiry resolve the other regulator’s case?

Are sanctions more than just monetary payments?

Many settlements impose compliance undertakings as part of their resolutions, which can be quite substantive. Compliance undertakings can include restrictions on the conduct and activities of firms and individuals and changes to compliance protocols. As with fines, compliance undertakings will be determined on a case-by-case basis.

Can you influence the SEC, FINRA, or DOJ’s decision to pursue an enforcement action?

Yes, to an extent. An aggressive defense can discourage regulators from pursuing enforcement action, and cooperation, documented remediation efforts, and effective compliance programs may help a respondent avoid unnecessary scrutiny or discipline. The SEC, FINRA, and DOJ also consider a variety of other factors in their charging and settlement decisions.

If you resolve your inquiry with the SEC, FINRA, or DOJ, will this affect the resolution of a parallel inquiry with another regulator?

Yes. The resolution of a parallel inquiry can have various implications for subsequent enforcement or disciplinary proceedings with another regulator. For example, a public admission of wrongdoing by the SEC can impact FINRA’s ability to seek disciplinary action in an enforcement proceeding or even the availability of a settlement, while a decision not to pursue enforcement action by the SEC may influence the DOJ’s decision whether to initiate a criminal case.

If the SEC imposes a bar, will this lead to a statutory disqualification under the Exchange Act?

If the SEC imposes a bar under 15 U.S.C. § 78u-3(a) or 78u-3(b) that bars an individual from acting as an officer or director of a public company (Exchange Act § 3(a)(39)), this may result in the individual becoming subject to a statutory disqualification under FINRA Rule 8250 or FINRA Rule 2020. A statutory disqualification can have various impacts on an individual’s ability to work in the industry and your compliance obligations.

If I settle my inquiry with FINRA, can I still appeal any findings?

A settlement agreement under FINRA’s Rule 9552 will terminate all rights of appeal, except for those specifically stated in the settlement agreement.

Does an enforcement proceeding trigger an obligation to update your Form U4?

A respondent’s responsibility to update Form U4 must be evaluated on a case-by-case basis, considering the circumstances of the proceeding and the specific reportable event in question.

Many enforcement actions require a reported disciplinary event. In a FINRA disciplinary proceeding, as in any other type of proceeding, you must update your Form U4 within 30 days of receiving notice of the disposition of the proceeding.

Are your insurance company’s policies going to be triggered?

Your insurance company’s policy terms will determine whether you must notify your insurance company or whether it has an obligation to provide coverage in the event of a regulatory inquiry.

What are the public disclosure obligations when you have an SEC inquiry or enforcement proceeding?

Public companies have various public disclosure obligations. Determining if the information obtained by an individual public company or company officers or directors is considered material may be complicated in an SEC inquiry or enforcement proceeding. You should work closely with a federal securities attorney to determine if the information is material under federal securities laws and if your company must make a public disclosure.

Talk to Spodek Law Group

Every case turns on its own facts, and general information is no substitute for advice about yours. Todd Spodek, managing partner of Spodek Law Group, and the firm's attorneys defend federal criminal and white collar matters nationwide. Reach the firm at 212-300-5196.