Customer complaints and regulatory audits can lead to FINRA inquiries/investigations. Inquiries can lead to formal action by FINRA which can result in career ending sanctions. I strongly recommend that registered representatives (RR) retain experienced counsel upon the receipt of a an inquiry letter and work with that attorney closely in responding to the inquiry, preparing to give testimony, if required, and attending the interview.

FINRA has among its investigative tools the power (through Rule 8210) to compel broker dealers and registered representatives (RR) to produce documents and to give testimony under oath (“On the Record” or “OTR”). (Failure to comply with either type of request is itself a punishable offense.) If you conduct your business as if you expect to be interrogated by a regulator you can use your testimony at an OTR to end an investigation rather than face a formal action by FINRA Enforcement. The purpose of this article is to help a firm or RR best prepare for an OTR.

The importance of doing well at an OTR is critical, and, without exaggeration, could be career altering. An OTR is generally scheduled by FINRA after one or more round of written requests and your responses to questions regarding the alleged violation(s). The investigator may have genuine questions or may simply want to get testimony under oath prior to recommending that a formal action be initiated. While these reasons sound grim, a firm or RR should approach an OTR with a positive, reasoned and cooperative mindset designed to convince the investigator (usually an enforcement attorney) that no further action should be taken.

The nature of an OTR obviously depends on the type of alleged rule violation FINRA is investigating. For purposes of illustration in this article I will focus on sales practices regarding alternative investments (AIs).

Not surprisingly, the first step to doing well at an OTR is knowing your customer. Correctly analyzing and documenting the suitability of an AI for your customer is critical, especially in the case of senior citizens. Such documentation should include an updated new account form which reflects a risk tolerance and investment objective appropriate for the AI as well as an analysis of why you recommended the product. Don’t be tripped up by poor basic documentation!

The next tip is understanding the product. AIs can be very complex. FINRA gets the benefit of hind sight in their review. The sense of urgency and the discussion points which may have existed with one or more of your customers at the point of sale may be difficult to recreate at an OTR without documentation. As important as documentation (and maybe more so because you may be able to explain why a new account card wasn’t updated) is your understanding of the product. What does this mean? It means that, to the extent possible, I insist on intensive study and role playing on a product by product basis prior to an OTR. It is not enough to believe you understand an AI, you should be qualified to sell the product, compare it to others in the same class and teach a college level class about it. My goal is to try to put you at or above your examiners knowledge level regarding a product. Your ability to engage in a real discussion and, if necessary, debate with the examiners, will serve your well going forward. Although poor OTR testimony can in some cases be rehabilitated, you will have to go through a hearing to get that opportunity, the cost and expense of which is prohibitive for most RRs.

Further, you need to keep in mind that your examiners will likely include a non-attorney FINRA investigator and a FINRA enforcement attorney and one or both may be very skilled questioners. (And those who are not so skilled can be just as effective by wearing down the witness after 8, 10 or even 12 hours.) These individuals have had all the time they want to prepare for your examination. They have 8210 power to gather information from licensed third parties without disclosing those individuals or entities. And they have all the time that they want to examine you with no legitimate objections available other than to questions which may seek attorney client privileged communication. Refusal to answer a question is itself a violation of rule 8210 and is independently punishable.

Unlike an OTR which focuses on the failure to disclose a lien or a felony arrest, the facts of which are likely undeniable, an OTR regarding the sale of an AI requires more than just “yes” or “no” answers. Such answers give an RR or firm the opportunity to clarify, educate and persuade. The groundwork for this opportunity has hopefully been laid in the written response to the initial 8210 requests. Experienced counsel can assist in developing a clear and consistent message of compliance with the rules throughout the inquiry process.

Most RRs are not professional witnesses and being a confident successful advisor does not make them one. The best way to approach an OTR is to be prepared. Preparation begins before the point of sale regarding the customer and product, continues with a well justified, suitable and well documented sale and concludes with serious and dedicated attention and preparation prior to the OTR itself.