The Rule 8210 Karma Train Runs FINRA Over

From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper

If you’ve read this blog for even a short while, you know my feelings on Rule 8210, or, more specifically, how FINRA uses that rule, i.e., as a cudgel to keep member firms and their associated persons in line. Endless 8210 requests for documents and information, sometimes asking multiple times for the same stuff, each one requiring the devotion of significant time, effort and money; this is what haunts broker-dealers these days. This is why compliance departments of almost any firm with more than a handful of reps have people whose sole (but horrifying) job is to respond to the barrage of regulatory inquiries. That’s also why when a decision like this comes down, a decision that finds that FINRA abused its 8210 power, it needs to be brought out into the daylight and examined closely.

The respondent, Jessica Bower Blake, worked in a non-registered capacity for UBS until January 2018. Apparently, UBS filed a disclosure with FINRA under Rule 4530 that she was terminated “for altering information on client-signed documentation and for ongoing performance issues.” (Why Rule 4530? Because, as I said, Ms. Blake was not registered, and thus had no Form U-4 or U-5, which would be the typical place a disclosure like this would reside.) Its curiosity appropriately whetted by this language, FINRA proceeded to send Ms. Blake an 8210 request, seeking her side of the story. Nothing unusual about that.

But, almost immediately, this routine inquiry went off the rails. The first problem was a simple matter of poor draftsmanship by the examiner who sent the 8210 letter. There were only four specific requests in the 8210 letter, the first of which asked for a “[s]igned statement addressed to FINRA in response to the allegations.” Unfortunately, according to the decision, “FINRA did not specify the allegations in the Rule 8210 request or elsewhere” that it wanted Ms. Blake to address in her statement, so she was unable to provide it. What Ms. Blake did was to email the examiner and say, “I am not sure what you need for this and I do not have any relevant documents because I no longer work for the firm ….” The decision continued: “She also told the examiner that she did not plan to register or work in the field again, and that she did not see an address to send any information. She concluded the email with, ‘Please advise.’”

The examiner responded to Ms. Blake’s email with his own, but he didn’t help things at all. He informed her that she had failed to provide the requested statement, specifically telling her, “What we need is a statement in response to the allegations reported by the Firm.” Repeating the same omission he made in the initial 8210 request, however, the examiner again “did not identify the allegations or attach a copy of UBS’ Form 4530 filing.” In addition, the examiner failed to inform Ms. Blake “in his email, or at any time thereafter” that he was of the view that she still owed him a response to two other requests in the 8210 letter.

I suppose Ms. Blake got frustrated by the examiner’s failure or refusal actually to spell out the allegations to which he wanted her to respond, so it seems she just decided to ignore it. Three weeks later, Enforcement issued the Notice of Suspension under Rule 9552, which informed Ms. Blake that FINRA was suspending her in all capacities “for failing to provide information to FINRA, unless she took corrective action by complying with the ‘requests.’” The Notice of Suspension did not specify which requests, documents, or information in the Rule 8210 request remained outstanding.

Here came the next set of errors by FINRA. First, the Notice of Suspension indicated that Ms. Blake’s Rule 8210 failure was predicated on a complete failure to respond when, in fact, she had responded, albeit only partially. Second, and worse, FINRA apparently failed to read Rule 9552, or maybe it just misunderstood how a 9552 suspension works, but, either way, there was a problem, as you will see. The Notice itself correctly informed Ms. Blake that if she requested a hearing in a timely manner, that would operate to “stay the effective date of any suspension.” Despite her stated intent to leave the securities industry, Ms. Blake nevertheless timely requested a hearing, which, by rule, stayed her suspension. Moreover, Ms. Blake responded to the Notice of Suspension with an email that said, “I did reply to this matter! Please contact me so we can resolve the matter.”

Well, FINRA did contact her; this time, it was someone from Enforcement who emailed her. He told Ms. Blake that she had not responded to three of the four requests in the 8210 letter. Making matters worse, even though Ms. Blake’s suspension was stayed because she had timely requested a hearing, the Enforcement staffer incorrectly advised her that she was “due to be suspended today.” While Enforcement also provided Ms. Blake with an extension to provide a complete response, it again “erroneously advised Blake that if she did not provide a complete response by August 16, 2018, Blake would be suspended from associating with any FINRA member in accordance with the Notice of Suspension.”

Ms. Blake apparently decided she’d had enough dealing with examiners, and smartly said nothing else until the hearing. There, she asserted that she had responded as best she could to the 8210 letter, but “that she did not know what other information she was required to provide because the Rule 8210 request was ambiguous.” Specifically, Ms. Blake “testified that she could not provide a response to Request No. 1 of the Rule 8210 request because FINRA did not define or describe the allegations in Request No. 1.”

Remarkably, the Panel agreed with her, and dismissed the proceedings and ordered Enforcement to cancel her suspension. In her decision, the Hearing Officer recapped all of FINRA’s errors. First, she concluded that “Enforcement did not have an adequate basis to conclude, at the time it issued the Notice of Suspension, that Blake failed to comply with the Rule 8210 request given the ambiguity of both Request No. 1 and the requests that remained outstanding under the Rule 8210 request.” This is a direct result of the fact that until the hearing itself, FINRA never properly spelled out for Ms. Blake the allegations it wanted her to address in her statement. As a result, the 8210 letter was “vague and ambiguous.” And now, my second favorite line from the decision: “A recipient of a Rule 8210 request should not have to guess what documents or information is being requested or have to connect the dots with language contained somewhere else in the Rule 8210 request to understand what information FINRA is seeking under a particular request.” I look forward to the first time that I will be able to invoke these words!

Second, the Hearing Officer concluded that the Notice of Suspension “was flawed” because it concluded that Ms. Blake had failed to comply with two specific requests, but “[n]o one at FINRA ever told Blake that those requests remained outstanding until after Enforcement issued the Notice of Suspension and after Blake requested a hearing.” Citing “fundamental fairness” — my favorite phrase in the decision — the Hearing Officer held that Ms. Blake “should not be suspended under the Notice of Suspension for failing to comply with requests she did not reasonably understand were outstanding prior to the issuance of the Notice of Suspension. She did not understand that these were outstanding because the . . . investigator represented to her (albeit mistakenly) that only Request No. 1 remained outstanding, and Request No. 1 was ambiguous with respect to the allegations to which Enforcement requested Blake to respond.”

Finally, the Hearing Office also found that FINRA “did not issue the Notice of Suspension in accordance with Rule 9552.” She noted that FINRA Rule 9552(c) requires “that FINRA’s notice must state the specific grounds and include the factual basis for the FINRA action, and that “FINRA Rule 9552(a) states that the written notice must specify the nature of the failure.” Here, FINRA not only failed to “adequately describe the specific grounds and factual basis for its action,” but it also confused things further by erroneously stating that the Notice of Suspension was triggered by Blake’s “complete failure to respond rather than a partial failure to respond.”

This is a small case, but a big win for Ms. Blake, as well as the industry. It is important because it highlights that FINRA can – and should – be required to act in a “fundamentally fair” way when wielding its 8210 powers. As the hearing officer observed, the obligation to respond to an 8210 request is “unequivocal” and “unqualified, and compliance is mandatory.” FINRA knows this, of course, and takes full advantage of this fact, but, arguably, too much so. Given the dire consequences for ignoring an 8210 request – permanent bars and expulsions – no one takes them lightly, so even requests that are questionable in their scope, in their length, in their relevance, are responded to. Ms. Blake, however, someone out of the industry with nothing to lose and with an argument based on nothing more than fairness, was able to make FINRA toe the line in a way that big firms do not dare to try.