What to Know
- FINRA published an external review recommending broad changes to its Enforcement program.
- If adopted, the recommendations would have a significant impact for broker-dealers and other respondents in FINRA investigations and enforcement actions.
- Among the most consequential proposals are new checks on Rule 8210 requests, a more robust Wells process, formal limitations periods for disciplinary actions, and improved credit for cooperation and remediation efforts.
FINRA recently published a report prepared by two outside experts – former SEC Commissioner Troy A. Paredes and Professor Paul R. Eckert of William & Mary Law School – containing recommendations intended to improve FINRA’s Enforcement function. FINRA commissioned the review as part of its FINRA Forward initiative and has said that it is “committed to drawing on these recommendations” as it continues to revise its Enforcement program.
The report contains twenty-four recommendations covering FINRA’s internal governance, investigations, settlement practices and transparency. Some of these recommendations build on changes FINRA implemented earlier this year, including introductory meetings when matters are referred to FINRA Enforcement, status updates provided to respondents at least every 90 days, meetings at the conclusion of fact-finding and a longer, 30-day period for Wells submissions.
We focus below on four recommendations that could have particular significance to broker-dealers facing FINRA investigations and Enforcement actions.
I. Checks on 8210 Requests
One of the recommendations that could have a major impact for member firms concerns FINRA Rule 8210, which grants FINRA broad authority to compel the production of documents, information and testimony from member firms and associated persons. Rule 8210 requests are often among the most burdensome aspects of a FINRA investigation, particularly in complex matters involving extensive trading activity, electronic communications or supervisory records.
The report recommends several reforms intended to increase oversight and transparency in FINRA’s use of Rule 8210 requests. It proposes greater senior-level review of information requests, pre-issuance discussions with firms regarding the scope and timing of requests, and measures to reduce duplicative requests for information already in FINRA’s possession. The report also recommends enhanced safeguards to protect attorney-client privileged material and suggests establishing a formal process through which firms could challenge particularly burdensome or unreasonable Rule 8210 requests before a neutral decision maker.
If implemented, these recommendations could materially change how firms engage with FINRA during investigations. While FINRA would retain its ability to obtain information needed to carry out its regulatory responsibilities, firms could benefit from a more structured process that allows greater dialogue regarding the scope, timing and burden of requests. For broker-dealers that regularly respond to large-scale Rule 8210 demands, these changes could help reduce costs and improve the efficiency of investigations.
II. Improved Wells Process
Perhaps the most significant recommendation in the report is a proposal to enhance Wells procedures to promote due process, transparency and fairness to respondents.
Historically, FINRA’s Enforcement process placed the principal opportunity for respondents to contest a contemplated enforcement action near the end of FINRA’s investigation. Under existing procedures, Enforcement first completes its investigation and conducts a “Sufficiency of Evidence” review. If FINRA preliminarily determines that formal discipline is warranted, the staff will conduct a “Wells Call,” during which the staff informs the individual or firm of the proposed charges and the primary evidence supporting the charges. A firm’s first opportunity to challenge those proposed charges and evidence in writing generally comes afterward, in the firm’s Wells submission.
The new recommendations would move FINRA’s substantive engagement with respondents earlier in the process. At the time of referral to Enforcement, a firm would receive written notice identifying the potential violations and a reasonably detailed description of FINRA’s concerns. FINRA also would disclose, where appropriate, the surveillance methodology, assumptions and quantitative analysis underlying the referral. The firm would then have a structured opportunity to address the merits before Enforcement’s charging theory has fully developed.
If adopted, these changes could reshape the longstanding structure of the Enforcement process, providing respondents with a more meaningful opportunity to engage with FINRA staff concerning allegations of misconduct, and also allowing FINRA to better understand respondents’ views of the facts.
III. Limitations Periods
One of the more widely discussed recommendations in the report is the proposal that FINRA adopt formal limitations periods for disciplinary actions. Currently, FINRA generally is not subject to a statute of limitations when bringing enforcement actions – although extremely lengthy delays can, in limited circumstances, be challenged as fundamentally unfair.
The report recommends that FINRA adopt specific time limits within which enforcement actions must be commenced. For matters based on violations of the federal securities laws, the authors suggest that FINRA align its limitations periods with the applicable federal statutes of limitation. For other matters, the report suggests that FINRA consider adopting a general five-year limitations period, subject to traditional doctrines, such as equitable tolling and continuing violations.
The adoption of formal limitations periods would represent a substantial change in FINRA enforcement practice. Firms and individuals frequently face investigations involving conduct that occurred many years earlier, when documents may no longer be readily available and witness recollections have faded. A limitations period could provide greater certainty to regulated entities while encouraging FINRA to investigate and resolve matters more promptly. At the same time, FINRA may be reluctant to impose restrictions that could prevent it from pursuing significant misconduct discovered after lengthy investigations. As a result, this recommendation may generate considerable debate within the industry.
IV. Cooperation Could Carry More Weight
The report also recommends significant revisions to FINRA’s approach to cooperation credit. Under FINRA’s existing framework, firms typically must demonstrate “extraordinary cooperation” to receive meaningful credit in an enforcement action. Many industry participants have criticized this standard as unpredictable and difficult to satisfy.
To address these concerns, the report recommends that FINRA adopt new guidance providing for a broader range of cooperation credit. The authors suggest that meaningful remediation efforts, prompt internal investigations, self-reporting, enhancements to supervisory systems and other proactive measures should receive greater recognition, even where a firm was already obligated to take those actions. The report further recommends greater transparency regarding how cooperation credit is awarded and encourages FINRA to explain more clearly in settlements when and why cooperation affected the outcome of a matter.
If adopted, these recommendations could create stronger incentives for firms to identify and remediate issues before regulatory intervention becomes necessary. They also align with a broader theme running throughout the report: that FINRA should place greater emphasis on achieving appropriate compliance outcomes rather than simply imposing sanctions. Firms facing regulatory inquiries may therefore have greater opportunities to influence the outcome of an investigation by demonstrating prompt remediation, thoughtful governance and a robust culture of compliance.
Takeaways for Member Firms
Although it remains unclear which recommendations FINRA ultimately will adopt, the report signals a meaningful effort to make the Enforcement process more transparent, predictable and collaborative. The recommendations consistently emphasize earlier engagement with respondents, enhanced procedural protections, greater oversight of investigative tools and increased recognition of remediation and cooperation.
For broker-dealers, the report underscores the growing importance of the early stages of an investigation. If FINRA adopts even a portion of these recommendations, firms may have greater opportunities to shape the direction of an investigation through early engagement, thoughtful responses to information requests, prompt internal reviews and meaningful remediation efforts. The report also offers a useful window into how FINRA leadership is thinking about the future of Enforcement, even if it remains unclear which recommendations ultimately will be implemented.
FINRA has not yet announced which recommendations it intends to adopt, and the report does not identify a formal public comment period or comment deadline. Rather, FINRA has stated that it will evaluate the recommendations as part of its ongoing FINRA Forward initiative and provide updates regarding implementation efforts.