Once again – twice again, actually – FINRA has used Rule 8210 as a cudgel, beating the poor unfortunate recipients of the “request” for documents and information into submission, or worse. This has got to stop.
The first case is a repeat of one I blogged about earlier this year, and it involves the use of 8210 to demand that a computer be produced to FINRA so it can make a complete copy of the hard-drive. Here’s what happened. At 8:45 am on Wednesday, I received by email an 8210 letter, telling me that my client had to provide “immediate access to FINRA staff to inspect and copy” “[h]ard drive(s), Google drive(s), and USB thumb drive(s).” The letter also included this threat/promise; note that the use of bold and underlining appears in the original, just to ensure these words are not skipped:
If your client fails to provide immediate access to FINRA staff of the requested information, they may be subject to the institution of an expedited or formal disciplinary proceeding leading to sanctions, including a bar from the securities industry.
At 9:00 – 15 minutes later – the examiners showed up at my client’s office and demanded that they be provided the computers so the hard drives could be copied, in their entirety. Now remember from my previous blog post that I have been down this very road before with FINRA. The last time this happened, in the face of essentially the same 8210 letter, my other client elected to produce the computer rather than face an Enforcement action. Despite that, sadly, the matter still eventually ended up as an Enforcement case. At the hearing in that case, I objected to the 8210 request as being unlawful, as it exceeded the scope of the rule (which does not permit computers to be seized and imaged). The Hearing Officer asked me if an objection had been lodged at the time the initial 8210 request was served, and I had to say no. Well, then, ruled the Hearing Officer, you waived your right to object here by not objecting sooner.
Armed with this background, when faced with Wednesday’s 8210 request, I told the examiners, who were poised to start the forensic imaging of the computers, that I objected to the request. They told me that my objection was “noted,” whatever that means, and asked if they could start. So much for the lesson I thought I had learned from the Hearing Officer.
The fact is, there is no way to object to an 8210 request, no matter what a Hearing Officer may think. You either produce what’s requested or you don’t, and if you don’t, you will become a respondent in an 8210 case with FINRA seeking to bar you. As I have said many times before, the 8210 process needs to be fixed, specifically to allow for objections of the sort that the Hearing Officer suggested. I don’t know what will be the outcome of this exam, and I sure hope that my client doesn’t find itself in an Enforcement setting, but, to be honest, part of me would relish the opportunity to get back in front of the same Hearing Officer and see how he rules this time on the propriety of the 8210 request, given the fact that I objected loudly and immediately. I don’t harbor much hope that anyone connected with FINRA will ever concede that Rule 8210 has limits, but, someday I am going to find a client with the gumption and the money to press that issue up the chain to make it to a federal judge, who will actually understand and acknowledge that 8210 has been abused.
As bad as this scenario sounds, however, the other 8210 situation is even worse, an even more egregious demonstration of FINRA’s willingness to use 8210 to achieve unfair ends.
My client has been registered with BDs on and off (but mostly on) for over 20 years, but it’s never been his sole job. He has also served as a consultant to the industry at times and, more importantly, to companies and other entities outside the securities industry as a result of his overall financial and consulting experience, and, in particular, his expertise in investment banking, capital markets, underwriting, risk management, compliance and controls. In that unregistered role, my client was engaged quite a while ago to provide some assistance to a small group of affiliated companies, some public, some private, which were looking for strategic advice and seeking to raise capital. None was in the securities business. He drafted some documents, offered feedback on others, provided strategic advice in certain areas, but he had no decision-making authority (regardless of the fact that he bore a “C” level title at a couple of the entities); he simply did what he was asked to do on an issue-by-issue basis.
Unfortunately for him, these companies later attracted FINRA’s interest (because some sales of securities in these companies were made by a couple of individuals who happened to be registered with a BD at the time, and FINRA was interested in whether the transactions were handled properly by the BD as a private securities transaction or outside business activity). So, because my client was associated (but registered) with a member firm, FINRA sent him an 8210 request asking for copies of documents he might still have in his possession as a result of the work he’d been asked to do for these companies.
If the story ended there, it would be routine, i.e., he’d produce the documents and get on with life, especially since FINRA had no real interest in him, but, rather, only in his documents. But, the story doesn’t end there. Turns out that a long time ago, in a move that preceded the FINRA exam by years and which had absolutely zero to do with FINRA, the companies whose documents FINRA wanted to see had each passed a corporate resolution that precluded anyone from producing company documents to anyone other than the courts, the government or in response to a subpoena. FINRA, of course, is not the government and has no subpoena power. Accordingly, the companies informed my client that in light of the longstanding resolutions, if he produced to FINRA the corporate documents that had been requested, they would likely sue him, as the corporate resolutions prescribed, as well as pursue other damaging actions.
Are you getting the picture now? My client was as between a rock and a hard place as anyone ever: on the one hand, he could produce the documents in his possession to FINRA and thus avoid be barred, but to do so meant he would likely get sued by the companies whose documents he produced; on the other hand, he could choose not to produce those documents, thus avoiding the likelihood of civil suit and other potentially damaging actions, but inviting the FINRA bar.
We brought this situation to FINRA’s attention. We said it was completely unfair to put my client in such an untenable situation, where no matter what he did, no matter which decision he made regarding the documents, he would lose. FINRA just shrugged. We pointed out that the corporate resolutions were not passed in response to the FINRA exam or to the 8210 letters, and therefore should govern. FINRA disagreed and said that was his problem, that when he elected to become a registered person, thereby subjecting himself to Rule 8210, he ought to have known that someday FINRA could compel him to produce documents that he happened to possess from third parties that had absolutely nothing whatsoever to do with his role as a registered representative. In other words, FINRA said if the corporate resolutions were a problem, he ought never to have associated with a BD.
Faced with the choice between a bar from FINRA and a civil suit from the companies, my client took the bar. And FINRA had no problem with that.
The Supplementary Material to Rule 8210 provides that the scope of documents which FINRA is entitled to inspect “does not ordinarily include books and records that are in the possession, custody or control of a member or associated person, but whose bona fide ownership is held by an independent third party and the records are unrelated to the business of the member.” Clearly, this language is meaningless, as FINRA routinely ignores it, as it did here. The documents that got my client barred weren’t his; they were corporate documents from his corporate clients, copies and drafts of which he happened to possess. They were utterly unrelated to whatever securities activities he performed as a registered or associated person (none of which, by the way, ever involved sales). And yet FINRA vowed to, and did, pursue him.
FINRA knows how powerful, how coercive Rule 8210 is, and it doesn’t hesitate to remind people. Just look at the bold and underlined language in that quote at the outset of this blog post. It’s always presented as an “or else” situation: produce the documents or else you will get barred. Somehow, this has to change. There has to be a mechanism by which 8210 requests can be challenged without having to risk being barred. Unless/until that happens, FINRA will simply continue to bully its way through exams.
 There is another sordid component to this story that bears telling. In the 8210 request, FINRA attempted to provide some comfort that despite the fact it was seizing the entire contents of the hard drive no matter what files it contains, it wouldn’t necessarily look at everything. To that end, FINRA said that we had two weeks within which to identify for FINRA those files that are subject to a privilege, and which, therefore, FINRA should not inspect. I told FINRA, however, that I intended also to identify personal and confidential files to be clawed back, files that had nothing to do with the exam. The examiner on-site told me that was fine, indeed, that FINRA had no interest in looking at such files.
Disturbingly, however, when I confirmed this with him in a subsequent email, he quickly backed away from what he had told me, and insisted instead that all I could prevent FINRA from reviewing were privileged documents, but not personal and confidential documents that were completely unrelated to the exam. He even provided a cite to a prior FINRA decision, in which the NAC made the following frightening pronouncement: “FINRA is not precluded from requesting confidential and private information, and the Commission has rejected assertions of privacy and confidentiality as justifiable reasons for failing to provide FINRA with that information.” He went on to admonish me that “a member’s obligation to respond to a FINRA Rule 8210 request is unequivocal and such member cannot impose conditions under which they will provide information.”
Putting aside the sad fact that the examiner pulled a 180 and acted as if he had never agreed that FINRA would refrain from looking at my client’s personal and confidential information, I find it rather remarkable – and disturbing and scary – that FINRA is so blatant about its supposed right to inspect this stuff. Rule 8210 is very clear: FINRA can only review documents and information that relate to its exam. It is difficult, therefore, to see how FINRA claims a right to review, say, one’s wedding photos, or personal emails, or orders previously placed at Amazon, i.e., the kinds of things that may reside on the hard drive of a computer.