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FINRA Enforcement: Bringing Cases Against Individual Brokers

September 20, 2022

When it comes to bringing enforcement actions against individual brokers, there is a lot to consider, especially when the sanctions can be life altering for the individual in question.

On this episode, we hear from Deputy Head of Enforcement Chris Kelly about what makes cases against individual brokers different from those brought against firms and all the considerations involved.

Resources mentioned on this episode:
FINRA Enforcement

Monthly Disciplinary Actions

Disciplinary Actions Online Database

Episode 69: Excessive Trading: When A Lot Becomes Too Much

Episode 77: Behind the Process: How an Enforcement Action Becomes an Enforcement Action

Listen and subscribe to our podcast on Apple PodcastsGoogle PodcastsSpotify or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 


00:00 - 00:21

Kaitlyn Kiernan: When it comes to bringing enforcement actions against individual brokers, there is a lot to consider, especially when the sanctions can be life altering for the individual in question. On this episode, we hear from Deputy Head of Enforcement Chris Kelly about what makes cases against individual brokers different from those brought against firms and all the considerations involved.


Intro Music

00:30 - 00:42

Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I'm excited to welcome back to the show today a frequent guest, Senior Vice President and Deputy Head of Enforcement Chris Kelly. Chris, welcome back.

00:43 - 00:44

Chris Kelly: Thanks for having me.

00:44 - 01:01

Kaitlyn Kiernan: You are a frequent guest on FINRA Unscripted, and we will link to some of our earlier episodes together, including our ever-popular episode on excessive trading. So, no need to go in too deep here, but can you kick us off by introducing yourself and telling us what you do at FINRA?

01:01 - 01:18

Chris Kelly: You bet. As you mentioned, I'm currently the Deputy Head of Enforcement, which means primarily two things. One, I report to the Head of Enforcement, Jessica Hopper. And two, I supervise the attorneys who manage the day-to-day investigation, bringing disciplinary actions on behalf of the Enforcement department.

01:18 - 01:41

Kaitlyn Kiernan: And we just spoke with the Head of Enforcement, Jessica Hopper, on our last episode to talk about the role of regulatory operations at FINRA. For our listeners, if you haven't heard that yet, I encourage you to go back and check that out. Now, to just start out, how many cases a year does FINRA typically bring against individual brokers, and how does that compare to the number brought against firms?

01:41 - 02:07

Chris Kelly: We've been remarkably consistent if you look back at the statistics for the last couple of years. Every year we're about 70%, 30%. So about 70% or so of our cases are against individual brokers and the other 30% are against broker dealers. That's not by any intention, that's just by happenstance. It's the way it seems to work out. And so, if you do the math, in a typical year, we bring roughly 400 to 550 cases against individual brokers.

02:07 - 02:09

Kaitlyn Kiernan: And what kind of cases are these?

02:10 - 02:50

Chris Kelly: So, there's really a wide variety. Some typical cases that we would bring against the individual broker would be, for example, that the broker failed to report to his firm an outside business activity, or that a broker sold securities away from his or her firm, a charge we call selling away. Or that a broker engaged in some securities transaction on behalf of the customer without getting the customer's authorization for that transaction, which we can charge either as unauthorized trading or sometimes discretion without written authorization. I will make a quick plug if you ever are curious to see the types of cases that we bring. FINRA has a great online resource, the monthly Disciplinary Actions Report. We can go on and see the cases separated by individual and firm.

02:51 - 03:07

Kaitlyn Kiernan: Yes. And we'll link to that in our show notes as well. That really is a great resource for firms that comes out around the 15th of every month. But you just named a wide variety of violations. What is in your tool belt when it comes to sanctions against individual brokers?

03:08 - 03:37

Chris Kelly: So, the sanctions are as varied as the violations and even more so, frankly, because they are generally different types of sanctions for different violations, but also the same violation can have a different sanction based on the particular aggravating or mitigating factors of the circumstance. To give a ballpark analogy, I would say typical low-level sanctions for us could be a ten-day suspension and a $5,000 fine on the low end. On the high end for a most severe and egregious misconduct, it could result in a bar.

03:37 - 03:58

Kaitlyn Kiernan: On a past episode of FINRA Unscripted, we talked about the life cycle of an enforcement matter and how a matter might become an enforcement action. And we'll link to that in our show notes, and I encourage listeners to check it out, but today I want to narrow in a little bit. Do you ever get a referral on a matter involving an individual broker that doesn't become a formal action?

03:59 - 04:39

Chris Kelly: Absolutely. We don't bring a formal action every time we receive a referral or a case from another department within FINRA. Many times, what we do is, instead of issuing a formal action, we'll issue what we call a cautionary action letter, which is essentially a written warning, putting the broker or the firm on notice of the violation. There's no bright line rule for when we might bring a formal action versus an informal action, such as a cautionary action letter. But some of the things we think about is whether it's the broker or the firm's first offense, whether the violation was intentional or result of a good faith mistake, whether there's any customer harm, and whether or not in the case an individual broker, the firm or some other regulator already disciplined the broker for the misconduct.

04:40 - 04:52

Kaitlyn Kiernan: You mentioned at the top, you consistently have something like 400 to 500 cases against individual brokers in a given year. Does that number include those informal actions you mentioned, like a cautionary action letter?

04:53 - 05:11

Chris Kelly: So earlier when I was referring to the number of actions, I was referring to the number of formal actions a year. But in addition to those, let's say 500 formal actions against individuals, we'll do almost an equivalent amount of the informal actions. So, every year we issue hundreds of cautionary action letters for violations that don't rise to the level of a formal action.

05:11 - 05:23

Kaitlyn Kiernan: So, what people don't see in those numbers or in the monthly disciplinary actions is that for just about as many matters where you bring an enforcement action, there are almost an equal number of matters where you don't bring formal action.

05:24 - 05:44

Chris Kelly: That's exactly right. And it's the nature of the way things are when we're not issuing a formal action. It is not and should not be public. But it does give somewhat of a skewed perspective of what we do in Enforcement, because you're not seeing a large portion of what we do. You might think that all we do is every time we get a case, we issue a formal action. When in reality, it's almost just as likely that we'll issue an informal action.

05:45 - 05:53

Kaitlyn Kiernan: And are there any differences in terms of how you think about bringing formal action when it comes to a matter against an individual versus against a firm?

05:54 - 06:41

Chris Kelly: The short answer is yes. While some of the same considerations apply, for example, we'll always consider whether a respondent, whether it's an individual or firm, has prior disciplinary history. There are differences, and I would say principally we give a lot of thought to the effect that a disciplinary action has against an individual. Every disciplinary action has an effect on the respondent. That's part of the reason why we're bringing disciplinary action to change behavior. But the effect of a fine on a large firm is a lot different than the effect of, let's say, suspending a broker. That's not something that we do lightly. It's something we understand can be a life altering event. Even a relatively short suspension could be a life altering event for that broker. So, it's something that we try to be very thoughtful and circumspect when we're thinking about suspending or barring an individual broker.

06:42 - 06:55

Kaitlyn Kiernan: As you mentioned, it can be life altering, especially the most severe sanctions, which include a permanent bar. Given that this is essentially a career ending sanction, in what kind of cases does FINRA seek a bar?

06:55 - 07:26

Chris Kelly: Most commonly, we would seek a bar for egregious misconduct. And when I say egregious misconduct, I'm thinking of fraud or conversion. In other words, stealing from a customer. Other violations that commonly result in a bar are if a broker refuses to cooperate in an investigation. In other words, we send what we call 8210 requests for information or for testimony, and the broker refuses to provide that information or testimony, that will normally result in a bar. And one other thing you might not think about is test cheating. If you cheat on a qualification exam to get into the industry, that usually results in a bar as well.

07:27 - 07:35

Kaitlyn Kiernan: It sounds like a lot of that gets down to the very root of your behavior, the ethics, the highest standard of commercial honor that is expected of brokers.

07:36 - 07:36

Chris Kelly: That's right.

07:37 - 07:55

Kaitlyn Kiernan: You also mentioned failures to reply to an 8210 request. When I look through the monthly disciplinary action reports that you mentioned, there does seem to be quite a few matters involving a bar that mentioned 8210. Can you explain what 8210 is and why it can result in a bar?

07:56 - 08:32

Chris Kelly: At FINRA, unlike some other regulators, we don't have things like subpoena power. And so, Rule 8210 is our mechanism to get information from individuals who are registered or associated with a member firm. So, if we want documents, we want the answers to questions or we want to take your testimony, we issue what we call a Rule 8210. Notice it's just a request for information that cites the Rule 8210, and we give them time to comply with that. A refusal to participate in testimony or to give us information is a serious violation because it prevents the very core of what we do, prevents our ability to investigate misconduct. The normal sanction for that refusal is a bar.

08:33 - 08:43

Kaitlyn Kiernan: Essentially to be a registered representative, you're agreeing to cooperate with FINRA in investigations, and if you choose not to cooperate, you're essentially choosing not to be registered anymore?

08:43 - 08:44

Chris Kelly: That's exactly right.

08:44 - 08:49

Kaitlyn Kiernan: So, when you are bringing an action against an individual, what does the timeline look like?

08:50 - 09:04

Chris Kelly: I'm going to give the classic lawyerly answer. It depends. Among other things, it depends on the type of the violation, the complexity of the violation, the strength of the evidence. And it can range anywhere from several weeks to months or in some cases longer than a year.

09:05 - 09:19

Kaitlyn Kiernan: The FINRA Enforcement team doesn't have unlimited resources, so I'm sure that plays into this as well. But how do you prioritize and know when to push for those cases that do take a matter of days versus the ones that take a year or more?

09:20 - 10:23

Chris Kelly: One of the things that I think makes us unique is our ability to respond quickly when necessary. And I think back to my own experience prior to coming to FINRA, I worked as a prosecutor at the U.S. Attorney's Office. And at the U.S. Attorney's Office when you get a securities fraud case, in most cases, the harm has been over for several years. The money is gone, the misconduct has happened, and you're just there to pick up the pieces and do justice.

One of the things I enjoy about FINRA is we are often learning about fraud and misconduct as it's happening so that we can react quickly to try to stop further harm from happening and to make the harmed customers whole almost immediately. So, we prioritize being able to react quickly to misconduct and the result is in some cases, we will find out about a potential misconduct on a Monday. The same day or the next day, we're sending out our 8210 requests that we talked about, and sometimes, not in every case, but sometimes we can conclude that investigation and bar an individual less than 30 days from the time that we got the matter to the time that they're barred.

10:24 - 10:36

Kaitlyn Kiernan: It's great that you have the ability in some cases to stop the act of harm happening to investors in real time. For other cases, when you can't move as quickly, what other tools do you have to protect investors as you're investigating?

10:37 - 11:24

Chris Kelly: There are a number of tools in our toolbox. One of the most aggressive tools I would describe it as is we can apply to the Hearing Officers for a temporary cease and desist order in order to have the Office of Hearing Officers order them to stop some behavior or misbehavior. But in most cases, those are relatively rare. In most cases what we often do, and with the most practical solution is, if it's an individual who engages in misconduct and remains associated with a firm, we will go to the firm and have a conversation with the firm that supervises that person, let them know what we're concerned about and talk to them about ways that the firm can help address that. So, for example, maybe there's some misconduct. We let the firm know about it, and then a firm could put that broker on heightened supervision to make sure that they don't engage in similar misconduct while our investigation is running its course.

11:25 - 11:30

Kaitlyn Kiernan: It sounds like firms really play a role when it comes to investigating misconduct by individuals.

11:31 - 12:11

Chris Kelly: I can't emphasize enough how important it is that we work with firms, and they work with us to address particularly egregious broker misconduct. We describe ourselves and FINRA Enforcement as being on the front lines of investor protection. But in reality, the firms are really the front lines of investor protection. They are the first ones often to identify misconduct and to respond to that misconduct. And so, working with the firms to identify this misconduct together and then to address it in a way that protects the firm's customers and protects the industry is really the best way for us to do our job and the best way for all of us to protect the reputation of the industry.

12:11 - 12:24

Kaitlyn Kiernan: And I'm sure there's some self-interest for the firm in there, too, since helping in these matters will help protect the firm's reputation as well. Do you have any tips for firms regarding how they can best serve in that first line of defense role?

12:24 - 13:08

Chris Kelly: So, I can give you a recent example. We had a firm that, through a review of emails, identified that one of its brokers was engaging in selling away. What I referred to earlier. They were selling securities products not through the firm, without the firm's permission, and without any firm supervision. They suspended the individual while they conducted an investigation of his potential selling way. And at the same time, once they had completed their investigation, they reported the results to FINRA and we were able to quickly bring a disciplinary action against that individual for his misconduct, which was conducted away from the firm. In that case, the firm did everything we would expect. They had a reasonably designed supervisory system. They noticed a red flag of misconduct. They responded promptly and effectively and then reported it to us.

13:08 - 13:15

Kaitlyn Kiernan: That's a really good example of how a firm came to FINRA early and often during their own internal investigation process.

13:16 - 13:16

Chris Kelly: Exactly.

13:17 - 13:24

Kaitlyn Kiernan: On the flip side, I'm sure there are some firms that didn't fill that first line of defense role. Can you share an example of how that might play out?

13:24 - 14:21

Chris Kelly: Sure. One of the things we've seen in a couple of scenarios is where a firm has brokers with a history of misconduct and that can mean anything from misconduct that results in formal action from a regulator or misconduct that results in letters of reprimand or suspensions by the firm itself but fails to track those incidents. And so, when they were reviewing the latest incident that a broker engaged at their firm, maybe the new supervisor doesn't realize that that individual had a dozen or two dozen prior incidents in deciding how to react. And so, because they're not keeping track of that history of misconduct, they're not responding appropriately. So, keeping track of and making that information available to the right decision makers and then responding appropriately, often with a plan of heightened supervision, if that's the goal, that really fits what the broker's alleged misconduct is. That is a really important thing for us and something we're going to look for whenever we identify misconduct by a broker.

14:22 - 14:30

Kaitlyn Kiernan: At the end of the day, are there any cases against individual brokers that really stick with you and drive home why these types of actions are so important?

14:31 - 15:23

Chris Kelly: Absolutely. So, we understand that 99% of the brokers in the industry are trying to do the right thing. But if 99% are trying to do the right thing, that means there are potentially thousands who are not always trying to do the right thing. And because of the trust that customers place in those brokers, they can commit an enormous amount of misconduct in a small amount of time. And so, we have literally dozens of examples of brokers who steal elderly customers' retirement savings or take advantage of customers with diminished mental capacity in ways that are really heart wrenching. Those cases are bad for customers, they're bad for firms, they're bad for the industry as a whole. And so ultimately removing these bad brokers quickly when we can identify them is not only good for customers and for FINRA, it's good for the industry and for the other brokers, the 99% who are trying to do the right things by their customers day in and day out.

15:24 - 16:01

Kaitlyn Kiernan: That's it for today's episode of FINRA Unscripted. Chris, thank you so much for joining me once again to share more information about the ins and outs of enforcement cases against individuals versus those against firms. Listeners, if you don't already, be sure to subscribe to FINRA Unscripted wherever you listen to podcasts and scroll back in our feed to listen to some of our past episodes with Chris for more insights into FINRA Enforcement. If you have any thoughts on today's episode or ideas for future episodes, you can email us at [email protected]. Today's episode was produced by me, Kaitlyn Kiernan and engineered by John Williams. Until next time.

16:01 – 16:06

Outro Music

16:06 - 16:34

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16:34 – 16:40

Music Fades Out

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