In the brokerage accounts section, we learned about the Code of Arbitration, which provides protocols for handling disputes with customers and other industry professionals. In this section, we’ll discuss Code of Procedure, which occurs when FINRA has a problem with something a financial professional or firm is doing. If a FINRA (or other SRO) rule is broken and FINRA finds out about it, the Code of Procedure details the procedure that follows.
FINRA could be tipped off to a rule violation in many ways, which could include customer complaints, whistleblowers, or FINRA potentially stumbling across the violation. If they feel the violation is legitimate, FINRA will file a complaint with FINRA’s Department of Enforcement (yes, it’s weird that FINRA files a complaint with itself). The representative or firm involved in the complaint is given a copy and is required to respond within 25 days of receipt.
The respondent (the firm or representative) will either admit, deny, or state they don’t have enough information to adequately answer the complaint. Depending on a few variables, the representative or firm could be subject to the following:
The penalty for the rule violation could be as light as a public reprimand (censure), all the way to a hefty fine and expulsion from the industry. To determine the level of penalty, the Department of Enforcement arranges a three-person panel to hear the case. If the violation is not denied, the panel’s goal is to come to a consensus on an appropriate punishment. The respondent will likely provide insight into the violation, which may sway the panel one way or the other.
If the violation is disputed, the panel allows the respondent to argue their case in a hearing, sometimes with a lawyer assisting them. The entire process feels very much like a real court case. The Department of Enforcement is essentially the prosecutor, while the representative or firm (who are typically represented by lawyers) is the defendant. Similar to a court setting, facts are presented and witnesses are interviewed. Instead of a judge and jury, a three-person panel oversees the process and renders a decision. Once the hearing commences, the panel works together to determine if a punishment should be applied, and the level of punishment if assessed. They must render a judgment within 60 days. Any disciplinary actions are made public on FINRA’s website.
Once the decision is rendered, either the Department of Enforcement or the respondent can appeal the decision. To formally submit the appeal, a written request must be sent within 25 days of the judgment to the National Adjudicatory Council (NAC), which is another department within FINRA. After reviewing the case, the NAC may affirm, modify, reverse, increase, or reduce the punishment. Decisions rendered by the NAC are published publicly on FINRA’s website. If either party is still not content with the judgment, one last appeal can be made to the Securities and Exchange Commission (SEC).
The entire process involved with the Code of Procedure is daunting but very similar to a criminal court. If you’re interested in the specifics, there’s a FINRA guide available online that goes through the details (although the Series 6 will most likely not test you on them).
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