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Representing Brokers in FINRA Investigations into Improper Margin Practices

Brokers in the Hot Seat: Navigating FINRA Margin Investigations

The Dreaded FINRA Knock

You’re a broker, doing your job, when suddenly, there’s a knock at the door, it‘s FINRA, and they want to investigate your margin practices. Gulp, your heart starts racing, palms get sweaty, what do you do? Take a deep breath, we’ve got your back.FINRA investigations into margin practices are no joke, but, with the right approach, you can navigate them smoothly. We‘re here to demystify the process and give you a game plan.

Understanding Margin Requirements 101

Before we dive into investigations, let’s do a quick margin 101. Margin accounts allow investors to borrow money from their broker to buy securities.1 FINRA sets the rules on how much can be borrowed, known as “initial” and “maintenance” margin requirements.For stocks, the initial requirement is 50% – meaning if an investor buys $10,000 of stock, they must put up $5,000 and can borrow the other $5,000 from the broker.2 The maintenance requirement is 25% – so if that $10,000 stock drops to $8,000, the investor needs to have at least $2,000 (25%) in equity, or face a margin call to deposit more funds.3Got it? Good, because FINRA doesn’t mess around when brokers violate these requirements.

The FINRA Investigative Process Demystified

So, FINRA is investigating your margin practices, what can you expect? Here‘s a typical playbook:

  1. Request for Documents and Records (FINRA Rule 8210)
    FINRA kicks things off by demanding documents and records related to the suspected violations, using its big stick – Rule 8210.4 Failing to comply can lead to suspensions and bigger headaches.
  2. On-the-Record (OTR) Interviews
    After reviewing documents, FINRA will summon your firm’s employees for OTR interviews, conducted under oath.5 These can be intense, multi-day grillings, so prep thoroughly with counsel.
  3. The Wells Process
    If FINRA finds violations, they’ll issue a Wells notice, giving you a chance to respond before formal charges.6 This is a crucial opportunity to present your defense.
  4. Potential Charges and Sanctions
    Depending on your Wells submission’s persuasiveness, FINRA may file a formal complaint, leading to a hearing before an adjudicator.7 Possible sanctions include hefty fines, suspensions, or even being barred from the industry.

Common Margin Violations FINRA Scrutinizes

Knowing what FINRA looks for can help you steer clear of violations. Some frequent issues:

  • Not collecting enough initial margin from customers
  • Allowing accounts to drift too far below maintenance requirements without issuing margin calls
  • Extending improper margin for day trading or other restricted activities
  • Failing to apply FINRA’s complex margin rules correctly (e.g. for options, bonds, etc.)

Even inadvertent mistakes can draw FINRA’s ire, so ensuring robust compliance systems is crucial.

Navigating Investigations: A Survival Guide

If FINRA comes knocking about your margin practices, don’t panic, but do take these steps:

  1. Hire Experienced Counsel Immediately
    The stakes are too high to go it alone. An attorney well-versed in FINRA proceedings can guide your response strategy.
  2. Implement a Comprehensive Legal Hold
    Preserve all potentially relevant records and data by issuing a legal hold notice firm-wide. Destroying evidence will only compound your troubles.
  3. Conduct an Internal Investigation
    Your counsel should spearhead a privileged review to understand potential issues before FINRA uncovers them.
  4. Prepare Thoroughly for OTR Interviews
    OTRs are essentially depositions – practice with counsel using FINRA’s likely lines of questioning.
  5. Leverage the Wells Process
    The Wells submission lets you argue persuasively why charges shouldn’t be brought. Craft it meticulously.
  6. Consider Potential Consequences
    Negotiate a settlement if the violations are clear, but be ready to contest overreaching charges at a hearing if needed.

Remember, being proactive and strategic from the start can make a huge difference in the outcome.

Christine Twomey
Christine Twomey
Just had my Divorce case settled 2 months ago after having a horrible experience with another firm. I couldn’t be happier with Claire Banks and Elizabeth Garvey with their outstanding professionalism in doing so with Spodek Law Group. Any time I needed questions answered they were always prompt in doing so with all my uncertainties after 30 yrs of marriage.I feel from the bottom of my heart you will NOT be disappointed with either one. Thanks a million.
Brendan huisman
Brendan huisman
Alex Zhik contacted me almost immediately when I reached out to Spodek for a consultation and was able to effectively communicate the path forward/consequences of my legal issue. I immediately agreed to hire Alex for his services and did not regret my choice. He was able to cover my case in court (with 1 day notice) and not only was he able to push my case down, he carefully negotiated a dismissal of the charge altogether. I highly recommend Spodek, and more specifically, Alex Zhik for all of your legal issues. Thanks guys!
Guerline Menard
Guerline Menard
Thanks again Spodek law firm, particularly Esq Claire Banks who stood right there with us up to the finish line. Attached photos taken right outside of the court building and the smile on our faces represented victory, a breath of fresh air and satisfaction. We are very happy that this is over and we can move on with our lives. Thanks Spodek law 🙏🏼🙏🏼🙏🏼🙏🏼🙌🏼❤️
Keisha Parris
Keisha Parris
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Taïko Beauty
Taïko Beauty
I don’t know where to start, I can write a novel about this firm, but one thing I will say is that having my best interest was their main priority since the beginning of my case which was back in Winter 2019. Miss Claire Banks, one of the best Attorneys in the firm represented me very well and was very professional, respectful, and truthful. Not once did she leave me in the dark, in fact she presented all options and routes that could possibly be considered for my case and she reinsured me that no matter what I decided to do, her and the team will have my back and that’s exactly what happened. Not only will I be liberated from this case, also, I will enjoy my freedom and continue to be a mother to my first born son and will have no restrictions with accomplishing my goals in life. Now that’s what I call victory!! I thank the Lord, My mother, Claire, and the Spodek team for standing by me and fighting with me. Words can’t describe how grateful I am to have the opportunity to work with this team. I’m very satisfied, very pleased with their performance, their hard work, and their diligence. Thank you team!
Anthony Williams
Anthony Williams
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Loveth Okpedo
Loveth Okpedo
Very professional, very transparent, over all a great experience
Bee L
Bee L
Amazing experience with Spodek! Very professional lawyers who take your case seriously. They treated me with respect, were always available, and answered any and all questions. They were able to help me very successfully and removed a huge stress. Highly recommend.
divesh patel
divesh patel
I can't recommend Alex Zhik and Spodek Law Firm highly enough for their exceptional legal representation and personal mentorship. From the moment I engaged their services in October 2022, Alex took the time to understand my case thoroughly and provided guidance every step of the way. Alex's dedication to my case went above and beyond my expectations. His expertise, attention to detail, and commitment to achieving the best possible outcome were evident throughout the entire process. He took the time to mentor me, ensuring I understood the legal complexities involved to make informed decisions. Alex is the kind of guy you would want to have a beer with and has made a meaningful impact on me. I also want to acknowledge Todd Spodek, the leader of the firm, who played a crucial role in my case. His leadership and support bolstered the efforts of Alex, and his involvement highlighted the firm's commitment to excellence. Thanks to Alex Zhik and Todd Spodek, I achieved the outcome I desired, and I am incredibly grateful for their professionalism, expertise, and genuine care. If you're in need of legal representation, look no further than this outstanding team.

Hypothetical Scenario: Avoiding a Margin Meltdown

Let’s illustrate with a hypothetical:Acme Brokers is being investigated over allegations it allowed several customers’ accounts to drop below FINRA’s 25% maintenance margin requirement without issuing timely calls for additional collateral.After being notified, Acme quickly retains experienced FINRA counsel and issues a comprehensive legal hold. The legal team conducts interviews to understand how and why the margin issues occurred.It turns out a new operations supervisor misunderstood the maintenance rules and didn’t escalate accounts approaching minimum requirements. However, the issues were caught within a few weeks and all accounts were brought into compliance.During OTR interviews, Acme employees are upfront about the mistakes but emphasize the firm’s overall strong compliance culture. The Wells submission argues the violations were inadvertent, swiftly remedied, and do not warrant charges.Ultimately, FINRA accepts Acme’s explanation of an isolated lapse quickly corrected. Acme agrees to a modest fine and implementing revised margin procedures, but avoids individual sanctions.By getting ahead of the issue and presenting a strong defense, Acme avoided a margin meltdown.

Why an Experienced FINRA Attorney Is Essential

“But I have in-house counsel,” you might think, “why do I need to hire an outside FINRA lawyer?” Here’s the thing, FINRA investigations require specialized expertise.A veteran FINRA attorney lives and breathes these proceedings daily. They’ll know the latest expectations, how to strategize document productions, prepare witnesses, and negotiate adeptly.Your in-house team, while skilled, likely lacks that dedicated FINRA focus. And you don’t want to be the test case for their learning curve when your career is on the line.An outside FINRA pro ensures you mount the most vigorous defense from day one. It’s an investment worth making to protect your livelihood.

The Biggest Mistake: Lack of Candor

Perhaps the deadliest sin in a FINRA investigation is lack of candor or outright dishonesty.Misleading FINRA staff or giving false testimony under oath could lead to charges even harsher than the original violations. And once credibility is lost, regaining it becomes extremely difficult.The smartest approach is radical transparency from the outset. If you made mistakes, own them, but provide full context and mitigation. Misleading FINRA is the surest path to a devastating outcome.

Don’t Go It Alone – We’re Here to Help

Look, FINRA margin investigations are high-stakes affairs, no question. But with the right guidance, you can absolutely put your best foot forward.At Spodek Law Group, we’ve guided countless brokers through this maze. We’ll make sure you understand the process, implement a smart strategy, and fight tenaciously to protect your career and reputation.The road may be tough, but we’ll walk it alongside you every step of the way. Don’t go it alone – reach out today for a consultation.

1 https://www.finra.org/investors/insights/margin-statistics
2 https://www.finra.org/rules-guidance/key-topics/margin-accounts
3 https://www.finra.org/investors/insights/margin-statistics
4 https://www.jdsupra.com/legalnews/what-should-you-expect-do-and-not-do-3920234/
5 https://federal-lawyer.com/securities-litigation/sec-fraud-defense/finra-defense/investigation-process/
6 https://www.finra.org/rules-guidance/guidance/faqs/enforcement-investigations-process-faq
7 https://www.finra.org/rules-guidance/guidance/faqs/enforcement-investigations-process-faq

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